Fitch Ratings has assigned a 'BB+' rating to Newfield
Exploration Co.'s (Newfield; NYSE: NFX) issuance of $500 million
senior unsecured notes due 2026. The company intends to use the net
proceeds along with cash on hand or borrowings under its revolving
credit facility to redeem the $700 million 6.875% senior
subordinated notes due 2020. The planned debt repayment should
result in the elimination of the final tranche of outstanding
senior subordinated notes. A full list of ratings follows at the
end of this release.
KEY RATING DRIVERS
Newfield's ratings reflect the company's liquids-focused
production profile and proved reserves base, strong reserve
replacement history, adequate liquidity and favorable hedging
position, and credit-conscious financial policy. These
considerations are offset by the company's heightened execution
risk given the relatively early development stage of and higher
capital allocation towards the SCOOP/STACK position (70% of planned
capital expenditures). Fitch recognizes, however, that results from
the STACK have been encouraging with strong growth potential from
multiple, oil-weighted stacked intervals with opportunities to
improve economics through production efficiencies.
The company reported net proved reserves of 645 million barrels
of oil equivalent (MMboe) and production of 135 thousand boe per
day (Mboepd), excluding about 6 Mboepd from discontinued operations
in Malaysia and natural gas produced and consumed in operations,
for the year-ended 2014. This results in a reserve life of over 13
years. The Fitch-calculated one-year organic reserve replacement
rate was 250% with an associated finding and development (F&D)
cost of $16.25 per boe.
Credit metrics strengthened year-over-year due to strong
operational performance and the application of Granite Wash
divestiture proceeds to the repayment of the $600 million 7.125%
senior subordinated notes. The Fitch-calculated debt/EBITDA,
debt/1p reserves, and debt/flowing barrel were approximately 2x,
$4.50/boe, and $21,100, respectively, for 2014. These metrics are
generally consistent with or better than similarly rated North
American E&P peers. Fitch's base case, assuming a West Texas
Intermediate (WTI) price of $50, forecasts pro forma debt/EBITDA of
over 1.6x in 2015.
SHIFTING FROM GROWTH TO RETURNS IN WEAK PRICE ENVIRONMENT
Newfield, consistent with other North American independent
E&P peers, has shifted its focus from a robust three-year
production (10%-15% annually) and cash flow (about 20% per year)
growth plan to optimizing returns and capital efficiency by
high-grading drilling activity. The company has budgeted about $1.2
billion, a roughly 40% year-over-year reduction, in capital
spending savings mainly attributable to a temporary suspension of
drilling activity in the company's Uinta and Eagle Ford acreage and
reduction in rigs operating in its Williston play (1 rig in 2015
from 4 rigs in 2014). Approximately 70% of the capital budget is
allocated to the SCOOP/STACK. Total production, adjusted for asset
sales, is expected to increase 18% year-over-year (146 mboepd).
This considers a relatively flat North American production profile
and the commencement of the Pearl development in China resulting in
year-over-year fourth-quarter production up 7%.
FINANCIAL MANAGEMENT MODERATES CREDIT RISKS
The company continues to take steps to improve its financial
profile through the downcycle via a recent equity offering, the
sale of non-core assets, and active debt management. Management
intends on balancing capital spending with cash flows in order to
preserve liquidity and maintain a strong balance sheet through the
downcycle. However, Newfield indicated that supportive pricing
signals could lead to an acceleration of drilling activity and it
continues to be opportunistic in its pursuit of 'bolt-on' acreage,
particularly for its Anadarko Basin position.
Fitch's base case, assuming a WTI price of $50, projects that
Newfield will exhibit a free cash flow (FCF) neutral profile in
2015. The Fitch base case results in pro forma debt/EBITDA of over
1.6x in 2015. Pro forma debt/1p reserves and debt per flowing
barrel metrics are forecast to improve to approximately $3.25/boe,
subject to any revisions, and $15,750, respectively. Fitch's base
case WTI price forecast assumption of $60 in 2016 and $75 long-term
suggests that Newfield may selectively increase drilling activity
in 2016. The Fitch base case considers that the company will
maintain capital spending within operating cash flows in 2016
resulting in a pro forma debt/EBITDA of nearly 1.8x.
Newfield maintains a rolling, multi-year hedging program, using
a combination of swaps and three-way collars, to manage cash flow
variability and support development funding. Fitch recognizes that
the company's three-way collar hedging strategy provides some
upside potential, but exposes cash flows to adjusted spot prices in
a weak pricing environment. As of Feb. 20, 2015, Newfield's oil
production was over 80% hedged for both 2015 and 2016.
ADEQUATE LIQUIDITY POSITION
Newfield has historically maintained a nominal cash balance. As
of Dec. 31, 2014, the company had $14 million in cash and cash
equivalents. The company's primary source of liquidity is the
recently upsized and extended $1.8 billion senior unsecured credit
facility due June 2020. The revolver has no outstanding borrowings
following the application of the majority of proceeds from
Newfield's $815 million (net) Feb. 26, 2015 equity offering.
The company has an extended maturities profile with its next
senior unsecured debt maturity in 2022. Financial covenants, as
defined in the credit facility agreement, consist of a maximum
debt-to-book capitalization ratio of 60% and an EBITDAX/interest
expense ratio of at least 3x. Other covenants across debt
instruments restrict the ability to incur additional liens, engage
in sale/leaseback transactions, and merge, consolidate, or sell
assets, as well as change in control provisions. The company is in
compliance with all of its covenants with ample cushion.
MANAGEABLE OTHER LIABILITIES
Newfield does not maintain a defined benefit pension plan. Asset
retirement obligations (AROs) increased to $186 million in 2014
from $122 million in 2013 principally due to the addition of AROs
related to the Pearl development in China ($28 million) and U.S.
onshore well growth ($30 million). Other contingent obligations
totaled $832 million on a multi-year, undiscounted basis comprising
firm transportation agreements ($389 million) and operating leases
and other service contracts ($443 million).
Additionally, the company entered into oil and gas delivery
commitments for a total of nearly 125 MMboe between 2015 and 2025.
The majority of these delivery commitments are associated with its
Tesoro and HollyFrontier refinery arrangements to accommodate the
company's waxy Uinta production. Management believes its reserves
and production will be sufficient to meet these commitments.
Further, Fitch understands that annual deficiency fees, assuming
current production relative to the maximum delivery commitment,
would be manageable at about $10 million per year for 2015-2016 and
approximately $40 million per year thereafter.
KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for the issuer
include:
--WTI oil price that trends up from $50/barrel in 2015 to
$60/barrel in 2016 and a long-term price of $75/barrel;
--Henry Hub gas that trends up from $3/mcf in 2015 to $3.25/mcf
in 2016 and a long-term price of $4.50/mcf;
--Production growth of less than 15% in 2015, generally
consistent with guidance, followed by modestly lower production
with an uptick in the production profile thereafter;
--Liquids mix increases to 63% in 2015 with the heightened
production growth in the Anadarko Basin and commencement of
operations in China with a continued focus on liquids
thereafter;
--Capital spending is forecast to be $1.2 billion in 2015,
consistent with guidance, followed by a balanced capital spending
program until market prices are supportive of longer term
production growth and cash flow outspend;
--Retention of the China operations.
RATING SENSITIVITIES
Positive: Future developments that may, individually or
collectively, lead to a positive rating action include:
--Increased size, scale, and diversification of Newfield's
operations with some combination of the following metrics;
--Mid-cycle debt/EBITDA below 2x on a sustained basis;
--Debt/flowing barrel under $20,000 and/or debt/1p below
$5.50/boe on a sustained basis.
Fitch does not anticipate a positive rating action in the near
term given the current weak pricing environment. However, continued
operational execution and a clear path to core production and
reserve base growth, while maintaining financial flexibility, could
lead to a positive rating action over the medium-term.
Negative: Future developments that may, individually or
collectively, lead to a negative rating action include:
--Mid-cycle debt/EBITDA above 2.5x on a sustained basis;
--Debt/flowing barrel of $25,000 - $30,000 and/or debt/1p above
$7/boe on a sustained basis;
--A persistently weak oil & gas pricing environment without
a corresponding reduction to capex;
--Acquisitions and/or shareholder-friendly actions inconsistent
with the expected cash flow and leverage profile.
Fitch does not expect a negative rating action in the near term
given the steps taken by management to pay down debt and balance
capital spending with cash flows. However, Fitch recognizes that a
large leveraging transaction and/or acceleration of drilling
activity without a supportive hedge position/market pricing outlook
could reduce financial flexibility and, potentially, pressure the
rating.
Fitch's ratings for Newfield are as follows:
Newfield Exploration Co.
--Long-term Issuer Default Rating 'BB+';
--Senior unsecured bank facility 'BB+';
--Senior unsecured notes 'BB+';
--Senior subordinated notes 'BB'.
The Rating Outlook is Stable.
Additional information is available at
'www.fitchratings.com'.
Applicable Criteria and Relevant Research:
--'Corporate Rating Methodology Including Short-Term Ratings and
Parent and Subsidiary Linkage' (May 28, 2014);
--Fitch Oil and Gas Assumptions Summary Feb. 2015 (Feb. 11,
2015);
--U.S. Rig Counts Under Pressure (Downcycle to Fewer than 1,000
Rigs Followed by Longer, Slower Recovery) (Feb. 5, 2015);
--'Shale and North American Energy (European Investor Tour)'
(Oct. 23, 2014);
--'Full Cycle Costs for North American E&P (Production Costs
Moderate in 2013)' (July 30, 2014);
--'North American Energy Outlook and LNG' (July 16, 2014);
--'North American Exploration and Production Handbook' (July 16,
2014);
--'Global Impact of US Shale Oil - Rising Production Tempers
World Prices' (Feb. 10, 2014);
--'Cash Flow Trends in the U.S. Energy Sector-Shareholder
Activism Having an Impact' (Feb. 4, 2014);
--'Scenario Analysis: Lifting the U.S. Crude Export Ban' (Jan.
27, 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
Fitch Oil and Gas Assumptions Summary Feb 2015
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=862009
U.S. Rig Counts Under Pressure (Downcycle to Fewer than 1,000
Rigs Followed by Longer, Slower Recovery)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=861552
Shale and North American Energy (European Investor Tour)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=801728
Full Cycle Costs for North America E&P (Production Costs
Moderate in 2013)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=753198
North American Energy Outlook and LNG
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=751784
North American Exploration and Production Handbook
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749557
Global Impact of U.S. Shale Oil (Rising Production Tempers World
Prices)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=735415
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=980799
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Fitch Ratings, Inc.Primary AnalystDino
KritikosDirector+1-312-368-3150Fitch Ratings, Inc.70 W. Madison
StreetChicago, IL 60602orSecondary AnalystMark C. Sadeghian,
CFASenior Director+1-312-368-2090orCommittee ChairpersonMichael
SimontonManaging Director+1-312-368-3138orMedia RelationsAlyssa
Castelli, +1-212-908-0540alyssa.castelli@fitchratings.comElizabeth
Fogerty, +1-212-908-0526elizabeth.fogerty@fitchratings.com