Fitch Downgrades Pacific Rubiales to 'BB'; Outlook Revised to Negative
03 March 2015 - 7:11AM
Business Wire
Fitch Ratings has downgraded Pacific Rubiales Energy Corp.
(Pacific Rubiales) foreign and local long-term Issuer Default
Ratings (IDRs) to 'BB' from 'BB+'. Fitch has also downgraded to
'BB' from 'BB+' its long-term rating on Pacific Rubiales'
outstanding senior unsecured debt issuances totaling approximately
US$4 billion with final maturities in 2019 through and 2025.
Additionally, Fitch has revised the Rating Outlook to Negative from
Stable.
The downgrade reflects the negative effect the decline in oil
prices have on Pacific Rubiales' credit profile. Medium and
long-term production and reserve replacement will likely be
affected by the steep decrease in prices seen in recent months.
This in turn will force Pacific Rubiales to reduce capital
expenditures significantly. Pacific Rubiales credit metrics will
also deteriorate in 2015 and 2016; leverage, as measured by
total-debt to EBITDA for the next two years would rise to or above
4.0x under Fitch's revised price deck for WTI oil prices of $50/bbl
for 2015 and $60/bbl for 2016.
The Outlook revision to Negative reflects further potential
long-term effects the reduction in capex may have on the company's
ability to replace the production from the Pirir-Ruibiales field
with new fields. Fitch's previous base case assumed that the
Pirir-Rubiales field, which today accounts for approximately 35% of
Pacific Rubiales' total production, reverts back to Ecopetrol in
the middle of 2016 and that Pacific Rubiales production declines in
2017 as a result of this. The decrease in production in light of
Fitch's revised price deck could be more severe than initially
anticipated given the capex reduction Pacific Rubiales will have to
implement over the next two years.
Under Fitch's price deck assumption for 2015, Pacific Rubiales'
liquidity position will be pressured but would still be manageable.
Further price decreases could trigger covenants embedded in Pacific
Rubiales' indebtedness. As of Sep. 30, 2014, Pacific Rubiales
reported $478 million of cash on hand and approximately $158
million of short-term debt and the remaining debt had a manageable
amortization schedule.
Fitch estimates Pacific Rubiales' FCF would break even at oil
prices of between $60/bbl-$65/bbl for the next 24 months. This
assumes cash costs are successfully cut per barrel by 15% and capex
trimmed back to $1 billion/year. Under this scenario, Pacific
Rubiales' net leverage would range between 3.2x and 4.2x. If
current prices of $50/bbl are sustained for the next 24 months,
EBITDA margins could decrease to the low 20% level, FCF would turn
negative and leverage could reach 6.0x-7.0x and result in further
negative rating actions.
RATING SENSITIVITIES
A negative rating action would be triggered by any combination
of the following events:
--A sustained leverage above 3.5x, which could be driven by
either a decrease in production as a result of capex curtailment or
persistent low oil prices;
--A significant reduction in the reserve replacement ratio could
affect Pacific Rubiales' credit quality given the current
relatively low proved reserve life of approximately 8.3 years
A positive rating action is unlikely in the medium term.
Additional information is available at
'www.fitchratings.com'.
Applicable Criteria and Related Research
--'Corporate Rating Methodology' (May 28, 2014).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and
Parent and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=980610
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Fitch RatingsPrimary AnalystLucas AristizabalSenior
Director+1-312-368-3260Fitch Ratings, Inc.70 W. Madison
StreetChicago, IL 60602orSecondary AnalystXavier OlaveAssociate
Director+1-212-612-7895orCommittee ChairpersonSergio
RodriguezSenior Director+52-81-8399-9100orMedia Relations:Elizabeth
Fogerty, +1-212-908-0526 (New
York)elizabeth.fogerty@fitchratings.com