Fitch Affirms Hess Corporation's IDR at 'BBB'; Outlook Stable
CHICAGO -- November 28, 2012
Fitch Ratings has affirmed Hess Corporation's (Hess; NYSE: HES) Issuer Default
Rating (IDR) and related ratings at 'BBB'. The Rating Outlook is Stable.
Approximately $7.84 billion in debt is affected by today's rating action. A
full list of ratings is at the end of this release.
Hess' ratings are supported by the company's strong operational metrics,
including high exposure to liquids in the upstream (approximately 67% of 2011
production and 74% of 2011 reserves); good size and scale as an independent
(1.573 billion boe reserves at YE 2011, with recent production approximately
400,000 boepd); robust full cycle netbacks; and respectable reserve
replacement (3-year RR 142%). As calculated by Fitch, Hess' most recent 3-year
Finding, Development & Acquisition (FD&A) costs rose to $25.03/boe, but were
elevated in part due to the company's infrastructure spending in the Bakken,
which raises long term profitability of produced barrels but will not
necessarily increase reserves. Fitch expects FD&A/boe metrics will trend down
significantly as these investments wind down, and as increased drilling
efficiencies are realized in the Bakken.
Hess also continues to enjoy modest diversification through its marketing and
refining (M&R) segment, which following the closure of the 350,000 barrel per
day (bpd) HOVENSA joint venture (JV) refinery, now includes just a 70,000 bpd
FCC unit in Port Reading, NJ, a network of terminals and retail gasoline
stations on the east coast, and an energy marketing business which sells
heating oil, gas, and electricity to the commercial and industrial sectors.
Ratings downsides for Hess center on high capex (latest 12 months [LTM] capex
of $8.1 billion at Sept. 30, 2012 versus $5.5 billion in 2010); the company's
$3.0 billion funding gap in 2012; rising debt levels that reflect higher
spending (debt at Sept. 30, 2012 has climbed to a high of $7.84 billion from
$6.05 billion at YE 2011); Hess' relatively low proven developed reserves
(just 52.3% of total proven reserves in 2011); and the potential for further
pressure on the company's integrated business model given the wave of
successful spin-offs in the energy sector.
Asset Sales to Fill the Gap
Hess will use asset sale proceeds to close its current $3.0 billion funding
gap. The plan is proceeding at or above targets, with sales of $2.4 billion
announced as of October, of which approximately $846 million had closed.
Completed asset sales include Snohvit in Norway ($132 million -- closed Q1);
Schiehallion ($524 million -- closed Q3); and Bittern ($190 million - closed
Q4). The sales of the Beryl fields and SAGE ($525 million) and the ACG
properties ($1.0 billion) -- are expected to close in Q1'13. The St. Lucia
storage facility, Eagle Ford acreage and Samara-Nafta fields in Russia (the
last of which was not included in the original asset sales program) are now
being marketed but do not yet have definitive buyers. While debt has risen on
interim basis, Fitch expects the company's debt balances will decline over the
next few quarters as proceeds from asset sales are received.
Fitch anticipates Hess will be FCF negative in 2013 but at significantly lower
levels than 2012 as capex is stepped down due to the combination of the
significantly reduced Bakken infrastructure spending (Tioga gas plant
expansion, rail loading facilities, gathering and transmission lines), the
completion of forced leasehold drilling in the Bakken by the end of the year,
and the avoided capex associated with asset sales. Fitch would also note that
Hess has capex flexibility in the Utica shale given that its jv partner CONSOL
holds all of its acreage by production.
Hess' latest financial performance has been reasonable, driven by a very
robust oil pricing environment. At Sept. 30, 2012, Hess generated record LTM
EBITDA of $7.95 billion, versus $7.4 billion at YE 2011. Debt rose as well in
the period as the company funded a portion of its financing gap with
borrowings, ending the period with debt at $7.84 billion, debt/EBITDA leverage
of 0.99 times (x) and EBITDA/gross interest coverage of 18.5x.
Hess maintains liquidity through a $4.0 billion committed bank facility
maturing in 2016; a $1.0 billion ARS facility backed by certain downstream
receivables ($459 million available at Sept. 30, 2012); $2.75 billion in other
committed lines; and cash. Excluding cash and equivalents of $528 million,
total liquidity across all of Hess' facilities at Sept. 30, 2012 was $4.65
billion. Hess' main financial covenant is a maximum debt-to-capitalization
ratio of 62.5% contained in its revolver (versus an actual ratio of 27.5% at
Sept. 30, 2012). Near-term maturities are light and include $37 million in
2013, $349 million due 2014, and no other major maturities due until 2019.
Hess' other obligations are manageable. Hess' qualified pension was
under-funded by $373 million at YE 2011 versus $132 million at YE 2010, but
this gap is manageable when scaled to underlying FFO. Expected pension
contributions for 2012 are $150 million, with contributions at Sept. 30, 2012
of $116 million. Hess also has $1.1 billion in letters of credit (LoC)
outstanding at Sept. 30, 2012, with most linked to margining requirements for
its energy marketing group. None of the LoCs were against the main revolver.
Hess has a number of credit contingent features in its agreements. At Sept.
30, 2012, if Hess were downgraded below Investment Grade, it would need to
post an additional $270 million in collateral. Hess' Asset Retirement
Obligations have risen in recent years due to upwards revisions in cost
estimates for field remediation as well as unfavorable tax treatment changes
in the UK. Hess' AROs stood at $2.67 billion at Sept. 30, 2012; however, the
company will see some relief from the sale of its North Sea properties
(Bittern, Beryl, and Schiehallion) as AROs and other liabilities associated
with assets held for sale will be assumed by buyers. These liabilities totaled
$618 million at Sept. 30, 2012. On the marketing side, Hess has leveraged
leases totaling $342 million linked to its retail stores, at Sept. 30, 2012,
down from $388 million at year-end 2011.
WHAT COULD TRIGGER A RATING ACTION
Positive: Future developments that could lead to positive rating actions
--Increased size, scale and diversification of its upstream portfolio,
accompanied by a managerial commitment to maintaining lower debt levels
relative to reserves and production. Fitch would note that positive rating
actions are unlikely in the current period given the high capex and restrained
reserve and production growth associated with Hess' portfolio repositioning.
Negative: Future developments that could lead to negative rating action
--Failure of stated asset sales to close as expected;
--A prolonged period of weak operational performance or low oil prices;
--The sale or spin-off of assets beyond levels originally outlined without
--A major negative reserve revision; or loss at the company's energy trading
Fitch affirms Hess' ratings as follows:
--Long-term IDR at 'BBB';
--Senior unsecured notes/debentures at 'BBB';
--Senior unsecured bank facility at 'BBB';
The company's commercial paper (CP) and short-term IDR ratings have been
Additional information is available at 'www.fitchratings.com'. The ratings
above were solicited by, or on behalf of, the issuer, and therefore, Fitch has
been compensated for the provision of the ratings.
Applicable Criteria and Relevant Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Updating Fitch's Oil & Gas Price Deck' (Aug. 15, 2012);
--'Statistical Review of U.S. E&P Companies' (May 10, 2012);
--'Dividend Policy in the Energy Sector -- Low Oil Prices Could Create Cash
Flow Stress' (Feb. 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology
Statistical Review of U.S. E&P Companies
Dividend Policy in the Energy Sector -- Low Oil Prices Could Create Cash Flow
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