Fitch Affirms Apache's Long-Term Ratings at 'BBB+'; Revises Outlook to
CHICAGO -- November 20, 2013
Fitch Ratings has affirmed the Issuer Default Rating and senior unsecured
ratings of Apache Corporation (NYSE:APA) at 'BBB+'. In addition, Fitch has
revised the company's Outlook to Positive from Stable. Ratings for the
company's preferreds have been withdrawn.
Approximately $10.93 billion in debt is impacted by today's rating action.
A full list of ratings follows at the end of this press release.
KEY RATINGS DRIVERS
Apache's ratings are supported by the company's recent debt repayments; rising
exposure to liquids (liquids production reached 55% on a pro forma basis in
Q3, the highest in the company's history); good size and scale as an
independent; strong historical track record as a top operator in the space;
and reduced exposure to politically volatile Egypt following the sale of a
1/3rd interest in its Egypt operations. While outside the company's control,
persistently high oil prices (average WTI of approximately $98/barrel and
Brent of $109/barrel year-to-date in 2013) have also been a credit positive.
Credit concerns center on the potential for future prolonged capex pressure
from the company's LNG projects, including its 13% stake in Wheatstone and the
larger potential funding needs associated with its 50% stake in the Kitimat,
B.C. export facility, which has not yet reached FID.
ASSET SALES AND DEBT REDUCTIONS
In 2012, Fitch downgraded APA from 'A-' to 'BBB+' due to a multi-year trend of
debt growing faster than underlying reserves and production, resulting in
higher debt/boe metrics. In the third quarter of this year, the company began
to reverse that trend through asset-sale funded debt repayments. Year-to-date,
the company has sold over $7.0 billion in assets, and repaid $1.85 billion in
debt, bringing its total debt down to $10.93 billion from $12.78 billion seen
the prior quarter, with zero short-term borrowings outstanding. Fitch
anticipates the company is likely to pay down additional portions of its long
term debt as further asset sale proceeds are received, including the sale of a
minority stake in Egypt to Sinopec, which closed November 14 for proceeds of
As part of the sale of the GoM shelf to Fieldwood Energy, LLC, APA exited
approximately $1.5 billion in future abandonment liabilities (asset retirement
obligation--ARO). As a result of this sale, APA's ARO fell from $4.75 billion
at June 30, 2013 to $3.26 billion. To the degree APA's onshore portfolio grows
at a faster pace than its offshore portfolio, Fitch believes growth in APA's
ARO liabilities may moderate, as onshore remediation tends to be less costly
than offshore remediation.
GROWING MOMENTUM IN ONSHORE SHALE
Following earlier acquisitions and recent restructuring activity, onshore
shale plays have increased as a percentage of Apache's portfolio. In Q3 the
key driver of production growth in US onshore was gains in the Permian and
Central regions, which saw y-o-y increases of 18% (increasing to 132,000
boepd) and 31% (increasing to 95,000 boepd). Similar to the pattern seen among
other North American E&P firms, we anticipate the trend of drilling efficiency
gains is likely to continue to provide benefits for APA in the form of
improving cash margins, better unit economics, and higher recoveries.
REDUCED EGYPT FOOTPRINT
The announced sale of the company's 1/3 minority stake of its Egypt operations
to Sinopec for $2.95 billion on November 14 helped to remove a key overhang on
the stock in terms of its exposure to a politically volatile Middle Eastern
country. On a pro forma basis accounting for the sale, Egyptian production has
fallen from 26% of portfolio production in 2009 to just 16% at Sept. 30, 2013.
GOOD FINANCIAL METRICS
Recent LTM financial metrics were good, and include balance sheet debt/EBITDA
of 0.91x (versus 1.01x at YE 2012), FFO interest coverage of 15.6x, and free
cash flow of -$1.84 billion. Looking forward, under our base case assumptions,
Fitch expects the company will be meaningfully FCF negative in 2014 (- $1.5
billion), although we don't expect any deficits to be debt-funded.
HIGH CAPEX STILL A CONCERN
With regards to future capex pressure, Fitch would note that the company's LNG
projects (the Chevron-operated Wheatstone facility in Australia, and the
Kitimat, B.C. export facility) may create funding pressures over an extended
time frame given the long lag between the initial investment and cash flows as
well as the potential for cost overruns. With regards to Wheatstone, final
investment decision (FID) was reached by operator Chevron and partners in
2011. Apache's share of spending for its 13% stake is approximately $4
billion. However, initial cash flows from the facility are not expected until
late 2016. No FID has been made with regards to Kitimat which makes its status
less certain, but if that project goes ahead, Fitch expects similar or higher
capex requirements given its size and remote location.
Because of their ratable nature, the LNG facilities should lower Apache's
overall cash flow volatility once up and running. However, in the interim,
credit metrics could be challenged as a sponsor must lean on the remainder of
its portfolio to produce supporting cash flows. Capex pressures on the company
could be significant over the near to medium term.
At Sept. 30, 2013, Apache's liquidity was strong. Cash and equivalents were
$1.25 billion, and given zero CP balances, the company had 100% availability
on its $3.3 billion committed unsecured revolver capacity for total liquidity
of $4.55 billion. Of this, $1.0 billion in capacity matures in August 2016,
and the remaining $2.3 billion matures in June 2017. All revolvers are U.S.
dollar denominated facilities which can be used to backstop Apache's $3.0
billion CP program. Near-term maturities are moderate and include nothing due
2014, $350 million due 2015, $1 million due 2016, and $900 million due 2017.
Covenant restrictions across Apache's debt instruments are light and include a
60% debt-to-capitalization maximum across its unsecured revolvers (actual
debt-to-cap of 25% at 9/30/2013), as well as limitations on sale leasebacks
and change of control provisions.
Apache's other obligations are manageable. The deficit on pension benefit
plans at year-end 2012 was just $7 million. The company's Asset Retirement
Obligation (ARO) declined to $3.26 billion at the end of the third quarter,
versus $4.75 billion the prior quarter, due to the sale of the GoM shelf and
transfer of related liabilities with the sale. Accrued environmental reserves
at the end of 2012 were $104 million.
Positive: Future developments that could lead to positive rating actions
--Sustained improvement in debt/boe metrics achieved through a combination of
reductions in long-term debt and growth in reserves and production; and,
--Other credit supportive actions such as the sale of a meaningful equity
stake in Kitimat to reduce future capex funding pressures or other commitment
to live within cash flow means.
Negative: Future developments that could lead to negative rating action
--Significant additional leverage added to the balance sheet stemming from
expansions in capex; a large leveraging transaction or transactions; or
debt-funded share buybacks;
--A sustained collapse in oil prices without offsetting adjustments;
--A major operational issue or reserve impairment.
Fitch affirms Apache Corporation's ratings as follows:
--Issuer Default Rating (IDR) at 'BBB+';
--Senior unsecured credit facility at 'BBB+';
--Senior unsecured notes at 'BBB+'.
--Commercial paper at 'F2';
--Short-term IDR at 'F2'.
The Rating Outlook has been revised to Positive from Stable.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Relevant Research:
--'Corporate Rating Methodology Including Short-Term Ratings and Parent and
Subsidiary Linkage' (Aug. 5, 2013);
--'Crossover Credits in Natural Resources -- Migration Catalysts 2003-2013'
(Oct 31, 2013);
--'Full Cycle Cost Survey for E&P Producers-2012 Numbers Up, but Adjustments
Tell a Different Story' (May 28, 2013);
--'Investor FAQs--Recent Questions on E&P, Refining, and Drilling and Services
Sectors' (Aug. 12, 2013);
--'Updating Fitch's Oil & Gas Price Deck' (July 29, 2013);
--'Energy Handbook--Upstream Oil & Gas' (June 28, 2013).
--'Dividend Policy in the Energy Sector-- Low Oil Prices Could Create Cash
Flow Stress' (February 2012)
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and
Crossover Credits in Natural Resources -- Migration Catalysts 2003-2013
Full Cycle Cost Survey for E&P Companies (2012 Numbers Up, but Adjustments
Tell a Different Story)
Dividend Policy in the Energy Sector -- Low Oil Prices Could Create Cash Flow
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS.
PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK:
HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING
PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND
METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF
CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL,
COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM
THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER
PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS
OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN
EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER
ON THE FITCH WEBSITE.
Mark C. Sadeghian, CFA, +1 312-368-2090
70 W. Madison Street
Chicago, IL 60602
Sean T. Sexton, CFA, +1 312-368-3130
Timothy Greening, +1 312-368-3205
Brian Bertsch, +1 212-908-0549
Press spacebar to pause and continue. Press esc to stop.