December 22, 2015 - 3:22 PM EST
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Fitch Downgrades Pacific Exploration and Production's Ratings to 'CCC'

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 Negative.

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.

KEY ASSUMPTIONS

--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.

RATING SENSITIVITIES

A negative rating action would be triggered by any combination of the following events:

--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.

LIQUIDITY

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'.

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

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=997247

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=997247

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Fitch Ratings, Inc.
Primary Analyst
Lucas Aristizabal
Senior Director
+1-312-368-3260
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Xavier Olave
Associate Director
+1-212-612-7895
or
Committee Chairperson
Sergio Rodriguez
Senior Director
+52-818-399-9100
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
[email protected]


Source: Business Wire (December 22, 2015 - 3:22 PM EST)

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