Fitch Assigns Initial Rating of 'BB+' to Pioneer Natural Resources Co.; Outlook Positive

CHICAGO--(BUSINESS WIRE)--

Fitch Ratings has assigned an initial 'BB+' Issuer Default Rating (IDR) to Pioneer Natural Resources Co. (PXD) and has also assigned 'BB+' ratings to the company's publicly issued senior unsecured notes and its $1.25 billion senior unsecured revolving credit facility. The Rating Outlook is Positive.

Pioneer's ratings are supported by the company's long-lived onshore reserve base, strong recent operating performance, and expiration of volumetric production payments (VPPs). Concerns include a rapidly increasing capital spending program and uncertainty about how it would be funded or whether it would be reduced in a lower oil price scenario.

The Positive Outlook reflects the positive production outlook, continued cash flow and liquidity support stemming from the company's very sizable hedging program, and the company's demonstrated willingness to protect its balance sheet by issuing equity.

While nearly all credit metrics have improved due to improved operational performance at the company and as a result of high liquids prices, continued execution on management's 2012 guidance would need to be seen for positive future rating action. Continued improvements in debt metrics (especially debt/flowing barrel of production) could be catalysts for future positive rating action.

Credit metrics continue to improve as of Dec. 31, 2011 reflecting reduced debt levels, strong cash flow generation and improving levels of EBITDAX (earnings before interest, taxes, depreciation, amortization and exploration expense) stemming from higher commodity price realizations and the company's vertical integration efforts which are helping to reduce well costs.

Looking forward, Fitch expects Pioneer to benefit from existing hedges, increasing production levels and VPP amortizations. While FCF is expected to be negative in 2012 (including the recent $297 million acquisition of Carmeuse Industrial Sands), debt levels should remain stable as the company is working to reinvest the proceeds from the company's fourth quarter $500 million equity issuance.

Capital expenditures are increasing rapidly based on recent drilling success, acceleration in the Horizontal Wolfcamp Shale and management's expectation of $100 West Texas Intermediate (WTI) oil prices in 2012. Also, the capital expenditure carry provided by Reliance in the Eagle Ford Shale joint venture is expected to run out at the end of 2012.

While production growth and hedges should support cash flows to fund this program in a lower oil price scenario, it is important to note that most of the company's oil hedges are three way collars that will not provide support until WTI prices fall below approximately $85 per barrel. Fitch would expect beyond 2012 that Pioneer would be at least FCF neutral, or if negative that funding deficits would be covered by asset sales or equity issuances.

For the latest 12 months (LTM) ending Dec. 31, 2011, Pioneer's EBITDAX was $1.67 billion which resulted in interest coverage of 8.5 times (x) and leverage, as measured by debt-to-EBITDAX, of 1.5x. While debt/boe (barrels of oil equivalent) of proven reserves and proven developed reserves (PDP) remain very strong for the rating category, Debt/flowing barrel of production is a more important metric for Pioneer given its extended reserve life, which is in line with the current rating category.

Pioneer maintains liquidity from cash and equivalents ($537.5 million at Dec. 31, 2011); its $1.25 billion credit facility due March 2016 (no outstanding borrowings and $65.1 million of un-drawn letters of credit); and operating cash flows of $1.5 billion during the LTM period which are supported by significant hedge positions.

Current maturities are minimal; however, the company may be required to purchase the $479.9 million of 2.875% convertible senior notes on Jan. 15, 2013. Alternatively note holders may convert the notes during any calendar quarter if the closing price of the Common Stock for at least 20 of the last 30 trading days during the immediately previous quarter is more than 130% of the Base Conversion Price (initially $72.60 per share). This conversion option is not available in the first quarter of 2012, but it did trigger in the second quarter of 2011.

In addition, since Fitch includes 100% of VPP balances in the debt calculations, debt levels will fall associated with VPP amortizations going forward. Total VPP obligations at Dec. 31, 2011 were $42.1 million.

Additional liquidity is available to the company as a result of Pioneer Southwest. The presence of the master limited partnership (MLP) benefits the parent company because of its ability to 'drop down' or sell assets to the MLP and the existence of a $300 million revolving credit facility at the MLP to finance these purchases. Note that the MLP currently has $32 million of outstanding borrowings on the facility. Additionally, Pioneer has the ability to sell additional units in the MLP to the public to raise additional capital without diluting Pioneer shareholders. Pioneer reduced its stake in the LP units from 61.9% to 52.4% in 2011 for net proceeds of $123.0 million, while retaining the 0.1% GP units.

Liquidity remains strong at Pioneer, and the company remains in compliance with all debt covenants. All of Pioneer's borrowings have covenants, with the most restrictive covenants being associated with the company's senior unsecured credit facility. Pioneer's new $1.25 billion senior unsecured credit facility contains a total debt-to-book capitalization maximum of 60%.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (Aug. 12, 2011).

Applicable Criteria and Related Research:

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229

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