Fitch Affirms Pioneer Natural Resources at 'BBB-'; Outlook Stable
23/02/2015 15:14
(The following statement was released by the rating agency) CHICAGO, February 23 (Fitch) Fitch Ratings has affirmed Pioneer Natural Resources Co.'s (Pioneer; NYSE: PXD) Issuer Default Rating (IDR) and related ratings at 'BBB-'. The Rating Outlook is Stable. Approximately $2.7 billion of debt is affected by today's rating action. A full list of rating actions is included at the end of this release. KEY RATING DRIVERS Pioneer's ratings reflect its liquid-focused onshore production profile and proved reserve base, strong cash position, and credit conscious financial policy. Offsetting factors include the company's size which is at the low end of the range for the rating category, limited geographic diversity, and growth-oriented equity base that may encourage an acceleration of drilling activity ahead of supportive pricing signals. The company reported, excluding discontinued operations, net proved (1p) reserves of 799 million barrels of oil equivalent (mmboe) for the year ended 2014 and production of 182 thousand boe per day (mboepd), an 18% year-over-year increase as of Dec. 31, 2014. This results in a reserve life of about 12 years. Reported drillbit reserve replacement was 239% with an associated finding and development (F&D) cost of $19.65 per boe ($15.51 per boe on horizontal additions). Liquids mix improved year-over-year on a full-year and fourth-quarter 2014 (4Q'14) basis, respectively, to 69% (vs. 64% in 2013; 48% oil of total 2014 production) and 71% (vs. 66% in 2013; 50% oil of total Q4'14 production). Credit metrics remained strong for the year ended 2014. The Fitch-calculated debt/EBITDA, debt/1p reserves, and debt/flowing barrel were approximately 1.1x, $3.25/boe, and $13,500, respectively. 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 debt/EBITDA of less than 1.4x in 2015. SHIFTING FROM GROWTH TO RETURNS IN WEAK PRICE ENVIRONMENT Pioneer has shifted its focus from a robust three-year production growth target (previously 16%-21% CAGR 2014-2016) to optimizing returns and capital efficiency by high-grading drilling activity in its Spraberry/Wolfcamp and Eagle Ford positions. The company has budgeted about a 45% reduction in capital spending ($1.85 billion), which is generally consistent with operating cash flows. These capex savings are principally attributable to a 50% reduction in horizontal drilling activity, the complete shutdown of vertical drilling activity, and slowdown of infrastructure construction and expansion projects. Production is anticipated to be up 10%-plus (oil production growth of 20%-plus) with growth weighted towards the first half of 2015. Growth represents production coming online from pre-downcycle activity and, to a lesser extent, improving breakeven prices from a shift to 'sweet spots' and service cost reductions. Management has guided that 4Q production growth will be flat year-over-year, suggesting that 2016 production growth may be challenged, all else equal, without an increase in capital spending. Management indicated that it is prepared to increase drilling activity in 2H'15 in response to a realization of roughly 20% lower service costs (about 10% achieved/budgeted), an improvement in oil prices, and/or successful divestiture of EFS Midstream. Fitch views production growth as integral to the Pioneer equity story, but management has indicated that it is being cautious and waiting for supportive pricing signals that encourage a measured acceleration of drilling activity. Management believes that returns realized at WTI prices of $90 over the past several years could be achieved at $70, albeit at lower growth rates, via operational efficiency gains and roughly 20% service cost deflation. Fitch anticipates that this would likely be a short-term return realization as existing 'sweet spots' are completed, additional development activities are needed, and service costs gradually adjust up. FINANCIAL POLICY MODERATES CREDIT RISKS Management's target leverage of less than 1.5x net debt-to-operating cash flow supports the rating. The company has demonstrated a willingness and ability to fund capex and free cash flow (FCF) shortfalls through equity offerings, the sale of non-core assets, and production JV arrangements. Additionally, in the current weak price environment, the capital program has been sized to be generally consistent with operating cash flow. Management intends on preserving its strong cash and balance sheet position until prices and margins improve. Fitch's base case, assuming a WTI price of $50, forecasts Pioneer will be about $150 million FCF negative in 2015. Cash-on-hand and planned asset divestitures proceeds are more than adequate to fund the shortfall. The Fitch base case results in debt/EBITDA of less than 1.4x in 2015. Debt/1p reserves and debt per flowing barrel metrics are forecast to remain relatively flat at approximately $3.25/boe, subject to any revisions, and $13,250, respectively. Fitch's base case WTI price forecast assumption of $60 in 2016 and $75 long-term suggests Pioneer would likely begin to increase drilling activity in 2016. The Fitch base case considers that Pioneer would begin to outspend operating cash flows in 2016 at a more significant level, but within its cash position, resulting in a debt/EBITDA estimate generally consistent with 2015. Pioneer 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 Pioneer'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. 6, 2015, Pioneer's anticipated oil and gas production were both over 90% hedged for 2015. Existing hedge positions also provide oil and gas coverage of roughly 70% and 25%, respectively, for 2016 assuming a flat production profile STRONG LIQUIDITY POSITION Pioneer has improved its cash position ahead of its previously planned multi-year drilling program through equity offering and non-core asset sale proceeds. Cash-on-hand was approximately $1 billion as of Dec. 31, 2014, with an estimated $1 billion in additional cash proceeds anticipated following the marketed Eagle Ford midstream sale. Additional liquidity is provided by the company's $1.5 billion unsecured credit facility (no outstanding borrowings as of Dec. 31, 2014) due December 2017. The company's main financial covenant, as defined in the credit facility, is a maximum debt-to-book capitalization ratio, less non-cash asset impairments and certain other items, of 60% (approximately 26% as of Dec. 31, 2014). Other covenants consist of additional lien limitations, transaction restrictions, and change in control provisions. Near-term maturities are manageable with $455 million (5.875% notes) due in 2016, $485 million (6.65% notes) due in 2017, $450 million (6.875% notes) due in 2018, and $450 million (7.5% notes) due in 2020. Fitch anticipates debt will be refinanced near maturity. MANAGEABLE OTHER LIABILITIES Pioneer does not maintain a defined benefit pension plan. The company's asset retirement obligations (ARO) were $189 million as of Dec. 31, 2014, which is generally consistent with the $194 million at year-end 2013. The company had contractual obligations totalling approximately $4 billion as of Dec. 31, 2014, on a multi-year, undiscounted basis. The obligations include: $3 billion in gathering, processing, transportation, and fractionation commitments; $910 million in drilling and purchase commitments; and $137 million in operating leases. Approximately $1.1 billion is payable in 2015. 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 grows about 10% in 2015 with increased, market price-driven activity providing single-digit growth in 2016 with a more robust growth profile thereafter; --Liquids mix improves from 69% in 2014 to 73% in 2015 with a continued focus on liquids thereafter; --Capital spending is forecast to be $1.85 billion in 2015, consistent with guidance, followed by a measured increase in drilling and infrastructure activities, assuming near-term service cost savings, given supportive pricing signals; --Completion of the EFS Midstream asset sale for approximately $1 billion during 2015. RATING SENSITIVITIES Positive: Future developments that may, individually or collectively, lead to a positive rating action include: --Increased size, scale, and diversification of Pioneer's operations; --Maintenance of a mid-cycle debt/EBITDA below 1.5x on a sustained basis; --Preservation of mid-cycle debt/1p reserves below $5.00/boe and/or debt/flowing barrel under $15,000. Future positive rating actions will be closely linked to Pioneer's ability to develop and grow its core production profile and reserve base while maintaining financial flexibility. Fitch does not expect a positive rating action in the near term given the current weak pricing environment. Negative: Future developments that may, individually or collectively, lead to a negative rating action include: --Material deviation from management's target leverage ratio resulting in mid-cycle debt/EBITDA of 2.0x-2.25x on a sustained basis; --Mid-cycle debt/1p reserves of over $6.00/boe and/or debt/flowing barrel to $20,000-$25,000; --A persistently weak market-pricing environment without a corresponding reduction to capex; --An increase in dividend payments or commencement of share repurchases inconsistent with the expected cash flow and leverage profile. Fitch does not anticipate a negative rating action in the near term given the company's response to the current weak pricing environment and strong cash position. However, Fitch recognizes that a considerable acceleration of drilling activity ahead of securing a favorable portfolio of hedges and/or a supportive market pricing outlook could reduce financial flexibility and, potentially, pressure the rating. Fitch has affirmed the following ratings with a Stable Outlook: Pioneer Natural Resources Co. --IDR at 'BBB-'; --Senior unsecured notes at 'BBB-'; --Bank revolver at 'BBB-'. Contact: Primary Analyst Dino Kritikos Director +1 312-368-3150 Fitch Ratings, Inc., 70 W. Madison Street, Chicago, IL 60602 Secondary Analyst Brad Bell Associate Director +1 312-368-3149 Committee Chairperson Mark Sadeghian, CFA Senior Director +1 312-368-2090 Media Relations: Alyssa Castelli, New York, Tel: +1 (212) 908 0540, Email: alyssa.castelli@fitchratings.com; Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: elizabeth.fogerty@fitchratings.com. 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: Scenario Analysis: Lifting the Crude Export Ban (Overall Credit Impact Limited but Varies by Industry) http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732055 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 Shale and North American Energy (European Investor Tour) http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=801728 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 Fitch Oil and Gas Assumptions Summary Feb 2015 http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=862009 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=980193 ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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