Fitch Ratings has affirmed the Long-Term Issuer Default Rating (IDR) for
Anadarko Petroleum Corporation (NYSE: APC) and Kerr-McGee Corp. at
'BBB'. Anadarko's Short-Term IDR and commercial paper rating have been
upgraded to 'F2' from 'F3'. The Rating Outlook has been revised to
Stable from Negative.
KEY RATING DRIVERS
Ratings for APC are supported by the company's significant production
scale, demonstrated asset quality, quality track record as an upstream
operator, strong liquidity position, and successful history of asset
development and monetization.
Successful Navigation of Commodity Downturn
APC has met or exceeded Fitch's expectations on numerous
credit-supportive actions. The company has executed nearly $3 billion in
asset sales YTD, with line of sight on $4 billion in total proceeds
during calendar 2016. Fitch expects 2016 year-end liquidity of
approximately $7.5 billion, consisting of $5 billion in credit facility
availability and $2.5 billion in cash. In February 2016, APC cut its
dividend to $100 million per year from $550 million, helping to stem
cash burn during the commodity downturn. Long-term debt issuance of $3
billion in the spring served to successfully refinance near-term
maturities, including the early redemption of $1.75 billion of senior
notes due in 2016 and a tender for $1.25 billion of notes due in 2017.
Additionally, APC has issued notice to redeem the remaining $750 million
of 2017 senior notes.
GoM Transaction Credit Positive
On Sept. 12, 2016, APC announced the purchase of deepwater Gulf of
Mexico (GoM) assets from Freeport McMoran. The company expects to deploy
GoM free cash flow (FCF) into North American onshore positions,
primarily the Delaware and D.J. basins. To fund the purchase, APC raised
$2.2 billion in equity, making the deal immediately deleveraging, as the
properties have 80 thousand barrels of oil equivalent per day (mboe/d)
of production (80% oil) associated with them. The purchase will double
APC's ownership in the Lucius asset to 49% from 23.8% at year-end 2015
and increase exposure to Heidelberg. Fitch believes the transaction was
executed on favorable terms for APC, particularly given its operational
integration, stage of development, FCF outlook and oil mix. APC has
disclosed an acquisition price of $13.50/boe for proved reserves, which
is competitive given the oil-weighted reserve base.
Based on recent strip pricing, APC estimates that its overall GoM
position will generate significant FCF in 2017-2021. This should provide
incremental FCF to drive growth in APC's U.S. onshore position, in
particular the Delaware and D.J. basins, improving visibility on APC
onshore volumes. This flows through as a longer-term positive for
Western Gas Partners (WES), APC's midstream Master Limited Partnership.
WES Enhances Financial Flexibility
Through its general and limited partnership ownership of Western Gas
Equity (WGP) and interests in WES, APC controls significant midstream
infrastructure related to its upstream operations. WES has allowed APC
to fund upstream operations with a high-value master limited partnership
(MLP) currency while retaining control of assets via the GP interest.
APC also retains a significant economic interest in WES and WGP through
its ownership of LP units. WES and WGP LP units retained by APC can be
monetized via sale to the public, providing an additional liquidity
option.
Recent Financial Performance
On a consolidated basis, Fitch-calculated LTM EBITDA was $3.8 billion,
down from $4.5 billion in calendar 2015, primarily due to the impact of
significantly lower realized oil & natural gas prices, resulting in
consolidated LTM debt/EBITDA of 4.6x. Fitch expects that leverage will
remain elevated in 2016 and 2017, at 4.1x and 2.9x, respectively,
moderately better than previously forecast, in part due to increased oil
volumes and cash flow from the GoM acquisition. Fitch expects 2016 FCF
after dividends of approximately negative $1.2 billion in 2016, but
believes that completed and potential asset sales will more than offset
negative cash flow and the company will end 2016 with a strong liquidity
position.
Top-Tier Upstream Operator
APC's production size and reserve base rank in the top quartile of North
American independent producers, and the company has successfully
executed high-complexity, long lead-time projects on-time and on-budget.
APC sales volumes were 780 mboe/d in the third quarter of 2016, down 1%
year over year with onshore growth and new GoM production partially
offsetting the effect of asset divestitures. Fitch anticipates the
potential for lower overall volumes in 2017 related to recent asset
divestitures. However, an increasing price deck should help fuel a
return to production growth in 2018.
KEY ASSUMPTIONS
--Base case WTI oil price that trends up from $42/barrel in 2016 to a
long-term price of $65/barrel;
--Base case Henry Hub gas that trends up from $2.35/mcf in 2016 to a
long-term price of $3.25/mcf;
--Consolidated capex of $3.4 billion in 2016, increasing in out years
in-line with Fitch's price deck;
--Production of approximately 782 mboe/d in 2016, increasing moderately
in out years on higher capital spending and increased U.S. onshore
spending.
RATING SENSITIVITIES
Positive - to 'BBB+' (individually or collectively)
--Demonstrated commitment to lower gross debt levels at APC;
--Mid-cycle debt/EBITDA projections under 2x;
--Sustained neutral-to-positive free cash flow generation and positive
through-the-cycle netbacks.
Negative - to 'BBB-' (individually or collectively)
--Material amounts of negative free cash flow or acquisitions funded
with increases in APC gross debt;
--Mid-cycle debt/EBITDA projections above 3x;
--Mid-cycle APC debt/flowing barrel projections above $20,000.
ROBUST LIQUIDITY POSITION
As of Sept. 30, 2016 APC reported consolidated cash of $4 billion ($145
million reported at WES) and $5 billion undrawn on revolving credit
facilities ($3 billion facility maturing 2021 and a $2 billion 364-day
facility) leading to $8.9 billion in liquidity at APC. This provides
significant flexibility to help weather the downturn in prices and
redeem the remaining $750 million in senior notes due 2017. APC's
liquidity position allows the company to invest through the cycle, which
is a characteristic of higher-quality E&Ps. Following the redemption,
the company's remaining near-term debt maturities include $114 million
and $900 million of senior notes due 2018 and 2019, respectively. APC
has significant leverage to oil and gas prices, and a rising price deck
will have a material positive impact on financial results and cash flow.
FULL LIST OF RATING ACTIONS
Fitch has affirmed the following ratings:
Anadarko Petroleum Corp.
--Long-Term Issuer Default Rating (IDR) at 'BBB';
--Senior unsecured notes at 'BBB';
--Senior unsecured revolving credit facility at 'BBB'.
Kerr-McGee Corp.
--Long-Term IDR at 'BBB';
--Senior unsecured notes at 'BBB'.
Fitch has upgraded the following ratings:
Anadarko Petroleum Corp.
--Short-Term IDR to 'F2' from 'F3';
--Commercial Paper to 'F2' from 'F3'.
The Rating Outlook is Stable.
Summary of Financial Statement Adjustments - Fitch has made no material
adjustments that are not disclosed within the company's financial
statements.
Additional information is available on www.fitchratings.com.
Applicable Criteria
Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016)
https://www.fitchratings.com/site/re/885629
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1014419
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1014419
Endorsement Policy
https://www.fitchratings.com/regulatory
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