Fitch Ratings has affirmed Hess Corporation's (Hess; NYSE: HES)
long-term Issuer Default Rating (IDR) and senior unsecured ratings at
'BBB' but revised the Rating Outlook to Negative from Stable.
Approximately $6.55 billion in debt is impacted by today's rating
actions. A full list of ratings follows at the end of this press release.
KEY RATING DRIVERS
Hess' ratings are supported by the company's strong current liquidity
(approximately $8 billion at Sept. 30, with one of the lowest
net-debt-to-capital ratios among independent E&Ps one year into the
downturn); good remaining capex flexibility; high exposure to liquids
(approximately 74% of 2014 production and 78% of reserves); consistent
track record as one of the better operators in the space and good
operational metrics; and decent size and scale as an independent, with
1.431 billion boe reserves at YE 2014, core regions in the U.S. (GoM,
onshore Bakken and Utica), North Sea, Asia-Pacific, and West Africa.
The Negative Outlook is driven by projected outspending on growth
projects in 2016 that Fitch anticipates is likely to meaningfully reduce
the company's liquidity under a lower for longer oil price scenario; the
loss of diversification associated with the previous sale of downstream,
midstream and retail assets; and the reduction in size in the upstream
through asset sales.
While Hess' liquidity is currently very strong, the company has
aggressively sold off a large number of assets as part of earlier
restructurings (as calculated by Fitch, approximately $9 billion since
2009), which may limit its ability to liquidate additional assets under
a lower-for-longer scenario without unfavorably impacting core credit
metrics. Discretionary growth investments over the next several quarters
while likely to be highly accretive in a rising oil price environment
might also limit financial flexibility if the downturn is prolonged.
FCF TRENDS
Hess' LTM FCF at Sept. 30, 2015 was -$2.82 billion, significantly weaker
than the -$1.11 billion seen at YE 2014, and was driven primarily by the
full year effects of the collapse in oil prices. Fitch expects the FCF
deficit to drop significantly in 2016 as capex is stepped down from
approximately $5 billion level to approximately $3 billion. As modelled
by Fitch, under our base case assumption of $50/bbl WTI, 2016 FCF is
approximately -$1.3 billion, while under a stress case assumption of $40
WTI, it is approximately -$2 billion. However, Hess' current cash
balances mean it should not need to borrow incremental debt for E&P
operations under either of these scenarios in 2016.
STRONG OPERATIONAL TRACK RECORD
As calculated by Fitch, Hess has been a solid performer in the
independent E&P space, with a consistent track record of strong reserve
growth at economical replacement costs, which are key indicators of
health for an E&P company. This includes above average full cycle
netbacks (average of $17.70/boe from 2010-2014); good reserve
replacement (average organic RR of 129% from 2010-2014); and a 2014
reserve life of just under 12 years.
Hess also continues to move down the cost curve in key shale plays. Well
completion costs in the Bakken have fallen to less than $5.3 million per
well versus $13.4 million seen in early 2012 while days to spud a well
have dropped from 45 in 2011 to 17. The company continues to have one of
the highest 30 day IP rates in the space. Despite its drop in size
following restructurings, it still retains good geographical diversity,
with core positions in the onshore shale (Bakken, Utica); offshore GoM;
the North Sea; Southeast Asia; and offshore West Africa. It is important
to note that several of these regions are PSC (Production Sharing
Contracts) regimes which offer a partial cash flow hedge in lower priced
environment. Hess also has a track record as one of the more successful
independent E&Ps in the exploration space, highlighted by its most
recent success in offshore Guyana.
AMPLE CURRENT LIQUIDITY
Hess has gotten ahead of the liquidity issue heading into the oil price
downturn. Total liquidity at Sept. 30 was $8 billion, including $3
billion in cash (mostly from the Bakken midstream JV in July of this
year); $4 billion in undrawn revolver commitments which mature in
January 2020; and another $900 million in uncommitted lines. Net debt to
cap at Sept. 30, 2015 was just 13%. The company's maturity wall is light
and includes just $522 million in total between now and 2018. As stated
above, under our base case assumption of $50/bbl WTI and stress
assumption of $40/bbl WTI in 2016, Hess would not need to borrow
incremental debt for E&P operations.
STRATEGIC TRANSFORMATION COMPLETE
Hess has all but completed its transition to a pure play E&P company
from a small integrated oil company, with its earlier exit from refining
and trading, the sale of its retail business for $2.8 billion in
September of 2014, and the sale of a 50% stake of its Bakken Midstream
to GIP for $3 billion in mid-2015. The only piece left is an IPO of the
equity stake in the Bakken midstream jv. Difficult market conditions for
MLPs suggest that such an IPO may be delayed; however, total proceeds
expected from such an event are small. In the future, when MLP market
valuations recover, Fitch expects the MLP is likely to provide an
ongoing valuable source of liquidity to Hess parent through dropdowns of
logistics assets.
KEY ASSUMPTIONS
Fitch's key assumptions within our rating case include:
--Base Case WTI oil prices of $50/bbl in 2016, $60/bbl in 2017, $65 in
2018, and $70/bbl in 2019;
--Stress Case WTI oil prices of $40/bbl in 2016, $45/bbl in 2017, and
$50/bbl thereafter;
--Base Case Henry Hub natural gas prices of $2.75/mcf in 2016, $3.00/mcf
in 2017,and $3.25/mcf in 2018;
--Stress Case Henry Hub natural gas prices of $2.25/mcf in 2016,
flatlining at $2.75/mcf thereafter;
--Base Case cumulative production growth of 1.7% from 2015-2019;
--Stress Case cumulative production growth of -4.6% from 2015-2019;
--Capex of less than $3.0 billion in 2016;
--Minimal growth in dividend and minimal asset sales in the Base Case;
--Flat dividends and $150 million in annual asset sales in the Stress
Case.
RATING SENSITIVITIES
Positive: No positive rating actions are currently contemplated given
the reduction in Hess' size, scale and diversification associated with
recent company restructuring and weakening credit metrics associated
with low oil prices. However, future developments that could lead to
positive rating actions include:
For an upgrade to 'BBB+':
--Increased size, scale, and diversification, and;
--Sustained debt/boe 1p in the <$30/boe range, debt/EBITDA<1.25x or
debt/flowing barrel <$13,500;
Negative: Future developments that could lead to negative rating action
include:
--Sustained debt/boe 1p above approximately $4.75/boe;
--Sustained debt/EBITDA above the 2x-2.25x;
--Sustained debt/flowing barrel > $18,000.
To remove the Negative Outlook at 'BBB':
--A credit-friendly method to fund deficit spending, for example a
material equity issuance, or asset sale with limited impacts on existing
metrics.
Fitch would anticipate downgrading the credit to the 'BBB-'level absent
evidence of meaningful production decline or oil inventory drawdown that
supports a price recovery by the end of 2016. A credit-friendly method
to fund deficit spending that helps bridge the credit profile through an
extended price recovery may also alleviate ratings pressure over the
next 12-18 months.
LIQUIDITY AND MATURITY PROFILE
Hess' total liquidity at Sept. 30 was $8 billion, including $3 billion
in cash; $4 billion in undrawn revolver maturing in January 2020, and
another $900 million in uncommitted lines. Net debt to cap was just 13%.
The company's maturity wall is very light and includes $71 million due
in 2016, $373 million due 2017, and $78 million due 2018, with the next
sizable maturity due 2019 ($1 billion). Hess' main financial covenant is
a maximum debt-to-capitalization ratio of 62.5% contained in its
revolver, and the company had ample headroom on this at Sept. 30. Hess
had historically carried a large LoC position linked to its energy
marketing arm but this requirement has largely gone away following its
exit from the downstream and energy marketing.
Covenant restrictions across Hess' debt instruments are light. 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.
OTHER OBLIGATIONS:
Hess' other obligations are manageable. Hess' qualified pension was
underfunded by -$199 million at YE 2014, versus overfunded by $188
million the year prior. The main drivers of the decrease were actuarial
losses and lower returns on plan assets. For 2015, expected pension
contributions were $45 million, of which $41 million had been paid as of
Sept. 30. Hess' Asset Retirement Obligation (ARO) linked to
environmental remediation stood at $2.16 billion at Sept. 30, 2015
versus $2.32 billion at Sept. 30, 2014.
FULL LIST OF RATING ACTIONS
Fitch has affirmed Hess' ratings as follows:
--Long-term IDR at 'BBB';
--Senior unsecured notes/debentures at 'BBB';
--Senior unsecured revolver at 'BBB'.
The Rating Outlook is revised to Negative from Stable.
Additional information is available on www.fitchratings.com
Applicable Criteria
Corporate Rating Methodology - Including Short-Term Ratings and Parent
and Subsidiary Linkage (pub. 17 Aug 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362
Additional Disclosures
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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=997759
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https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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