Fitch Downgrades Apache's Long-Term Ratings to 'BBB'; Outlook Remains Stable

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has downgraded the long-term Issuer Default Rating (IDR) and senior unsecured ratings of Apache Corporation (NYSE: APA) to 'BBB' from 'BBB+'; the Rating Outlook remains Stable.

A full list of rating actions follows at the end of this release.

Approximately $8.83 billion of debt is affected by today's rating action.

KEY RATING DRIVERS

The main driver of the downgrade is Fitch's downward revision of its energy price deck on February 24 and the impact on Apache's forecast credit metrics, including leverage and debt/boe metrics, which are now expected to be somewhat weak for the 'BBB+' rating category. Other credit concerns include reduced diversification stemming from asset sales, and the company's reduced size post-asset sales (including the impact of a relatively sharp drop in 2016 production), which should take consolidated production just below 500,000 boepd.

Apache's ratings are supported by the company's high capex flexibility; strong liquidity and light maturity wall over the next several years; solid operational track record; rising exposure to liquids; and favorable impacts of portfolio restructuring, which have allowed it to exit less creditor-friendly projects including its liquefied natural gas (LNG) investments.

CREDIT SUPPORTIVE ACTIONS TO DATE

Apache has shown substantial cost focus and capex flexibility since the downturn began, and a willingness to downsize in order to earn its cost of capital. Capex for 2016 is projected at $1.4 billion-$1.8 billion, approximately 66% below 2015 levels and 85% below the year prior. Of this, $700 million-$800 million will be allocated to North American onshore plays with the remainder to international. Fitch believes the company has significant flexibility to further reduce capex given its multi-rig onshore programs, operator status on most properties, and held-by production acreage, although planned cuts are likely to impact operational momentum in some plays.

APA's credit quality has also benefited from significant asset sales made prior to the downturn, a portion of which were used to pay down near-term balance sheet debt and build liquidity. In terms of other levers to pull, Apache has been somewhat less aggressive than some of its peers insofar as it has elected not to cut its dividend or issue equity to date. We anticipate the company might need to pull some of these levers if a lower-for-longer scenario were to persist.

WEAKER METRICS

As calculated by Fitch, APA's debt/EBITDA leverage at YE 2015 rose to 2.4x versus 1.14x the year prior despite gross debt falling by approximately $2.5 billion over the same period. Under our base case price assumptions, we expect leverage will rise to approximately 4.2x in 2016 before dropping to 2.9x in 2017 and approximately 2.2x in 2018. APA's free cash flow (FCF) at YE 2015 was negative $2.33 billion, and comprised cash flow from operations of $2.86 billion (including cash from discontinued operations), capex of $4.81 billion, and dividends of $377 million. Looking forward, we expect FCF to improve to negative $260 million in 2016 due to sharply lower capex.

In terms of upstream metrics, APA's consolidated reserves declined by 35% in 2015, to 1.56 billion boe from 2.4 billion boe the year prior. The largest individual drivers behind the decline were sales (down 385 million boe), and price revisions (down 368 million boe), partially offset by extensions, discovery and improved recovery (up 117 million boe). A significant portion of the decline was proven undeveloped reserves (PUDs), which are debooked if no plan exists to develop them under a five-year window at historical prices.

Lower reserves caused APA's debt/1p reserves to weaken. As calculated by Fitch, the company's consolidated debt/boe 1p reserves (prior to adjustments for Egypt minority interests) rose from $4.69/boe to $5.61/boe. By contrast, debt/boe proven developed (PD) reserves edged down, as fewer PD reserves were impacted by the five-year rule. Debt/PD declined from $6.81/boe to $6.59/boe. Debt/flowing barrel also declined from $17,186/barrel to $16,405/barrel at YE 2015.

EXIT FROM INTERNATIONAL LARGELY COMPLETE

The move by Apache to reduce its international footprint and refocus on the U.S. onshore appears to be complete for now. In 2015, Apache sold off its stakes in LNG projects (Kitimat and Wheatstone), sold its Australia position, and its Yara ammonium and nitrate facility. Earlier it had had sold off a 1/3 stake in its Egyptian assets (to Sinopec), its Argentine position (to YPF), shallow water GoM properties (to Fieldwood), as well as blocks in the DW GoM. As of YE 2015, outside of exploration interests, Apache had a presence in just four core regions: the U.S., Canada, Egypt, and the North Sea. On a production basis, the U.S. remains the largest single region (47%), followed by Egypt (27%), the North Sea (13%), and Canada (13%). We expect the U.S. will grow rapidly relative to other regions given the company's favorable position in the Permian and MidContinent.

Recent divestments as well as lower capex have led total production to decline to 535,000 boepd at YE 2015 from 760,000 boepd seen in 2013. Fitch expects APA's consolidated production will drop below 500,000 boepd in 2016 and 2017, in line with capex cuts, prior to rebounding.

NEGATIVE FCF TO MODERATE

As calculated by Fitch, Apache's LTM FCF stood at negative $2.33 billion as of YE 2015. Despite anticipated production declines in the high single digits in 2016, we anticipate APA's FCF will improve to approximately negative $260 million in 2016 due to sharply lower capex.

KEY ASSUMPTIONS

Fitch's key assumptions for the issuer include:

--Base Case WTI oil prices of $35/bbl in 2016, $45/bbl in 2017, and $55 in 2018;

--Base Case Henry Hub natural gas prices of $2.25/mcf in 2016, $2.50/mcf in 2017, and $2.75/mcf in 2018;

--Base Case capex of $1.73 billion in 2016; $2.32 billion in 2017 and $2.86 billion in 2018;

--Production growth of -8.7%, -1.5%, and 1.7% from 2016-2018;

--Flat dividends in 2016 and 2017 and modest dividend growth thereafter;

--$400 million in asset sales in 2016.

RATING SENSITIVITIES

Positive: No upgrades are currently contemplated given weaker credit metrics associated with low oil prices. However, future developments that could lead to positive rating actions include:

For an upgrade to 'BBB+':

--Sustained midcycle debt/EBITDA under 2.0x, or midcycle debt/flowing barrel at or below the $15,000-$16,000/barrel range;

--Meaningful gross debt reductions, funded through an equity issuance, dividend cuts, or asset sales;

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

For a downgrade to 'BBB-':

--Midcycle debt/EBITDA above approximately 2.25x-2.75x;

--Sustained debt/flowing barrel above the $18,000-$20,000/barrel range;

--A major reduction in size, scale and diversification, or loss of operational momentum in key plays.

LIQUIDITY AND DEBT STRUCTURE

At Dec 31, 2015, Apache's liquidity was robust. Cash and equivalents were $1.467 billion. There were no drawings on the company's $3.5 billion senior unsecured revolver, for total liquidity of approximately $4.97 billion. The revolver matures in June of 2020 and is used to backstop Apache's $3.5 billion commercial paper program.

APA's maturity wall is light. The company redeemed all of its 2017 maturities; as a result, the next maturities are not due until 2018 and 2019 ($550 million and $150 million). Covenant restrictions across Apache's debt instruments include a 60% debt-to-capitalization maximum in its revolver, as well as merger restrictions, asset sale restrictions, limitations on sale leasebacks, and change of control provisions. APA may also incur liens up to 5% of total consolidated assets, approximately $940 million at YE 2015.

The company had large asset impairments in 2015 (approximately $25.5 billion) linked to the dramatic drop in hydrocarbon prices, but has an amendment in its revolver excluding the impact of non-cash impairments for its covenant test. At YE 2015 APA's debt-to-capital ratio was 34%.

In February, Apache signed a three-year Letter of Credit (LoC) agreement which allows for the issuance of up to 900 million (pounds sterling) associated with abandonment obligations assumed in its North Sea acquisitions. The facility has an accordion feature to expand up to 1.075 million GBP and a one-year extension. The covenants of the facility are similar to the ones in Apache's main revolver. The facility will cover potential LoC requirements associated with decommissioning properties in the North Sea. Apache has given a range of $US500 million-$1.1 billion in possible additional LoCs/collateral it would need to post to cover asset retirement obligations (AROs) in the event of further specified credit rating downgrades under its existing North Sea contracts.

OTHER LIABILITIES:

Apache's other obligations are manageable. The company has a small UK pension plan which was modestly underfunded in 2015. Expected cash contributions to the plan in 2016 are $7 million. The company's ARO declined to approximately $2.6 billion in 2015, down substantially from the $3.09 billion seen at YE 2014. The main driver of this decrease was the removal of AROs associated with divested assets. Accrued environmental reserves at YE 2015 were $52 million versus $67 million at year-end 2014. Contingencies for legal liabilities were $29 million. APA's purchase obligations were modest in 2016, and totalled $383 million (versus $1.19 billion the year prior). Major components included $194 million in drilling rig obligations, $96 million in firm transportation agreements, and $43 million in office and related equipment.

FULL LIST OF RATING ACTIONS

Fitch has taken the following rating actions:

--L-T Issuer Default Rating (IDR) downgraded to 'BBB' from 'BBB+';

--Senior unsecured credit facility downgraded to 'BBB' from 'BBB+';

--Senior unsecured notes downgraded to 'BBB' from 'BBB+';

--Commercial paper affirmed at 'F2';

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

The Rating Outlook is Stable.

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

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1001022

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1001022

Endorsement Policy

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

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Fitch Ratings
Primary Analyst
Mark C. Sadeghian, CFA
Senior Director
+1 312-368-2090
Fitch Inc.
70 West Madison Street,
Chicago, IL 60602
or
Secondary Analyst
Dino Kritikos
Director
+1 312-368-3150
or
Committee Chairperson
Shalini Mahajan
Managing Director
+1 212-908-0351
or
Media Relations:
Alyssa Castelli, New York, +1 212-908-0540
Email: [email protected]

Source: Fitch Ratings

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