Fitch Affirms Pan American Energy LLC's Ratings at 'B+' & Argentine Branch at 'AAA(arg)'
Fitch Ratings has affirmed Pan American Energy LLC's (PAE) Foreign currency Issuer Default Rating (IDR) at 'B+' and its local currency IDR at 'BB'. Simultaneously, Fitch has affirmed the international scale rating of the debt issuance by Pan American Energy LLC Sucursal Argentina (PAME) at 'BB-/RR3'. RR3 reflects good recovery prospects in the event of default. Fitch has also affirmed the National Long-term rating of PAME and its debt issuance at 'AAA (arg)'. The rating actions affect USD500 million of issued debt.
The Rating Outlook for all ratings is Stable.
PAE's ratings are supported by the company's strong business position, large reserves base, low leverage and good operating performance. The one-notch foreign currency IDR above the country ceiling of Argentina is supported by PAE LLC's reliable strong cash flow generation, high level of dollar-denominated export revenues relative to total debt, ownership by a strong parent, and a good track record of payment during stressed sovereign scenarios.
The ratings are tempered by PAE's exposure to political interference in Argentina, volatility of the domestic business environment and inflation pressures on its cost structure. Mitigants to this situation include PAE's ample liquidity and its proved access to the financial markets.
STRONG BUSINESS POSITION, STRONG PARENTS
PAE has a strong business position in the Argentine market as the second largest producer of oil and gas in Argentina, accounting for approximately 19% of domestic 2011 production. The company exports approximately 50% of its oil production. PAE's exports totaled USD2.1 billion in 2011 and favorably compare to its long-term debt maturities. PAE is a company incorporated in the United States, 40% owned by Bridas Corporation (Bridas) and 60% by BP's (rated 'A' by Fitch with a Outlook Positive). Bridas is 50% owned by Bridas Energy Holdings Ltd (BEH) and 50% by China National Offshore Oil Corporation International Limited (CNOOC, rated 'A' by Fitch).
LARGE RESERVES BASE
As of December 2011, PAE had oil and gas reserves of 1.4 billion barrels of oil equivalent (boe), equivalent to 15.9 years of production (23 years for oil, 8.6 years for natural gas). The company has historically increased reserves and production volumes sustainably, despite operating under a challenging environment.
STRONG CAPITAL STRUCTURE AND GOOD OPERATING PERFORMANCE
PAME's leverage is low at approximately USD1.5 of debt per barrel of proved reserves as of June 2012. The company maintained a strong operating performance during the past year despite domestic price caps and a double-digit inflation rate. For the 12 months ended June 2012, EBITDA was USD1.5 billion, sufficient to cover its USD1.0 billion capex. In the second half of 2012, EBITDA is expected to be negatively affected by the seizure of PAE's main producing field, Cerro Dragon, by some group of contractor workers in June 2012. Still, operating metrics are expected to remain strong with a Debt to EBITDA below 1.5x and EBITDA to interest above 7x.
EXPOSURE TO GOVERNMENT INTERFERENCE
The Argentine government has been increasing its interference in the oil and gas sector, as reflected by the recent publication of decree No 1277, which includes regulations related to investment levels in the oil and gas sector and domestic price references. The Secretariat of Energy has reestablished, with certain modifications, the oil plus regime suspended in February 2012. This regime provides certain tax benefits for oil producers that reach certain production and reserves replacement levels. The magnitude and timing of such benefits is uncertain and subject to the government's discretion.
HIGH TRANSFER AND CONVERTIBILITY RISK
Following the publication of Decree No 1722 on Oct. 26, 2011, Pan American Energy Sucursal Argentina (PAME, PAE's Argentine branch) is obliged to repatriate 100% of its export revenues. Prior to that date, oil and gas producers could maintain up to 70% of export proceeds abroad, which provided a shield against transfer and convertibility risk. This change in regulation highlights an increased intervention by the government in the oil and gas sector and the potential for foreign currency controls. This risk is one factor that limits the company's foreign currency IDR to 'B+'.
PAE and PAME's Outlook remain Stable. A negative rating action on these entities ratings could result from a material increase in the government's interference in the sector, a significant increase in debt levels without the associated revenue increase. A Debt to EBITDA ratio greater than 3.5x and EBITDA to interest coverage below 4.5x could trigger a negative rating action. A positive rating action seems unlikely due to the business environment in Argentina and the fact that PAE is rated one notch above the country ceiling. An upgrade of the Argentine Sovereign could potentially result in a positive rating action.
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.
The rating actions reflect the application of Fitch's current criteria which are available at 'www.fitchratings.com'
Applicable Criteria and Related Research:
--'Corporate Rating Methodology'(Aug. 12, 2011);
--'Rating Oil and Gas Exploration and Production Companies' (April 5, 2011);
--'Rating Corporates Above the Country Ceiling' (Jan. 27, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology
Rating Oil and Gas Production Companies
Rating Corporates Above the Rating Ceiling
Ana Paula Ares, +5411 5235 8121
Fitch Ratings Argentina Calificadora de Riesgo S.A.
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Buenos Aires, C1041AAM
Gabriela Curutchet, +5411 5235 8122
Daniel Kastholm, +1-312-368-2070
Elizabeth Fogerty, +1-212-908-0526