Fitch Ratings expects to rate Pioneer Natural Resources Co.'s (Pioneer;
NYSE: PXD) senior unsecured notes 'BBB-'. The company intends to use the
net proceeds for general corporate purposes, including funding the
repayment or repurchase of the 5.875% senior notes due 2016 and 6.65%
senior notes due 2017. Pioneer expects to issue approximately $1 billion
in notes with 2021 and 2026 maturities.
KEY RATING DRIVERS
Pioneer's ratings reflect its liquid-focused onshore production profile
and proved reserve base, strong liquidity position, and credit conscious
financial policy. Offsetting factors include the company's size, which
is at the low end of the range for the rating category, limited
geographic diversity, and growth-oriented equity base that may encourage
an acceleration of drilling activity ahead of supportive pricing signals.
The company reported, excluding discontinued operations, net proved (1p)
reserves of 799 million barrels of oil equivalent (mmboe) and production
of 182 thousand boe per day (mboepd) for the year ended 2014. This
results in a reserve life of about 12 years. Production has continued to
grow throughout the year reaching 210.7 mboepd in Q3 2015. Reported year
end 2014 drillbit reserve replacement was 239% with an associated
finding and development (F&D) cost of $19.65 per boe ($15.51 per boe on
horizontal additions). Liquids mix continues to improve year-over-year
to 71.5% (51.8% oil) in Q3 2015 compared to 69.2% (47.8% oil) in Q3 2014.
Credit metrics remain strong with latest-12-month (LTM) debt/EBITDA of
approximately 1.4x, as of Sept. 30, 2015, generally consistent with the
approximately 1.2x at year end 2014. Leverage metrics have benefited
from the company's ability to fund capital outspend with cash flow from
operations, cash-on-hand, asset sale proceeds, favorable hedge position,
and growing oil-focused production profile. The Fitch-calculated debt/1p
reserves and debt/flowing barrel metrics, as of Sept. 30, 2015, were
approximately $3.2/boe and $12,700, respectively. Fitch notes that these
metrics are generally consistent with or better than similarly rated
North American E&P peers.
FORECAST CONTINUED OUTSPEND, METRICS REMAIN MANAGEABLE
Fitch's base case, assuming a West Texas Intermediate (WTI) and Henry
Hub price of $50 and $2.75, respectively, projects that Pioneer will be
less than $1.2 billion free cash flow (FCF) negative in 2015. The
current Fitch base case results in debt/EBITDA of approximately 2.1x.
Proforma 2015 debt/1p and debt/flowing barrel are forecast to increase
to about $4.4/boe, subject to price-induced reserve revisions, and under
Fitch's 2016 base case WTI and Henry Hub price forecast assumptions of
$50 and $2.75, respectively, suggest that prices will continue to
influence management's drilling plans and limit capital outspending. The
Fitch base case considers that the company will spend approximately $2.2
billion in 2016, consistent with the 2015 capital program, given the
company's favorable hedge position and robust production growth targets
(15% total and 20% oil three-year compound annual growth rate). Cash
flow from operations, proceeds from asset sales, and cash on hand are
anticipated to be sufficient to cover projected negative FCF. Fitch's
base case forecasts debt/EBITDA of under 1.8x in 2016.
Pioneer maintains a rolling, multi-year hedging program, using a
combination of swaps and three-way collars, to manage cash flow
variability and support development funding. Fitch recognizes that
Pioneer's three-way collar hedging strategy provides some upside
potential, but exposes cash flows to adjusted spot prices in a weak
pricing environment. As of Oct. 30, 2015, Pioneer's anticipated 2015 oil
and gas production were about 90% and 85% hedged, respectively. Existing
hedge positions also provide oil and gas coverage of roughly 85% and
70%, respectively, for 2016 assuming approximately 15% growth in oil and
flat gas production.
Fitch's key assumptions within the rating case for Pioneer include:
--WTI oil price that trends up from $50/barrel in 2015 to a long-term
price of $70/barrel;
--Henry Hub gas that trends up from $2.75/mcf in 2015 to a long-term
price of $3.50/mcf;
--Production grows to approximately 202 mboepd in 2015, generally
consistent with management guidance, followed by a robust mid-teens
growth profile thereafter;
--Liquids mix improves to 72% in 2015 with a continued focus on liquids,
particularly oil, thereafter;
--Capital spending is forecast to be $2.2 billion in 2015 and 2016,
followed by a measured increase in drilling and infrastructure
activities given supportive pricing signals;
--Receipt of the $1 billion EFS Midstream asset sale proceeds in equal
installments during 2015 and 2016.
Positive: Future developments that may, individually or collectively,
lead to a positive rating action include:
--Increased size, scale, and diversification of Pioneer's operations;
--Maintenance of a mid-cycle debt/EBITDA below 1.5x on a sustained basis;
--Preservation of mid-cycle debt/1p reserves below $5.00/boe and/or
debt/flowing barrel under $15,000.
Fitch does not expect a positive rating action in the near term given
the current weak pricing environment.
Negative: Future developments that may, individually or collectively,
lead to a negative rating action include:
--Material deviation from management's target leverage ratio resulting
in mid-cycle debt/EBITDA of 2.0x - 2.25x on a sustained basis;
--Mid-cycle debt/1p reserves of over $6.0/boe and/or debt/flowing barrel
to $20,000 - $25,000;
--A persistently weak market-pricing environment without a corresponding
reduction to capex;
--An increase in dividend payments or commencement of share repurchases
inconsistent with the expected cash flow and leverage profile.
Fitch does not anticipate a negative rating action in the near term
given the company's strong liquidity position, measured capital
outspend, favorable hedge position, and growing, oil-focused production
profile. However, Fitch recognizes that a considerable acceleration of
drilling activity ahead of securing a favorable portfolio of hedges
and/or a supportive market pricing outlook could reduce financial
flexibility and, potentially, pressure the rating.
STRONG LIQUIDITY POSITION
Pioneer has and continues to improve its cash position via an equity
offering and non-core asset sale proceeds to meet the funding needs of
its planned multi-year drilling program. Cash-on-hand was approximately
$581 million as of Sept. 30, 201, with an additional $500 million in EFS
midstream sale proceeds receivable in mid-2016. Additional liquidity is
provided by the company's $1.5 billion unsecured credit facility (no
outstanding borrowings as of Sept. 30, 2015) due August 2020.
The company's main financial covenant, as defined in the credit
facility, is a maximum debt-to-book capitalization ratio, less non-cash
asset impairments and certain other items, of 60% (approximately 20% as
of Sept. 30, 2015). Other covenants consist of additional lien
limitations, transaction restrictions, and change in control provisions.
Near-term maturities are manageable with $455 million (5.875% notes) due
in 2016, $485 million (6.65% notes) due in 2017, $450 million (6.875%
notes) due in 2018, and $450 million (7.5% notes) due in 2020. Fitch
understands that the planned $1 billion senior unsecured notes issuance
is intended to prefund the 2016 and 2017 maturities.
MANAGEABLE OTHER LIABILITIES
Pioneer does not maintain a defined benefit pension plan. The company's
asset retirement obligations (ARO) were $182 million as of Sept. 30,
2015, which is generally consistent with the $189 million at year-end
2014. The company had contractual obligations totalling approximately $4
billion as of Dec. 31, 2014, on a multi-year, undiscounted basis. The
obligations include: $3 billion in gathering, processing,
transportation, and fractionation commitments; $910 million in drilling
and purchase commitments; and $137 million in operating leases.
Approximately $1.1 billion is payable in 2015.
FULL LIST OF RATING ACTIONS
Fitch currently rates Pioneer Natural Resources Co. as follows:
--Long-Term Issuer Default Rating 'BBB-';
--Senior unsecured notes 'BBB-';
--Bank revolver 'BBB-'.
Fitch expects to rate the following senior unsecured notes:
--Senior unsecured notes 'BBB-'.
The Rating Outlook is Stable.
Date of Relevant Rating Committee: Feb. 20, 2015
Additional information is available on www.fitchratings.com
Corporate Rating Methodology - Including Short-Term Ratings and Parent
and Subsidiary Linkage (pub. 17 Aug 2015)
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