Fitch Assigns 'BB+' to Pioneer Natural Resources' Senior Unsecured Note Offering

November 9, 2009 5:02 PM EST

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has assigned a 'BB+' rating to Pioneer Natural Resources' (Pioneer; NYSE: PXD) senior unsecured note offering. Fitch also maintains the following debt ratings on Pioneer:

--Issuer Default Rating (IDR) at 'BB+';

--Senior unsecured notes at 'BB+';

--Credit facility at 'BB+'.

The Rating Outlook is Stable.

The note offering is not expected to increase debt levels at the company as proceeds are expected to be used to repay outstanding revolver borrowings. At Sept. 30, 2009, Pioneer had approximately $730 million of outstanding borrowings under the company's $1.5 billion senior unsecured credit facility. While the current transaction will increase liquidity at Pioneer, it will also limit the amount of future debt reductions available to Pioneer management. However, given the expected proceeds from the note offering in the range of $300-$500 million, Fitch anticipates that the company will still be able to modestly reduce debt levels as proceeds from free cash flow are used to reduce the remaining revolver borrowings and as the company's volumetric production payment obligations continue to amortize (as Fitch includes these in the total debt levels).

The senior notes are expected to rank pari passu with the existing senior unsecured notes for the company and mature on Jan. 15, 2020. Covenant restrictions include limitations on liens and limitations on sale and leaseback transactions. There are no financial covenants in the supplemental indenture. Noteholders will benefit from change of control protections in the form of a put at 101% of par value should a change of control be accompanied by a rating decline. Additional protection stems from a possible Pioneer USA (the company's principal U.S. subsidiary) guarantee if the company's senior unsecured credit facility obtains a guarantee by Pioneer USA.

Pioneer's ratings continue to be supported by the company's long-lived onshore reserve base; positive production outlook stemming from the 2009 VPP expirations and increased 2010 capital spending levels; and the continued expectation of positive free cash flows. Offsetting factors include the high levels of debt relative to production levels; weak five-year average organic reserve replacement rates; and the company's significant exposure to natural gas prices.

Credit metrics continued to weaken as of Sept. 30, 2009 reflecting lower commodity prices and the resulting lower levels of EBITDAX. Increased hedging activity and the potential for additional debt reductions stemming from FCF and VPP amortizations are expected to stabilize credit metrics over the next twelve months. For the latest 12 months (LTM) period ending Sept. 30, 2009, Pioneer's EBITDAX (earnings before interest, taxes, depreciation, amortization and exploration expense) was $1.03 billion which resulted in interest coverage of 5.8 times (x) and leverage, as measured by debt-to-EBITDAX, of 3.0x. At year-end 2008, debt/boe of proven reserves was $3.43/boe ($.57/mcfe) and debt/boe of proven developed reserves (PDP) was $5.94/boe ($.99/mcfe).

Fitch continues to expect Pioneer to generate positive free cash flows in 2009 and 2010 stemming from the significantly reduced capital expenditures (relative to 2008 levels). Improved operating cash flows are being further supported by falling volumetric production payment (VPP) obligations beginning in January 2010 and by increased hedging activity. As a result, Pioneer is anticipated to continue to direct cash flows to reduce remaining borrowings under the company's credit facility following the current note offering. Pioneer is expected to increase capital expenditure levels in 2010 as it looks to stem declining production levels and begin growing production and reserves associated with the company's oil and liquids rich assets. Rising debt levels (given the current asset base and production profile) or significant share repurchases would be a catalyst for negative rating action.

Pioneer maintains liquidity from cash and equivalents ($55.6 million at Sept. 30, 2009); its $1.5 billion credit facility ($724 million of availability at Sept. 30, 2009); and operating cash flows of $625.5 million during the LTM period ending Sept. 30, 2009. Current maturities are minimal, with the only maturity facing the company coming in 2012 with the maturing of $6.1 million of the 5.875% senior notes and the expiration of the company's credit facility (a $1.5 billion facility with $776 million of outstanding borrowings and LCs). In addition, since Fitch includes 100% of VPP balances in the debt calculations, debt levels will fall associated with VPP amortizations going forward. This includes approximately $111 million in 2009, $90 million in 2010 and $45 million in 2011. Total VPP obligations at Sept. 30, 2009 were $214.2 million.

Additional liquidity is available to the company as a result of the IPO of Pioneer Southwest. The presence of the MLP benefits the parent company because of its ability to 'drop down' or sell assets to the MLP and the existence of a $300 million revolving credit facility at the MLP to finance these purchases. Note that the MLP currently has $135 million of outstanding borrowings on the facility and has access to approximately $275 million in borrowing capacity on the revolver due to covenant restrictions (an additional borrowing capacity of $140 million). Additionally, Pioneer has the ability to sell additional units in the MLP to the public to raise additional capital without diluting Pioneer shareholders. Liquidity remains adequate at Pioneer, and the company remains in compliance with all debt covenants.

Pioneer is a large independent oil & gas exploration and production company with operations in the U.S. (Permian Basin, Mid-Continent, Rockies, Gulf Coast & Alaska) and Africa (Tunisa and South Africa). At year-end 2008, the company had approximately 960 MMBOE of proven reserves. Pioneer is headquartered in Irving, TX.

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

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.

    Source: Fitch Ratings

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