Fitch Expects to Rate Anadarko's Senior Unsecured Notes 'BBB'; Outlook Remains Negative
Fitch Ratings expects to rate Anadarko Petroleum Corporation's (NYSE:
APC) pending issuance of senior unsecured notes 'BBB'. APC intends to
use proceeds to refinance the 5.950% senior notes due in September 2016,
to refinance a portion of the 6.375% senior notes due in September 2017,
and for general corporate purposes.
The Rating Outlook is Negative.
Ratings for APC are supported by the company's significant production
scale, demonstrated asset quality, strong track record as a quality
upstream operator, adequate liquidity position, and successful history
of asset development and monetization.
The Negative Outlook is driven primarily by changes to Fitch's oil & gas
price deck which lead to lower cash flow expectations and increases in
near-term leverage forecasts, as well as execution risks related to
potential asset sales. Fitch believes that APC has sufficient liquidity,
financial flexibility, market access, and potential asset monetizations
to support operations and maintain an investment-grade profile through
2018, when Fitch expects a sufficient recovery in commodity prices to
support the rating at an investment-grade level. Reductions in gross
debt are not modelled into Fitch's base case projections, but would be a
strong support for the rating if funded with asset sale proceeds or in
an otherwise creditor-friendly manner. Fitch recognizes that Anadarko
has a significant pipeline of saleable assets that could bolster
liquidity and/or reduce gross debt. However, the timing of sales and use
of proceeds will have to be evaluated in the context of prevailing
commodity price expectations in order to determine credit quality and
ratings impact. Anadarko's strong track record regarding asset sales
also provides support for the rating.
KEY RATING DRIVERS
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 produced 836 thousand barrels of oil equivalent per day (mboe/d) in
2015, at approximately 53% liquids (oil and natural gas liquids). Fitch
expects lower volumes in 2016 due to portfolio declines from reduced
capex and the impact of recent asset divestitures.
APC has consistently generated positive cash netbacks (as calculated by
Fitch, cash netbacks were $11/boe in 2015, down from $30/boe in 2014).
Full-cycle netbacks, which include a capital cost component, were
challenged in 2015 due to the combination of lower oil & natural gas
prices and price revisions on 1P reserves, which impact standard capital
cost calculations. However, Fitch realizes that 1P reserves de-booked
related to delayed capex plans or price revisions will potentially be
re-booked in a mid-cycle price environment, offsetting a portion of the
effect of current period FD&A metrics on full-cycle economics.
APC owns significant fee-mineral interests in the Rockies Region through
its Land Grant position. In the company's Wattenberg position, the fee
minerals ownership significantly increases total economic value on a
PV-10 basis. The position creates superior economics for APC relative to
competitors and provides the company with the opportunity to invest
through commodity cycles in its most economic positions.
Liquidity Levers Pulled to Date
In February 2016, APC cut its dividend to $100 million per year from
$550 million, which will save $450 million per year. Fitch expects the
company to maintain the $100 million dividend, as the current dividend
is small relative to the overall budget. On Feb. 24 2016, Anadarko
announced agreements to monetize approximately $1.3 billion in non-core
and midstream assets. The monetizations include the sale of future
royalty income from its Wyoming soda ash and coal interest ($420
million), the East Chalk asset ($105 million), and the 50.1% interest in
the Maverick Basin gathering system to Western Gas Partners ($750
million). Fitch expects that asset sales will continue to be a part of
APCs strategy for navigating the downturn, but recognizes that the size
and timing of sales proceeds is uncertain.
Reduced 2016 Capital Plan
APC has set an initial 2016 capital budget of $2.6 - $2.8 billion
(excluding capital spending at WES), which is approximately 50% lower
than 2015 capex and approximately 70% lower than 2014. Lower drilling
activity in 2016 will likely result in modest production declines. Fitch
expects oil production to remain relatively flat YoY, as the majority of
capex dollars are focused on development of liquids properties, and Gulf
of Mexico oil volumes (Lucius/Heidelberg) will help to support output.
Gas volumes are expected to comprise the majority of the decline, as
this portion of the portfolio will likely run closer to a natural
decline rate with less support from new drilling activity. Fitch expects
U.S. onshore development to focus primarily on the Wattenberg and
Permian horizontal programs in the light of low oil & gas prices. This
will allow a moderate pace of well completions and will help to sustain
volumes into the company's gathering & processing systems, which are
primarily the WES assets.
Recent Financial Performance
On a consolidated basis, Fitch-calculated EBITDAX for 2015 was $4.5
billion, down from $10.4 billion in 2014, primarily due to the impact of
significantly lower realized oil & natural gas prices. LTM debt/EBITDAX
increased to 3.4x from 1.5x in 2014. Fitch currently expects that
leverage will remain elevated in 2016 and 2017 (5.1x and 3.6x,
respectively) before falling in 2018 to levels consistent with mid-cycle
leverage tolerances for the rating category. Fitch expects 2016 free
cash flow (FCF) after dividends of approximately negative $1.1 billion
in 2016, but believes that completed and potential asset sales will be
sufficient to offset negative cash flow in 2016 and that liquidity will
remain adequate.
WES Increases 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 execute asset dropdowns (sales from E&P to master limited
partnerships [MLP), effectively allowing APC to fund upstream operations
with a higher-value 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.
KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for APC include:
--Base case WTI oil price that trends up from US$35/barrel in 2016 to a
long-term price of US$65/barrel;
--Base case Henry Hub gas that trends up from US$2.25/mcf in 2016 to a
long-term price of US$3.25/mcf;
--E&P capex of $2.8 billion in 2016;
--Production of approximately 782.5 mboe/d in 2016, including the impact
of divestitures, declining to approximately 700 mboe/d in 2017.
Production declines are primarily related to natural gas volumes, with
oil volumes essentially flat through our forecast.
RATING SENSITIVITIES
Negative: to 'BBB-' (individually or collectively):
--Material amounts of negative free cash flow or opportunistic
acquisitions funded with increases in APC's gross debt;
--Mid-cycle E&P debt/EBITDA projections above 2.5x;
--Mid-cycle APC debt/flowing barrel projections above $18,000.
Resolution of Negative Outlook:
--Successful execution of non-core asset sales, with proceeds applied to
decrease gross debt or increase liquidity cushion;
--Mid-cycle debt/EBITDA projections under 2.5x.
Positive: to 'BBB+' (individually or collectively):
--Demonstrated commitment to significantly lower gross debt levels at
APC;
--Maintenance of significant liquidity cushion during the current cycle;
--Mid-cycle debt/EBITDA projections under 2.0x;
--Mid-cycle APC debt/flowing barrel projections under $15,000.
Upgrades to 'BBB+' are not considered likely in the near term due to
expectations for elevated leverage in 2016 and continued weakness in
commodity prices.
ADEQUATE LIQUIDITY POSITION
As of Dec. 31, 2015, the company had $939 million in cash and a combined
$4.75 billion of capacity on the $3 billion and $2 billion unsecured
revolving credit facilities leading to $5.7 billion in current
liquidity. This provides significant flexibility to help weather the
downturn in prices, and ultimately to bridge potential negative FCF
until Fitch's mid-cycle price assumptions in 2018. Fitch notes that $2
billion in liquidity is related to a 364-day facility that matures in
January 2017, presenting some liquidity risk related to bank
participation and APC's ability to extend the facility. APC's liquidity
position allows the company to invest through-the-cycle, which is a
characteristic of investment-grade E&Ps. Given the large oil & gas
production base, the company has significant sensitivity to oil and gas
prices, and any change in prices will have a material impact on
financial results and cash flow.
Anadarko has zero-coupon notes due 2036, which can be put to the company
in October of each year, in whole or in part, for the then-accreted
value, which will be $839 million at the next put date in October 2016.
Fitch believes the potential exists for a put of a portion of the zeros.
As of Dec. 31, 2015, the company had ~$5.7 billion in liquidity, making
a put of the entire $839 million a manageable event which could serve to
reduce gross debt if funded with asset sale proceeds.
Date of Relevant Rating Committee: March 11, 2016
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
Short-Term Ratings Criteria for Non-Financial Corporates (pub. 13 Aug
2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869259
Additional Disclosures
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1000916
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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