April 3 – Fitch Ratings has assigned an ‘A-‘ rating to Apache Corporation’s
(Apache) issuance of $3.0 billion in unsecured notes but maintained its
existing Negative Outlook. The issuance will be comprised of 5-, 10-, and 31-
year notes. Net proceeds from the offering will be used to fund part of the cash
portion of the $2.85 billion Cordillera Energy Partners III, LLC acquisition, as
well as repay $400 million in 6.25% notes due April 15,
2012.
Apache’s current ratings are as follows:
–Issuer Default Rating (IDR) ‘A-‘;
–Senior unsecured credit facility ‘A-‘;
–Senior unsecured notes ‘A-‘;
–Preferred ‘BBB+’
–Commercial paper: ‘F2’;
–Short-term IDR ‘F2’.
Note that the Negative Outlook does not apply to the Commercial paper or
Short-term IDR.
The main driver for the Negative Outlook stems from the leveraging impact of the
Cordillera transaction, both because of its relatively heavy debt component (79%
of financing), and because the acquisition was light on proven reserves, as it
was primarily driven by the value of acreage (254,000 acres in the liquids-rich
Granite Wash, Tonkawa, Cleveland, and Marmaton plays in Oklahoma and the Texas
Panhandle adjacent to existing Apache assets). While Apache’s financial metrics
should remain strong in the current high oil priced environment, debt/boe
metrics are expected to weaken following the financing. On a pro-forma basis as
calculated by Fitch, balance sheet debt/boe of 1p reserves after giving effect
to the issuance, Cordillera transaction, and expected April 2012 note repayment
would rise to approximately $3.19/boe from $2.41/boe at year-end 2011.
Other ratings issues for Apache center on recent increases in AROs; the
potential for high future capex; and ongoing event risk, as the Cordillera
acquisition is the latest of a string of deals, including the ExxonMobil North
Sea transaction ($1.75 billion), the acquisitions of BP and Devon properties
($6.4 billion and $1.05 billion); and the acquisition of Mariner ($4.4 billion).
Apache also has meaningful exposure to Egypt, although this is expected to
decline on a percentage basis following recent acquisitions.
With regards to future capex pressure, Fitch would note that the company’s two
pending LNG projects –the Chevron operated Wheatstone facility in Australia,
and Apache-operated Kitimat, B.C. export facility — could create funding
pressures over an extended time frame given the long lag between the initial
investment and cash flows; as well as the potential for cost overruns and other
delays. Because of their ratable nature, the LNG facilities are expected to
lower Apache’s overall portfolio volatility once they are up and running.
However, given the size of LNG-related commitments (total Wheatstone spending is
$4.0 billion for Apache’s 13% project stake), interim financing choices will be
important for Apache’s credit profile. For example, a sustained period of low
oil prices would be a key credit risk if the company were to fund these projects
out of operating cash flow.
Apache’s ratings are supported by the company’s size; diversified portfolio of
upstream properties; significant leverage to liquids (approximately 50% of the
company’s 748,000 boepd of 2011 production was liquids, most of which was oil
rather than lower priced NGLs); its substantial exposure to higher-priced Brent
and Brent-linked crudes within its oil portfolio; historical track record of
strong growth in reserves and production at economical replacement costs; and
meaningful capex flexibility. While outside the company’s control, persistently
high oil prices have also been a strong credit positive, allowing the company to
fund capex and repay debt on an accelerated basis. Current LTM financial metrics
are strong, and include debt with equity credit/EBITDA of 0.62x, FFO interest
coverage of 21.4x, and free cash flow of $2.57 billion. Fitch expects the
company will be modestly free cash flow positive in 2012.
At year end 2011, Apache’s liquidity was strong. Availability was 100% across
the company’s $3.3 billion in committed unsecured revolver capacity, including
its main US revolvers ($1.5 billion and $450 million), its Canadian and
Australian revolvers ($150 million and $200 million, respectively), all of which
mature in 2013, and its $1.0 billion 2016 revolver. The facilities are used to
backstop Apache’s $2.95 billion CP program.
Apache’s near-term maturity schedule is manageable, with $400 million in 6.25%
notes due April 15, $900 million due 2013, and $350 million due 2015. Covenant
restrictions across Apache’s debt instruments are light and include a 60%
debt-to-capitalization maximum across its unsecured revolvers, as well as
limitations on sale leasebacks and change of control provisions. Total
debt-to-cap was 19.9% at Dec. 31, 2011.
