Fitch Affirms Apache's Long-Term Ratings at 'BBB+'; Revises Outlook to Stable

CHICAGO--(BUSINESS WIRE)--

Fitch Ratings has affirmed the Issuer Default Rating and senior unsecured ratings of Apache Corporation APA at 'BBB+'. In addition, Fitch has revised the company's Rating Outlook to Stable from Positive.

Approximately $10.92 billion in debt is impacted by today's rating action.

A full list of ratings follows at the end of this press release.

KEY RATINGS DRIVERS

Apache's ratings are supported by the company's rising exposure to liquids (liquids production reached 60% on a pro forma basis in the third quarter of 2014 [3Q'14], the highest in the company's history); good size and scale as an independent E&P; historical track record as a top operator in the space; strong operational metrics; and plans to exit its LNG investments, which had previously created concerns about plugging a potentially sizable multi-year funding gap associated with these long term projects.

Credit concerns center on the uncertainty created by the company's recent decision to sell or spin-off the company's international business; the potential loss in size and diversification associated with this plan, including the loss of countercyclical production sharing contracts (PSCs); a recent uptick in the company's debt, with total debt rising from approximately $9.73 billion to approximately $10.92 billion in 3Q'14; and (if sustained) the impact of the recent slide in oil prices on company cash flows.

ANNOUNCED EXIT/RESTRUCTURING OF INTERNATIONAL

Earlier this year, Apache announced it was looking to reduce its exposure to international operations and refocus on North American onshore through either a sale or a complete spin-off of its international portfolio. Execution is expected mid-2015 following a period of study. APA's international operations are substantial and include Egypt, North Sea, Australia, and interests in the Wheatstone LNG project. As of year-end (YE) 2013, international operations had 1p reserves of 747 million boe, and associated production of approximately 279,000 boepd. In connection with this decision, in 3Q'14 APA reclassified undistributed earnings in its offshore regions as no longer permanently reinvested overseas and took a deferred income tax expense of $814 million in 3Q'14.

Significant uncertainties exist as to which course of action the company is likely to take, although Fitch would note that a spin-off may be easier to execute when compared to the complexity of international asset sales. The uncertainty associated with Apache's restructuring, as well as recent increases in debt, have led Fitch to revise the company's Outlook back to Stable from Positive.

ASSET SALES AND LEVERAGE TRENDS

Asset sales have been a key driver of Apache's deleveraging. Over the last several quarters, Apache repaid a meaningful portion of debt with proceeds from asset sales including the sale of Argentine assets to YPF ($800 million plus $52 million assumed debt), the sale of a minority stake in Egypt to Sinopec ($2.95 billion), the GoM shelf sale to Fieldwood Energy LLC ($3.7 billion) and Canadian properties. At the end of 2013, the company paid down revolver debt and tendered for approximately $850 million in notes and exercised a make-whole for $350 million in Canadian notes, driving total debt from a highwater mark of $12.78 billion at June 30, 2013 to $9.73 billion at YE 2013. However, total debt moved up to $10.92 billion in the latest quarter, driven by leasehold acquisitions around core shale plays and other spending.

NEGATIVE FCF

Apache's negative free cash flow (FCF) rose to -$2.38 billion for the latest 12 month (LTM) period ending June 30, 2014, comprised of cash flow from operations (including discontinued operations) of $9.01 billion, capex of $11.03 billion, and dividends of $351 million. Management has indicated that asset sales will continue to be used to plug funding gaps in its capex, especially as it ramps up its onshore programs. Fitch expects the company will be significantly FCF negative over the next two years in Fitch's base case. Other financial metrics were solid at Sept. 30, and include balance sheet debt/EBITDA of 1.02x (unchanged from YE 2013), and FFO interest coverage of 16.6x.

GROWING MOMENTUM IN ONSHORE SHALES

As a result of restructuring activity and capex reallocations, onshore shale plays continue to increase as a percentage of Apache's portfolio. In 3Q'14 North American liquids production rose by approximately 15%, to 211,000 boepd from 183,000 boepd the year prior, while overall North American production rose 8%, from 328,000 boepd to 355,000 boepd. Permian production was the strongest growth component within this, rising by 23% over the same period. On an aggregate basis, Apache's liquids production rose to 60% of company totals, up from 59% the previous quarter. Similar to the pattern seen among other North American E&P firms, Fitch anticipates the trend of drilling efficiency gains is likely to continue to provide benefits for APA in the form of improving cash margins, better unit economics, and higher recoveries, although lower oil prices may slow this trend.

LIQUIDITY

At Sept. 30, 2014, Apache's liquidity was good. Cash and equivalents were $510 million, net of restricted cash of $74 million. Given commercial paper (CP) balances of $1.23 billion, the company had approximately $2.07 billion in availability (63%) on its $3.3 billion committed unsecured revolvers, for total liquidity of $2.58 billion.

Of Apache's revolver capacity, $1 billion in capacity matures in August 2016, and the remaining $2.3 billion matures in June 2018. All revolvers are U.S. dollar denominated facilities which can be used to backstop Apache's $3 billion CP program.

Near-term maturities are moderate and include no major maturities beyond amortizations until 2017, when $900 million in notes come due. Covenant restrictions across Apache's debt instruments are light and include a 60% debt-to-capitalization maximum across its unsecured revolvers, as well as merger restrictions, asset sale restrictions, limitations on sale leasebacks and change of control provisions.

OTHER LIABILITIES

Apache's other obligations are manageable. There was no deficit on the company's pension benefit plans at YE 2013. The company's Asset Retirement Obligation (ARO) declined to $3.27 billion at the end of the third quarter, down substantially from the $4.75 billion seen at June 30, 2013, due to the sale of the GoM shelf and transfer of related liabilities with the sale. Accrued environmental reserves in the third quarter were $86 million.

RATINGS SENSITIVITIES

Positive: Future developments that could lead to positive rating actions include:

--Sustained improvement in debt/boe metrics including debt/1p in the $3.00-$3.50/boe range or debt/PD in the $4.00-$4.50/boe range.

--Fitch would note that where the company needs to be in this range depends in part on how aggressive the currently proposed restructuring is, with a larger restructuring likely to require metrics on the lower end of the range.

Negative: Future developments that could lead to negative rating action include:

--Significant additional leverage stemming from higher capex; a large leveraging transaction or transactions; or debt-funded share buybacks;

--A major operational issue or reserve impairment;

--Sustained debt/boe PD above the $6.00/boe range or sustained debt/EBITDA above the 1.25-1.5x range

Fitch affirms Apache Corporation's ratings as follows:

--Issuer Default Rating (IDR) at 'BBB+';

--Senior unsecured credit facility at 'BBB+';

--Senior unsecured notes at 'BBB+'.

--Commercial paper at 'F2';

--Short-term IDR at 'F2'.

The Rating Outlook has been revised to Stable from Positive.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Relevant Research:

--'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);

--'Corporate Rating Methodology Including Short-Term Ratings and Parent and Subsidiary Linkage' (May 28, 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:

Shale and North American Energy (European Investor Tour)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=801728

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

Global Impact of U.S. Shale Oil (Rising Production Tempers World Prices)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=735415

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

North American Exploration and Production Handbook

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749557

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Cash Flow Trends in the U.S. Energy Sector (Shareholder Activism Having an Impact)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=733556

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=926675

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