Apache Corporation -- Moody's affirms Apache's Ba1 ratings; outlook remains negative

Rating Action: Moody's affirms Apache's Ba1 ratings; outlook remains negativeGlobal Credit Research - 21 Apr 2021New York, April 21, 2021 -- Moody's Investors Service, ("Moody's") affirmed Apache Corporation's (Apache) Ba1 Corporate Family Rating (CFR), Ba1-PD Probability of Default Rating (PDR) and Ba1 senior unsecured notes rating. The outlook remains negative. Moody's concurrently upgraded Apache's Speculative Grade Liquidity Rating (SGL) to SGL-1 from SGL-2."The affirmation of Apache's Ba1 ratings reflects a more supportive oil and gas price environment combined with the company's continued restraint in capital spending and dividends that will drive free cash flow generation and improved credit metrics in 2021," said Pete Speer, Moody's Senior Vice President. "However, the company needs to substantially reduce outstanding debt to enhance the resiliency of its cash flow based leverage metrics to periods of weaker commodity prices while also reducing leverage on its smaller production and reserves base."Upgrades:..Issuer: Apache Corporation.... Speculative Grade Liquidity Rating, Upgraded to SGL-1 from SGL-2Affirmations:..Issuer: Apache Corporation....Probability of Default Rating, Affirmed Ba1-PD....Corporate Family Rating, Affirmed Ba1....Commercial Paper, Affirmed NP....Senior Unsecured Notes, Affirmed Ba1 (LGD4) Outlook Actions: ..Issuer: Apache Corporation ....Outlook, Remains Negative RATINGS RATIONALE The affirmation of Apache's Ba1 CFR reflects Moody's expectation of recovery in leverage metrics and meaningful free cash flow generation in 2021. Apache like many of its peers swiftly cut capital expenditures and dividends in 2020 as oil prices collapsed in response to the coronavirus pandemic. The benefits of those cuts extend into 2021 with capex expected to remain at levels that largely maintain oil production volumes but overall production will continue to decline primarily because of declines in US natural gas volumes. Free cash flow generation will grow substantially in 2021 thanks to high oil prices year to date and could rise further if prices remain above Moody's base oil price assumptions. This will allow Apache to reduce debt and financial leverage, helping its credit metrics recover from the very weak levels in 2020.Apache's Ba1 CFR reflects the benefits of its large asset base that is diversified geographically, geologically and by hydrocarbon. Its mix of unconventional and conventional reservoirs moderates its capital intensity compared to its more shale focused peers. Apache's property portfolio benefits from having producing assets in the North Sea and Egypt that provide exposure to Brent oil pricing and generates meaningful cash flow even in a low oil price environment. This adds diversification to its large acreage position in the Permian Basin. The company also benefits from a continued claim on the prospective acreage position in Suriname with many discoveries reported to date.The company's strong business profile is offset by high debt levels and weaker credit metrics than its similarly rated peers. Apache's cash flow based credit metrics are lower and its leverage on production and proved developed (PD) reserves is higher than its Ba1 and many Ba2 rated peers. With limited capital investment resulting in declining to flat production and PD reserves over the next few years it is important for the company's Ba1 rating that debt be reduced beyond upcoming maturities to drive improvements in credit metrics and enhance the company's resilience to future downcycles in commodity prices.The negative outlook reflects Apache's still weak investment returns and financial leverage metrics relative to peers under Moody's base commodity price assumptions and the need to reduce debt beyond the company's limited amount of upcoming maturities to sustain metrics supportive of its rating through commodity price volatility. If the company generates substantial free cash flow and prioritizes debt reduction as stated by management then the outlook could be changed to stable.Apache's SGL-1 rating indicates very good liquidity as underpinned by its $4 billion committed revolving credit facility that matures in March 2024 and forecasted free cash flow generation. As of December 31, 2020, there was approximately $2.95 billion of availability on the revolver after taking into account $150 million of borrowings outstanding and around $900 million of letters of credit, most of it being made up of letters of credit posted for asset retirement obligations in the UK North Sea. The facility has one financial maintenance covenant for which Apache has ample headroom for future compliance. The company has limited debt maturities through the revolver maturity in 2024, with no debt maturities in 2021, followed by $213 million maturing in April 2022 and $123 million in January 2023.Apache's senior unsecured notes are rated Ba1, the same as the CFR. The company's revolving credit facility and senior notes are all unsecured with no subsidiary guarantees.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSApache's ratings could be downgraded if its investment returns and financial leverage metrics do not sustainably improve from 2020 levels. An LFCR below 1x, Retained Cash Flow (RCF)/Debt below 20%, or Debt/PD above $12/boe could result in a ratings downgrade.In order for a ratings upgrade to be considered, Apache has to substantially reduce outstanding debt and return to modest production and reserves growth at competitive returns with oil and gas prices in the middle of Moody's medium term ranges. A Leveraged Full-Cycle Ratio (LFCR) above 1.5x, RCF/Debt above 40%, and Debt/PD approaching $8/boe could support a ratings upgrade.Apache Corporation is a large independent exploration and production company headquartered in Houston, Texas. It is a wholly owned subsidiary of publicly traded APA Corporation (APA). The company operates in the Permian Basin in west Texas and southeastern New Mexico, with acreage spanning the Midland, Delaware and Central Basin Platform sub-basins. Core international operating areas are in Egypt and the North Sea. An exploration program is underway in Suriname which is owned by another APA subsidiary, for which Apache holds a claim on that asset.The principal methodology used in these ratings was Independent Exploration and Production Industry published in May 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1056808. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. 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Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Peter Speer Senior Vice President Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. 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