Fitch Ratings has downgraded Pacific Exploration and Production Corp.
(Pacific) foreign and local Long-term Issuer Default Ratings (IDRs) to
'CCC' from 'B-'. Fitch has also downgraded to 'CCC/RR4' from ' B-/RR4'
the long-term rating on Pacific's outstanding senior unsecured debt
issuances totalling approximately USD4 billion with final maturities in
2019 through and 2025. The ratings were previously on Rating Watch
KEY RATING DRIVERS
The downgrade reflects Fitch's expectations that the company's capital
structure could weaken to an unsustainable level over the near term as a
result of slower oil price recovery expectations. The rating action also
incorporates the company's delay in the sale of assets to bolster
liquidity as well as delays in reaching an agreement with the company's
syndicate of lenders under its USD1 billion revolving credit facility
and other bank loans. Towards the end of September 2015, the company
received a 90 days waiver, which expires at the end of December 2015,
for some maintenance covenants included in these facilities.
A key factor in Fitch's previous rating commentary was the delay in the
sale of none-core assets to bolster liquidity and the company's ability
to negotiate covenants with banks. The company is yet to announce a
material divestiture and negotiation with its syndicate of bank with
regards to the covenants are still ongoing. On Dec. 17, 2015, the
company announced that the syndicate of lenders under the revolving
credit agreement had formed a steering committee to negotiate the terms
of a potential extension of covenant relief. Simultaneously, the company
announced it had hired Lazard Freres & Co. LLC as its financial advisor
in order to assist with the ongoing negotiations.
Pacific credit metrics have been materially affected by the sharp
decline in oil prices, as well as the company's debt increase during
2015. Total and net debt/EBITDA for the latest 12 months (LTM) ended
September 2015 have increased to 4.3x and 3.9x, from 1.9x and 1.8x, as
of year-end 2014. This was mostly due to due to the decline in global
oil prices as well as Pacific's debt increase of more than USD600
million during first-half 2015. Positively, Pacific reported zero
short-term debt as of September 2015.
--Fitch's price deck for WTI oil prices of $50/bbl for 2015 and 2016,
recovering to $60/bbl in 2017;
--Piriri-Rubiales field reverts to Ecopetrol in 2016;
--Production declines on a year-over-year basis in 2016 and 2017.
A negative rating action would be triggered by any combination of the
--A continuous deterioration of the company's capital structure and
liquidity as a result of either a decrease in production as a result of
capex curtailment or persistent low oil prices;
--A significant reduction in the reserve replacement ratio could affect
Pacific's credit quality given the current proved reserve life of
approximately 9 years when excluding Piriri-Rubiales production.
A positive rating action is unlikely in the medium term.
Adequate Liquidity Position: The company's liquidity position as of
Sept. 30, 2015 was adequate, with Pacific reporting $489 million of cash
on hand an zero short-term debt. The company's debt amortization
schedule is spread between 2017 and 2025 with an average of $1 billion
coming due every two years. Pacific's liquidity could remain relatively
stable provided the company succeeds at running a balanced FCF over the
next two years which would potentially stabilize the credit; break even
FCF is possible with Fitch's new price deck if the majority of the
company's capex is considered discretionary and is cut without further
erosion of production. Liquidity could deteriorate significantly if the
company fails to reach an agreement with its syndicate lenders.
Fitch has downgraded the following ratings:
Pacific Exploration and Production Corp.
--Foreign and local currency IDRs to 'CCC' from 'B-';
--International senior unsecured bond ratings to 'CCC/RR4' from 'B-/RR4'.
Date of Relevant Rating Committee: December 22, 2015.
Additional information is available at 'www.fitchratings.com'.
Corporate Rating Methodology - Including Short-Term Ratings and Parent
and Subsidiary Linkage (pub. 17 Aug 2015)
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