Fitch Upgrades Pacific Rubiales' IDRs to 'BB+'; Outlook Stable
Fitch Ratings has upgraded Pacific Rubiales Energy Corp.'s (Pacific Rubiales) foreign and local currency Issuer Default Ratings (IDRs) to 'BB+' from 'BB'. The rating action affects approximately USD900 million of outstanding senior unsecured notes with final maturity in 2016 and 2021. The Rating Outlook is Stable.
The rating action reflects the company's successful production and reserve diversification efforts as well as its proven track record of increasing production while maintaining adequate reserve replacement ratios. The rating action also takes into consideration the company's lower business risk as a result of the completion of several key infrastructure projects, including the expansion of its oil pipeline to transport production. The company's increased production diversification mainly comes from the additional production from the Quifa block, which has a concession that expires in 2031. Future diversification is expected to come from the CPE-6 block, which has a base case net prospective resource of 169 million barrels of oil equivalent (boe).
Pacific Rubiales' ratings are supported by the company's position as the largest independent oil and gas player in Colombia and its management team that has significant expertise in heavy oil exploration and production. The ratings also reflect the company's strong liquidity and low leverage. Pacific Rubiales' credit quality is tempered by the company's small scale, production concentration and relatively small reserve profile. The company also benefits somewhat from its partnerships with Ecopetrol (IDR rated 'BBB-' by Fitch), Colombia's national oil and gas company, which shares is Pacific Rubiales' investments and production.
Solid Financial Profile:
The company's ratings reflect its adequate financial profile characterized by low leverage and strong interest and debt service coverage. As of the last 12 months (LTM) ended June 30, 2012, the company reported leverage ratios, as measured by total debt to EBITDA and total debt-to-total proved reserves of 0.5 times (x) and USD2.7 per boe, respectively. As of June 30, 2012, debt of approximately USD1.1 billion was primarily composed of approximately USD803 million of senior unsecured notes, USD193 million drawn from the company's revolving credit facility and the balance was composed of other financial obligations, including capital lease obligations. As of the LTM ended June 30, 2012, Pacific Rubiales reported an EBITDA, as measured by operating income plus depreciation and stock-based compensation, of USD2.1 billion.
Piriri-Rubiales Concession Expires in 2016:
Although Pacific Rubiales production and reserves profile has significantly improved in recent years, the expiration of the Piriri-Rubiales production agreement in 2016 is expected to have a significant impact on the company's financial results. As a result of the expiration of the Piriri-Rubiales production agreement in 2016, Fitch expects Pacific Rubiales production level for 2017 to be in line with that of 2011 or below current production; during 2010, this field represented approximately 75% of total net production, and nowadays it represents approximately 62% of production. The company is expected to be able to replace Piriri-Rubiales production by 2017 given the company's recent diversification efforts and high reserve replacement ratios, coupled with its proven track record of increasing production. The rating does not incorporate the possibility of extending production from this field past its expiration date. As of December 2011, this field represented approximately 30% of the company's total proved and probable reserves of 407 million boe; excluding Piriri-Rubiales resources, debt-to reserves are still low at approximately USD3.6 per boe.
Improving Operating Metrics:
The operating metrics for the company have been improving rapidly and its growth strategy is considered somewhat aggressive. During 2011, the company reserve replacement ratio was 550% and its current proved reserve life index is approximately 9.4 years using current production levels. During the past two years, the company increased gross and net production to approximately 232,245 boe/d and 92,611, from approximately 221,896 boe/d and 88,092 boe/d as of June 2011, respectively. As of December 2011, Pacific Rubiales' proved (1P) and proved and probable (2P) reserves, net of royalties, amounted to approximately 319 million and 407 million bbls, respectively. The company's reserves are composed of heavy crude oil (80%) and natural gas and light and medium oil (20%). Pacific Rubiales has a significant number of exploration prospects, which will require significant funds to develop. In the short term, the company plans to devote its efforts developing the Quifa, Sabanero and CPE-6 blocks, which surround and are near Rubiales-Piriri block, and should eventually replace Piriri-Rubiales block.
Negative Free Cash Flow Due to Large Capex:
Free cash flow (cash flow from operations less capital expenditures and dividends) has been negative given the company's growth strategy. For the LTM ended June 30, 2012, free cash flow was positive for the first time since 2007 standing at USD28 million. Pacific Rubiales' significant capital expenditures plans over the next few years could continue to pressure free cash flow in the near term. Increasing production at the Piriri-Rubiales and the surrounding Quifa block are expected to account for the bulk of the company's capital expenditure, which is expected to be approximately USD6.5 billion between 2012 and 2016. By the year 2017 and after the expiration of the Piriri-Rubiales concession, leverage might increase to approximately 1.0x as a result of decrease in production and lower oil prices considered under Fitch's base case scenario.
Strong Liquidity Position:
The company's current liquidity position is considered strong, characterized by robust cash on hand, strong cash flow generation and manageable short-term debt obligations. As of the LTM ended June 30, 2012, Pacific Rubiales funds from operations (FFO) generation was USD1.4 billion and its cash on hand was USD572 million, while its short-term debt amounted to USD211 million. The company has two revolving credit facilities totaling USD700 million. Going forward, the company is expected to have a manageable debt amortization, although its liquidity position will be somewhat weaker due to its aggressive capital expenditure plant that will demand significant financial resources. Capital investments are expected to be funded for the most part with internal cash flow generation.
A rating downgrade would be triggered by any combination of the following events; A sustained adjusted leverage above 3x, driven by increase in debt for exploration combined with a low success rate of discoveries; an increase in royalties that significantly cripples the company's financial profile (no changes in royalties are expected in the near future) and/or a decline in production and reserves.
Factors that could result in a positive rating action include an increased diversification of the production profile of the company, consistent growth in both production and reserves, positive free cash flow generation and/or the extension of the Rubiales-Piriri concession which expires in 2016.
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. 8, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology
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