Fitch Rates Anadarko's Amortizing Notes 'BBB'

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has assigned a 'BBB' rating to Anadarko Petroleum Corporation's (NYSE: APC) issuance of senior unsecured amortizing notes. Fitch has also affirmed the Issuer Default Ratings (IDRs) for APC and Kerr-McGee, Inc. A full list of rating actions follows at the end of this release.

The Rating Outlook is Stable.

Approximately $14.3 billion of debt, excluding debt at Western Gas, is affected by today's rating action.

TANGIBLE EQUITY UNIT OFFERING

The $325 million Tangible Equity Unit (TEU) offering consists of a $70 million amortizing note and a $255 million equity purchase contract. The notes amortize at $24 million per annum until maturity and are pari passu with existing APC senior unsecured debt. Each TEU will automatically settle on June 7, 2018 and deliver either WGP common units or an equal value of APC shares, at APC's option. The equity purchase contract would hold an equity-level claim in the event of bankruptcy and receives 100% equity credit under Fitch's methodology. The company expects to use proceeds for general corporate purposes.

KEY RATING DRIVERS

APC's production size and reserve base rank in the top quartile of independent producers. APC produced 843 mboe/d in 2014, with approximately 49% liquids (oil and NGLs). Fitch expects 2015 production of 812 mboe/d, with the lower total YoY reflecting asset divestitures. APC is expecting production growth in core positions, and grew 2014 U.S. onshore production 16% on a divestiture adjusted basis to 658 mboe/d. U.S. onshore development has focused primarily on the Wattenberg horizontal program, as well as increasing Eagle Ford and Marcellus production.

APC has consistently generated positive full-cycle netbacks ($14/boe in 2014) through a combination of good operating cost control and competitive finding & development (F&D) costs. Full-cycle returns could be challenged in 2015 due to the combination of lower oil & natural gas prices, but APC should be able to realize some savings through reductions in service costs, which will lower the overall impact on cash flow.

APC's substantial global asset portfolio allows the company to selectively invest in its most economic plays. This is a credit-positive for larger E&P companies in times of commodity price weakness, as the company can defer a portion of long-term capex dollars while maintaining production growth by allocating capital to short-term, high rate-of-return projects. APC's land grant position in the Rockies creates superior economics relative to competitors and creates additional opportunities for the company to invest through commodity cycles in its best positions.

WESTERN GAS ENHANCES FINANCIAL FLEXIBILITY

Fitch views the relationship between APC and WES/WGP as a credit positive. APC retains a significant economic interest through in WGP its GP and LP interests and WES. These interests are significant funding levers, allowing APC to retain control over midstream operations while funding organic growth with newly issued MLP capital at WES or through additional monetization of LP interests in WES and WGP. APC currently holds approximately 88% of the outstanding WGP LP units, which would drop to 85% after the effect of the TEU equity purchase contracts. Dropdowns to WES also provide a meaningful source of liquidity for the parent.

RECENT FINANCIAL PERFORMANCE

Performance for the period ending March 31, 2015 was good. APC generated $8.7 billion in EBITDA, leading to consolidated leverage of 1.9x. Consolidated free cash flow was negative $7.5 billion, which includes a $5.2 billion one-time cash payment related to the settlement of Tronox litigation and capital expenditure at WES.

Fitch expects that deconsolidated leverage at APC will increase in 2015, primarily due to lower oil and natural gas prices. Concerns about higher leverage are offset by the company's financial flexibility, size and scale, and overall asset quality relative to peers. Fitch does not expect material increases in debt at the APC level. Total consolidated balance sheet debt at March 31 2015 was $16.8 billion, including $2.5 billion of debt at WES. As calculated by Fitch, APC's debt/1P was $4.4/boe and debt/flowing barrel was $15,029, down from $4.9/boe and $17,600, respectively, at Dec. 31, 2014. Upstream metrics exclude debt at WES.

GOOD LIQUIDITY POSITION

At March 31, APC had $1.8 billion in cash and $4.5 billion undrawn on its combined credit facilities leading to $6.3 billion in liquidity. APC's strong liquidity position allows the company to invest through the cycle, which is characteristic of higher quality E&Ps. APC's financial performance has significant sensitivity to oil and gas prices, and any uptick in oil and gas prices will have a material positive impact on financial results and cash flow.

APC's near-term maturities are manageable and include $1.75 billion in 2016 and $2.0 billion in 2017. Fitch believes the company will refinance upcoming maturities given the low interest rate environment. Covenants are light and include maintenance of consolidated debt to capitalization of less than 65%.

COMPANY STRENGTHS OFFSET COMMODITY WEAKNESS

As a large independent E&P, APC tends to run a mostly unhedged portfolio, which increases cash flow sensitivity to changes in oil & gas prices, particularly given the large production base. In Fitch's stress case, we assume capex dollars are allocated to short-cycle and a portion of mid-cycle spending is cut, which allows APC to maintain current production at the expense of some longer horizon projects that may be uneconomic at stress pricing. Fitch expects that any deterioration in APC credit metrics will be primarily price-driven and not out of line with changes across the investment-grade E&P space.

KEY ASSUMPTIONS

--Fitch price deck (WTI) of $50/bbl in 2015, $60/bbl in 2016, and $75/bbl long term

--Global production grows at 3% CAGR, with a moderate tilt towards increasing liquids production (approximately 53%)

--2015 consolidated capex of $6.5 billion. Capital spending in out years is increased in line with increases in Fitch's oil and gas price deck

--Modest service cost reductions of 8% in 2015, driven by lower lease operating expenses. Modest increases in out years are driven by increased activity levels

--WES continues to fund organic growth and asset dropdowns at approximately 50/50 debt/equity.

--APC maturities are refinanced at market rates.

RATING SENSITIVITIES

Positive: Future developments that may lead to positive rating actions include:

--Maintenance of a large, diverse resource base, with selective funding of core asset development and long term projects in light of changes in oil and natural gas prices;

--Some combination of the following metrics;

--APC debt/EBITDA (excluding the effects of consolidated WES debt and EBITA) approaching 1.25x;

--Debt/1P sustained under $5.00/boe;

--debt/flowing barrel of $12,500-$15,000.

Fitch views positive rating actions as a possibility over the medium-term. Positive rating actions will be linked to the company's ability to balance current production with investments related to future growth during the downcycle, in addition to maintaining adequate financial flexibility for the category.

Negative: Future developments that could lead to negative rating action include:

--APC Debt/EBITDA sustained above 2.5x ;

--Debt/1P approaching $6.00- $7.00/bbl;

--Debt/flowing barrel above $17,500-$20,000;

--Opportunistic leveraging acquisitions leading to out-of-category credit metrics.

Fitch believes that APC's asset quality, resource size, and strong track record of execution and reserve replacement make near-term negative rating actions unlikely.

Fitch has taken the following rating actions:

Anadarko Petroleum Corp.

--Long-term IDR affirmed at 'BBB'';

--Senior unsecured amortizing notes assigned 'BBB';

--Senior unsecured notes affirmed at 'BBB';

--Senior unsecured credit facility affirmed at 'BBB';

--Short-term IDR affirmed at 'F2';

--Commercial Paper affirmed at 'F2';

Kerr-McGee, Inc.

--IDR affirmed at 'BBB';

--Senior unsecured notes affirmed at 'BBB'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 28 May 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis (pub. 25 Nov 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=821568

Additional Disclosures

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=985879

Endorsement Policy

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

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View source version on businesswire.com: http://www.businesswire.com/news/home/20150604006146/en/

Fitch Ratings
Primary Analyst
Brad Bell
Associate Director
+1-312-368-3149
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Mark C. Sadeghian, CFA
Senior Director
+1-312-368-2090
or
Committee Chairperson
Shalini Mahajan
Managing Director
+1-212-908-0351
or
Media Relations:
Alyssa Castelli, +1 212-908-0540
[email protected]
Elizabeth Fogerty, +1 212-908-0526
[email protected]

Source: Fitch Ratings

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