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Rating Action: Moody's rates new Apache senior notes Ba1
Global Credit Research - 03 Aug 2020
New York, August 03, 2020 -- Moody's Investors Service, ("Moody's") assigned a Ba1 rating to Apache Corporation's (Apache) proposed senior unsecured notes offering. Apache's existing ratings, including its Ba1 Corporate Family Rating (CFR), and negative outlook remain unchanged. The proceeds from the proposed offering will be used to fund an announced tender offer for outstanding senior notes and repay revolver borrowings.
"This senior notes offering extends Apache's debt maturity profile and liquidity runway to weather this period of low oil and gas prices," commented Pete Speer, Moody's Senior Vice President.
..Issuer: Apache Corporation
....Senior Unsecured Regular Bond/Debenture, Assigned Ba1 (LGD4)
Apache's proposed and existing 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. The new senior notes will be used to fund a simultaneously announced tender offer for existing senior notes spread across multiple maturities, but targeting nearer-term maturities. The remaining proceeds will be used to repay revolver borrowings, with the overall transaction supporting the company's good liquidity position (SGL-2) by extending its maturity profile and increasing available borrowing capacity on its revolver.
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 has a prospective acreage position in Suriname with three discoveries to date. This could prove to be a very valuable asset, but this requires significant development and therefore production and cash flow generation will not begin for several more years.
The company is challenged by high debt levels and weak credit metrics relative to similarly rated peers even prior to the oil price collapse in March 2020. Apache has substantially cut its dividend and capital spending to minimize negative free cash flow in 2020 and generate free cash flow as commodity prices recover to reduce debt. These decisive steps will enable the company to maintain solid liquidity and achieve some debt reduction in 2021. However, low capital investment will drive declining production and reserves that will result in higher E&P leverage metrics, while cash flow based credit metrics are expected to be weaker than most peers even when oil prices recover to $50/bbl or higher.
The negative outlook reflects the uncertain pace of recovery in oil prices over the remainder of 2020 and 2021. If commodity price recovery is limited, then declines in production and reserves could accelerate and Apache's metrics will not improve to levels supportive of its Ba1 rating.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Apache's ratings could be downgraded if commodity prices remain low, the company's production and reserves fall faster than Moody's forecasts or if debt reduction over the medium term falls short of expectations. Retained Cash Flow (RCF)/Debt sustained below 20%, Leveraged Full-Cycle Ratio (LFCR) sustained below 1x, 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 grow production and reserves funded with internally generated cash flow at competitive returns in a more supportive commodity price environment. A LFCR above 1.5x, RCF/Debt above 30%, and Debt/PD approaching $8/boe could support a ratings upgrade.
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.
Apache Corporation is a large independent exploration and production company headquartered in Houston, Texas. 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, and an exploration program is underway in Suriname.
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. 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_1133569.
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.
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. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Steven Wood MD - Corporate Finance Corporate Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653
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