Fitch Upgrades Newfield Exploration to 'BBB-'; Outlook Stable.
The upgrade reflects Newfield's continued development of its core STACK position with development project results in-line with or above the three-year plan type curve helping support multi-year production expectations and mitigate operational execution risks. In addition to the forecasted strong production growth, Fitch's base case projects an improving leverage profile with debt/EBITDA metrics in the 1.5x range and positive FCF beginning in the 2019-2020 timeframe. Another consideration is the reduced credit impact and risk of lower production and cash flows from further portfolio optimization activities given the company's Anadarko production growth and solid liquidity position.
Approximately $2.6 billion of debt is affected by this's rating action. A full list of rating actions follows at the end of this release.
KEY RATING DRIVERS
Three-Year Plan On Track: Newfield communicated its updated three-year plan in early 2018 targeting returns-driven Anadarko development resulting in 14%-18% annual production growth, while reducing leverage metrics and maintaining a strong liquidity position. Halfway through the year, Newfield has favorably raised its full-year 2018 average production guidance twice in conjunction with the announcement of quarterly results on the back of strong well results and a favorable commodity price environment. Newfield only increased capex modestly, with the increase related to increased working interest and non-operated activity in high-return projects. The company's leverage and liquidity position also compare positively relative to plan.
Development Projects Outperforming Plan: Recent development project well results have generally outperformed the company's 1.3 million barrels of oil equivalent (mmboe) STACK three-year plan type curve helping support multi-year production expectations and mitigate operational execution risks. Newfield's plan expands the company's liquids-focused production well past Fitch's investment-grade size threshold, with Fitch forecasting total production of approximately 189 mmboepd in 2018, growing to 210 mmboepd in 2019. Further, the company's shift to row drilling in late-2018 and 2019 should help improve well returns, but it may create some lumpiness in the production and cash flow profiles. Another longer-term consideration is the potential for future bounded cubes within a drilling section to experience weaker well results due to project interference. Fitch believes, however, that the size of the company's bounded cubes, current level of production, strong credit metrics, and robust liquidity position help moderate these risks.
Positive FCF, Investment-Grade Metrics: Fitch's base case forecasts Newfield will be approximately FCF neutral in 2018 and around $40 million FCF positive in 2019. This considers the Oklahoma gross production tax cash flow headwind, which increases the amount of tax collected on new wells to 5% from 2% for the first three years of the well's life. Fitch believes the additional cash generation could lead to some incremental drilling activity, but any potential increased drilling activity would likely be measured with Newfield managing to achieve at least FCF neutrality. Debt/EBITDA is forecast to decline to approximately 1.6x in 2018 and 1.5x in 2019, well below Fitch's target of 2.5x-2.8x for the 'BBB-' rating level. Debt/proved developed (PD) reserves and debt per flowing barrel metrics are forecast to be around $5.80/boe and $13,000, respectively, in 2018. These numbers are also well below their respective investment-grade markers of $6.00-$6.50 debt/PD reserves and $20,000 debt/flowing barrel.
Ample Covenant Headroom: Financial covenants, as defined in the credit facility agreement, consist of a maximum debt to book capitalization of 60% (24% as of June 30, 2018) and EBITDAX to interest expense ratio of at least 2.5x (8.95x).Other covenants across the 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 provision. Fitch believes Newfield has ample cushion within all of its covenants and has demonstrated a willingness and ability to actively manage potential covenant risk. For example, in March 2016, the company proactively amended its interest coverage covenant to 2.5x from 3.0x, at a cost of $3 million, in order to opportunistically increase headroom.
Price Risk Managed Through 2019: Newfield has historically maintained a proactive hedging program, using a combination of swaps and collars, to manage cash flow variability and support development funding. Management has been less active in its multi-year hedging activities more recently given its current cash position and competitive full-cycle cost profile, as well as the backwardated oil futures curve and management's constructive view of oil prices. As of July 16, 2018, Newfield was approximately 47% hedged for 2H18 based on the midpoint of guidance and 30% hedged for 2019, with no hedges in place for 2020. The reported net derivative liability was about $269 million as of June 30, 2018.
Newfield Exploration Company's rating reflects the company's strong balance sheet, neutral to positive FCFprofile, and core Anadarko operational momentum. Compared to investment-grade, onshore growth-oriented peers like Pioneer Natural Resources Company (BBB/Stable), Continental Resources, Inc. (BBB-/Stable) Concho Resources Inc. (BBB/Stable), and Encana Corporation (BBB-/Stable), Newfield remains considerably smaller in both production and proved reserves when compared with Newfield's U.S. onshore peers, with Newfield having 195 mboepd production at June 30, 2018 and 680 mmboe of reserves at 2017 year end. Newfield has a strong position in the Anadarko Basin; however, the position is smaller than higher-rated peer Pioneer's core Midland basin asset and Concho's large Midland and Delaware assets. Newfield's cash netbacks compare well against peers in terms of costs. Cash netback at June 30, 2018 was $24.3/boe, better than Encana at $14.2/boe, but less than Continental at $29.7/boe and Concho at $32.1/boe. Credit metrics are strong and in-line with peers. Newfield's debt/EBITDA ratio of 1.9x at June 30, 2018, was only bested by Pioneer (0.7x) and Concho (1.1x). Debt/flowing barrel was also strong for the category at about $12,500, more than Pioneer at $7,000 and Concho at about $10,500, but much less than Continental at about $21,800.
Fitch's Key Assumptions Within the Rating Case for the Issuer
--WTI oil price of $65/bbl in 2018, $60/bbl in 2019 and $55/bbl thereafter;
--Henry Hub gas price that trends up from $2.75/mcf in 2018 to a longer-term price of $3.0/mcf;
--Production of approximately 189 mboepd in 2018 followed by annual growth in the low double-digit range;
--Capex of approximately $1.4 billion followed by production growth-linked annual increases;
--No shareholder returns near-term;
--No material M&A activity.
Developments that May, Individually or Collectively, Lead to Positive Rating Action
--Increased size and scale with production approaching 300mboe/d with some combination of the following metrics;
--Maintenance of debt/EBITDA below 2.0x-2.5x on a sustained basis;
--Maintenance of mid-cycle debt/flowing barrel of $15,000-$17,500/boe or debt/proved developed reserves of below $5.00-$5.50/boe on a sustained basis.
Developments that May, Individually or Collectively, Lead to Negative Rating Action
--Material loss of operational momentum leading to expected production below 175 mboepd for an extended period;
--Mid-cycle debt/EBITDA above 3.0x on a sustained basis;
--Mid-cycle debt/flowing barrel above $20,000/boe or debt/proved developed reserves of over $6.00/boe on a sustained basis.
Robust Liquidity: Fitch's base case forecasts Newfield will maintain a robust liquidity profile over the next few years with positive FCF further bolstering liquidity. Cash and equivalents were almost $300 million as of June 30, 2018. Supplemental liquidity is provided by the company's recently upsized and extended $2.0 billion revolver (no borrowing outstanding as of June 30, 2018) due May 2023.
Extended Maturities Profile: Newfield has no maturities until 2022.
Manageable Other Liabilities: Asset retirement obligations (AROs) decreased year-over-year to $136 million, as of June 30, 2018, from $158 million, as of June 30, 2017. Other contingent obligations, as of Dec. 31, 2017, totalled $517 million on a multi-year, undiscounted basis comprising of firm transportation agreements ($336 million) and operating leases and other service contracts ($181 million). Newfield has oil and gas delivery commitments with Andeavor and HollyFrontier to accommodate the company's waxy Uinta production. These arrangements resulted in $29 million of deficiency fees during 2017.
The company's total transportation/processing cost guidance for 2018 includes Arkoma unused firm gas transportation and Uinta oil & gas delivery shortfall fees of approximately $36 million and $13 million, respectively. Both plays have exhibited declining production trends over the past few years due to underinvestment. However, Uinta production is up 20% from Q2 2017 to Q2 2018 as the company attempts to hold acreage to preserve its long-term development option following some promising horizontal well results. Fitch views the risk of an increase in shortfall fees as manageable and has considered these costs in the Fitch cases.
FULL LIST OF RATING ACTIONS
Fitch has upgraded the ratings as follows:
Newfield Exploration Company
--Long-term IDR to 'BBB-' from 'BB+';
--Unsecured credit facility to 'BBB-' from 'BB+'/'RR4';
--Senior unsecured notes to 'BBB-' from 'BB+'/'RR4'.
The Rating Outlook is revised to Stable from Positive.
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|Publication:||Daily the Pak Banker (Lahore, Pakistan)|
|Date:||Nov 28, 2018|
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