Moody's Lowers Outlook on Apache Corp. (APA) to Negative; Ratings Affirmed

November 11, 2016 11:14 AM EST

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Moody's Investors Service (Moody's) changed the rating outlook for Apache Corporation (NYSE: APA)(Apache) and its guaranteed subsidiaries to stable from negative. Moody's affirmed Apache's and its guaranteed subsidiaries' Baa3 senior unsecured ratings and its P-3 commercial paper rating.

"Apache's demonstrated commitment to limit capital investment to within cash flow and maintain a sizable cash balance led to our changing its rating outlook to stable," commented Pete Speer, Moody's Senior Vice President. "Ongoing operational improvements and rising commodity prices will improve its credit metrics in 2017, while the company works to lower its organic reserves replacement costs to generate more competitive returns and stem production declines."

Outlook Actions:

..Issuer: Apache Corporation

....Outlook, Changed To Stable From Negative

..Issuer: Apache Finance Canada Corporation

....Outlook, Changed To Stable From Negative

..Issuer: Apache Finance Canada II Corporation

....Outlook, Changed To Stable From Negative


..Issuer: Apache Corporation

....Senior Unsecured Commercial Paper, Affirmed P-3

....Senior Unsecured Regular Bond/Debenture, Affirmed Baa3

..Issuer: Apache Finance Canada Corporation

....Backed Senior Unsecured Regular Bond/Debenture, Affirmed Baa3

..Issuer: Apache Finance Canada II Corporation

....Backed Subordinare Shelf, Affirmed (P)Ba1

....Backed Senior Unsecured Shelf, Affirmed (P)Baa3


Apache's Baa3 senior unsecured rating and Prime-3 short-term rating incorporate Moody's expectation of gradually improving cash flow generation and cash flow based credit metrics in 2017. The Baa3 rating is supported by Apache's large and diversified asset base, aggressive reductions in capital spending which has limited anticipated negative free cash flow in 2016 and 2017, and manageable debt maturities through 2020. The company's asset portfolio benefits from the ownership of producing properties in the North Sea and Egypt that generate meaningful cash flow even in a low oil price environment, adding diversification to its high quality large acreage positions in multiple basins in North America, including the Permian Basin. The company also has stronger asset value coverage of debt than most Baa3 peers. The rating is restrained by the company's historically higher finding and development costs (F&D) and correspondingly weaker investment returns than peers.

Apache's rating outlook is stable reflecting Moody's expectation that the company's financial leverage metrics will improve in 2017 in line with the company's improving operational performance and Moody's commodity price estimates, and that the company will avoid negative free cash flow and maintain its sizable cash balance.

Apache's P-3 short-term liquidity rating is supported by its excellent liquidity profile reflecting its cash and available borrowing capacity under its committed revolving credit facility. At September 30, 2016, the company had $1.2 billion of cash, no commercial paper (CP) outstanding and full availability under its $3.5 billion committed revolving credit facility that matures in June 2020. The company's $3.5 billion commercial paper program is fully backed by the revolving credit facility. The credit facility has a financial covenant restricting debt-to-capitalization to a maximum of 60%, for which the company has ample headroom that Moody's expect to continue through 2017. Apache has no secured debt so its assets are unencumbered providing it with the flexibility to sell oil and gas properties to raise cash.

In order for Apache's rating to be considered for an upgrade, the company will have to achieve modest production and reserves growth funded within cash flow and at competitive returns compared to peers. Moody's expects oil prices to remain in a range of $40 to $60 per barrel for the medium term with significant volatility both within and outside that band. The rating could be upgraded if Apache can sustain RCF/Debt above 25% and an LFCR approaching 1.5x at the low end of that commodity price range.

Apache's ratings could be downgraded if RCF/debt falls below 15% on a sustained basis.

The principal methodology used in these ratings was "Global Independent Exploration and Production Industry" published in December 2011. Please see the Rating Methodologies page on for a copy of this methodology.

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