Fitch Rates Hess Corp.'s Unsecured Debt Offering 'BBB'
CHICAGO -- June 19, 2014
Fitch Ratings has assigned a 'BBB' rating to Hess Corporation's (Hess; NYSE:
HES) senior unsecured notes. The notes will be issued in two tranches due 2017
and 2024. Proceeds from the issuance will be used to refinance debt, including
the repayment of $250 million in 7% notes that matured in February 2014, the
repayment of various lease obligations, as well as for working capital and
other general corporate purposes.
Fitch currently rates Hess as follows:
--Long-term Issuer Default Rating (IDR) 'BBB';
--Senior unsecured notes/debentures 'BBB';
--Senior unsecured bank facility 'BBB'.
The Rating Outlook is Stable.
Key Ratings Drivers
Hess' ratings are supported by the company's strong operational metrics,
including high exposure to liquids in the upstream (approximately 72% of 2013
production and 77% of reserves); decent size and scale as an independent
(1.437 billion boe reserves at YE 2013, with core regions in the U.S. [GoM,
onshore Bakken and Utica], North Sea, Asia-Pacific, and West Africa); robust
full-cycle netbacks; and respectable reserve replacement (three-year organic
reserve replacement of RR 136%).
As calculated by Fitch, Hess' most recent three-year Finding, Development &
Acquisition (FD&A) costs rose to $38.29/boe. However, these costs were
elevated due to the company's infrastructure spending in the Bakken, which
raises long-term profitability of produced barrels but does not necessarily
increase current-year reserves. Fitch expects FD&A/boe metrics will trend
significantly lower as these investments wind down, and as increased drilling
efficiencies continue to be realized in the Bakken. The company has also
repaid a significant amount of debt with asset sales proceeds, with debt at
March 31, 2014 falling to $5.58 billion versus a high-water mark of $8.11
billion at YE 2012.
Ratings downsides for Hess include the loss of diversification benefits
associated with the downstream and retail assets; some loss of size primarily
through upstream asset sales (pro forma production excluding Libya and assets
held for sale was 297,000 boepd in 1Q'14 vs. 406,000 boepd in 2012); and the
tail risk of further activist shareholder pressure for the company,
particularly if Hess were to encounter a period of sustained low oil prices or
weak execution in key plays.
Less Negative FCF Trend
Hess' free cash flow (FCF) status has improved as it nears the end of a
multi-year investment in shale plays. LTM FCF at March 31, 2014 was -$845
million, a reduction from the -$1.21 billion in FCF seen in 2013. Main drivers
of the improvement include moderation in capex and improving funds from
operations (FFO). Further improvements are expected over the year as shale
production continues to ramp up, the company completes one-time infrastructure
spending in the Bakken, and capex associated with sold assets rolls off. Hess
has reasonable capex flexibility in its exploration program of the Utica shale
given that its joint venture partner CONSOL holds all of its acreage by
Bakken Performance Improving
After an earlier period of flat performance, Bakken metrics have begun to
improve. The company has now largely exited its leasehold drilling program and
has been doing higher efficiency pad drilling. Strong operational performance
in the Bakken is especially important as it would tend to put to rest
operational complaints made by shareholder activists in the most recent proxy
Hess' latest financial performance has been good, driven by robust oil prices
and margin increases driven by portfolio high grading. At March 31, 2014, Hess
generated EBITDA of $6.5 billion, and total debt was $5.58 billion, resulting
in debt/EBITDA of 0.86x, while EBITDA/gross interest stood at 14.5x. The
company bought back approximately $2.54 billion in shares over the LTM period,
funded by asset sales proceeds.
Hess maintains liquidity through a $4 billion committed bank facility maturing
in 2016; approximately $1.44 billion in other committed lines; $258 million in
uncommitted lines; and $1.28 billion in cash and equivalents. At March 31,
2014, total liquidity across all of Hess' facilities including cash was
approximately $6.6 billion. Hess' main financial covenant is a maximum
debt-to-capitalization ratio of 62.5% contained in its revolver, vs. an actual
ratio of 18.7% at March 31. There are no financial covenants beyond the
debt-to-cap covenant contained in the revolver. Other non-financial covenants
contained in the bond indentures include restrictions on mergers and asset
sales, limitations on sale leasebacks, and cross-default provisions. Hess'
maturity schedule is manageable. The company has no major maturities due until
Hess' other obligations are manageable. The company's pension was overfunded
by $188 million at YE 2013 versus underfunded by $347 million at YE 2012. Hess
has historically carried a large letter of credit (LOC) position primarily
linked to its energy marketing arm ($389 million outstanding at March 31,
2014). None of the LOCs were drawn from the company's main revolver. This
requirement has been declining as Hess completes its exit from the downstream
and energy marketing. At March 31, 2014, if the company were to be downgraded
below investment grade, it would be required to post an additional $104
million in collateral to satisfy existing derivative positions. Hess' Asset
Retirement Obligation (ARO) stood at $2.2 billion at March 31, 2014, vs. $2.25
billion at YE 2013.
Positive: Future developments that could lead to positive rating actions
--Increased size, scale and diversification of Hess' upstream portfolio,
accompanied by a managerial commitment to maintaining lower debt levels
relative to reserves and production. 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
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' (May 2014);
--Global Impact of US Shale Oil -- Rising Production Tempers World Prices
(Feb. 10, 2014);
--Cash Flow Trends in the U.S. Energy Sector-Shareholder Activism Having an
Impact (Feb. 4, 2014);
--Scenario Analysis: Lifting the U.S. Crude Export Ban (Jan. 27, 2014);
--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).
Applicable Criteria and Related Research:
Energy Handbook - Upstream Oil & Gas
Updating Fitch's Oil and Gas Price Deck
Investor FAQs: Recent Questions on the E&P, Refining, and Drilling and
Scenario Analysis: Lifting the Crude Export Ban (Overall Credit Impact Limited
but Varies by Industry)
Cash Flow Trends in the U.S. Energy Sector (Shareholder Activism Having an
Global Impact of U.S. Shale Oil (Rising Production Tempers World Prices)
Corporate Rating Methodology - Including Short-Term Ratings and Parent and
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
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
Sean T. Sexton, CFA
Brian Bertsch, +1 212-908-0549
Press spacebar to pause and continue. Press esc to stop.