Fitch Upgrades Pioneer Natural Resources Co. to 'BBB-'; Outlook Revised to
CHICAGO -- March 4, 2013
Fitch Ratings has upgraded the ratings on Pioneer Natural Resources Co.
(Pioneer, NYSE: PXD) to 'BBB-' from 'BB+'. A full list of rating actions
follows at the end of this release. The Rating Outlook is Stable.
Key Rating Drivers
Pioneer's ratings and Stable Outlook are supported by the company's long-lived
onshore reserve base, consistent production growth, and valuable leasehold
acreage positions in key oil and liquids basins, the Permian and the Eagle
Management has established a track record of willingness to defend its target
leverage ratio of no more than 1.75 net debt to operating cash flow and to
fund growth capex with means other than debt. This track record has included
two separate common equity raises ($489.5 million in Q4 2011 and $1.32 billion
in Q1 2013), two joint venture asset sales in key positions ($1.1 billion in
proceeds from the Eagle Ford JV in 2010 and $1.7 billion in proceeds from the
South Wolfcamp JV in 2013), and a robust hedging program.
Concerns include relatively high leverage for an investment grade exploration
and production company, high capex investment required to fund growth, and the
risk of a macroeconomic scenario that involves materially and persistently
lower oil prices in the long run.
The company's controlled subsidiary master limited partnership (MLP), Pioneer
Southwest Energy Partners L.P. (NYSE: PSE) also presents a potential risk.
While it is not management's current plan, large asset drop downs to the MLP
could be considered in order to pursue preferential tax treatment. Such a
change in strategy could create structural subordination for PXD note holders
and could be credit negative if combined with equity friendly uses of the
proceeds such as a share buyback or dividend.
Looking forward, capital expenditures are expected to remain high based on
recent drilling success, acceleration in the Horizontal Wolfcamp Shale.
Management's capital budget for 2013 is $3 billion. The capital expenditure
carry provided by Reliance in the Eagle Ford joint venture ran out at the end
of 2012 and Eagle Ford capex in the plan is up significantly from $130 to $575
million for 2012 and 2013 respectively.
While production growth and hedges should support cash flows to fund this
program in a lower oil price scenario, it is important to note that most of
the company's oil hedges are three way collars. In Pioneer's case these hedges
will only provide up to a maximum of approximately $18 of support per barrel
if WTI prices fall below approximately $75 per barrel.
FCF is expected to be approximately negative $1 billion 2013. However the
recent $1.3 billion common equity raise and announcement of the $1.7 billion
South Wolfcamp JV (expected to close in Q2 2013) should allow the company to
fund this deficit and pay down some debt relative to 2012 year end levels.
Fitch would expect beyond 2013 that Pioneer will continue to outspend cash
flow to fund its major drilling programs but that if FCF negative then
management will continue to target net debt to operating cash flow 1.75(x).
Fitch expects this would be met from a combination of production growth, asset
sales (or joint ventures), and/or common equity issuances.
For the latest 12 months (LTM) ending Dec. 31, 2012, Pioneer's adjusted EBITDA
was $2.1 billion which resulted in leverage, as measured by debt-to-EBITDAX,
of 1.7x. Debt/flowing barrel of production was approximately $22,600 at Dec.
31, 2012 using fourth quarter average production of 165 thousand barrels of
oil equivalent per day.
Pioneer maintains liquidity from cash and equivalents ($229 million at Dec.
31, 2012); its $1.5 billion credit facility due 2017; and operating cash flows
of $1.8 billion during the LTM period, which are supported by significant
hedge positions going forward. These calculations are not pro forma for the
company's $1.3 billion equity raise and conversion of $240 million of
convertible notes in 2013.
Current maturities are minimal; however, Fitch expects the $480 million of
convertible notes due 2038 will be addressed in 2013.
According to Pioneer $240.6 million in principal were converted in January and
February of 2013, and the company anticipates redeeming all remaining notes in
2013. Further Pioneer has stated that in general, upon conversion of a
convertible senior note, the holder will receive cash equal to the principal
amount and common stock for the conversion value in excess of the principal
amount. Fitch estimates this would total $500 million in cash for the
principal and roughly $400 million in additional common equity for the excess
conversion value (which would vary depending on Pioneer's stock price).
Other than the convertible notes, the next maturity will be $455 million of
5.875% senior notes due in 2016.
Liquidity is solid at Pioneer, and the company remains in compliance with all
debt covenants. All of Pioneer's borrowings have covenants, with the most
restrictive covenants being associated with the company's senior unsecured
credit facility. Pioneer's $1.5 billion senior unsecured credit facility
contains a total debt-to-book capitalization maximum of 60%.
Negative: Future developments that may, individually or collectively, lead to
negative rating include:
--Failure to execute on production growth expectations and a significant
negative revision in expectations for horizontal drilling in the Permian
--A material deviation from management's targeted leverage of less than 1.75x
net debt to operating cash flow. In particular, material capex increases,
dividends or share repurchases above and beyond growth in cash flow from
operations that result in more negative free cash flow prospects and increased
--Large asset drop downs to the MLP subsidiary that signal a change in
management strategy and increase risk of structural subordination.
--A large debt financed acquisition that would significantly increase
--Macro events outside the company's control such as a large and sustained
decrease in oil prices.
Positive: Pioneer would need to continue to defend its balance sheet and
execute on production growth expectations for the intermediate term. In
particular this would require reduced leverage significantly below 1.5x debt
to EBITDA and $20,000 debt per boe of production per day, and reduced negative
free cash flow.
Fitch upgrades Pioneers ratings as follows:
--Long-term Issuer Default Rating to 'BBB-' from 'BB+';
--Senior unsecured credit facility to 'BBB-' from 'BB+';
--Senior unsecured notes to 'BBB-' from 'BB+'.
The Outlook is revised to Stable from Positive.
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 Related Research:
--'Corporate Rating Methodology' dated Aug. 8, 2012.
Applicable Criteria and Related Research
Corporate Rating Methodology
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Daniel Harris, +1-312-368-3217
Fitch Ratings, Inc.
70 W. Madison St.
Chicago, IL 60602
Sean T. Sexton, CFA, +1-312-368-3130
Mark C. Sadeghian, +1-312-368-2090
Brian Bertsch, +1-212-908-0549 (New York)
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