Fitch Affirms Pioneer Natural Resources' IDR at 'BB+'; Outlook StableNEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the following ratings for Pioneer Natural Resources' (Pioneer; NYSE: PXD):
--Issuer Default Rating (IDR) at 'BB+';
--Senior Unsecured Notes and Credit Facility at 'BB+'.
The Rating Outlook is Stable. Approximately $2.7 billion of debt is affected.
Pioneer's ratings continue to be supported by the company's long-lived onshore reserve base; positive production outlook stemming from volumetric production payment (VPP) expirations and increased capital spending levels; and the continued expectation of positive/neutral free cash flows supported by a sizable hedging program. Offsetting factors include the high levels of debt relative to production levels; weaker historical average organic reserve replacement rates; and the company's significant exposure to natural gas prices (after existing hedge protections end).
Pioneer recently announced a $1.15 billion joint venture agreement with Reliance Industries Limited (Reliance) to sell a 45% interest in the company's Eagle Ford Shale play. The transaction will result in $266 million of cash paid to Pioneer at closing and $879 million of drilling carry. The drilling carry will fund 75% of Pioneer's share of future drilling costs over a six-year period. As a result of the announcement, Pioneer is expected to use the proceeds to accelerate drilling activity in the Eagle Ford Shale play and to reduce debt. Pioneer now expects to grow production by an estimated 10% from fourth quarter 2009 to fourth quarter 2010 and sustain a 15% production growth rate between 2011 and 2013. Growing production combined with a significant hedging program will provide the company with significant cash flow visibility going forward. As a result, Pioneer should be able to continue to live within operating cash flows and therefore not require additional borrowings despite expectations of increased capital expenditures going forward.
Credit metrics continue to improve as of March 31, 2010 reflecting reduced debt levels, positive free cash flow (FCF) generation and improving levels of EBITDAX (earnings before interest, taxes, depreciation, amortization and exploration expense) stemming from higher commodity price realizations. Looking forward, Fitch expects Pioneer to benefit from significant existing hedges, increasing production levels and the potential for additional debt reductions and VPP amortizations. For the latest 12 months (LTM) ending March 31, 2010, Pioneer's EBITDAX was $1.31 billion which resulted in interest coverage of 7.0 times (x) and leverage, as measured by debt-to-EBITDAX, of 2.1x. At year-end 2009, debt/boe of proven reserves was $3.27/boe ($.54/mcfe) and debt/boe of proven developed reserves (PDP) was $5.61/boe ($.93/mcfe). Pioneer generated a positive $294 million of FCF during the LTM period.
Fitch continues to expect Pioneer to generate positive/neutral free cash flows in 2010 and 2011 despite the increases to the company's capital expenditure program. Improved operating cash flows are being further supported by falling VPP obligations beginning in January 2010, increased hedging activity and the recovery of excess royalties paid by the company for deepwater leases in the Gulf of Mexico. As a result, Pioneer is anticipated to continue to direct cash flows to reduce remaining borrowings under the company's credit facility and to increase capital expenditures to begin growing production and reserves associated with the company's oil and liquids rich assets. Rising debt levels (given the current asset base and production profile) or to fund significant share repurchases could be a catalyst for negative rating action.
Pioneer maintains liquidity from cash and equivalents ($34.5 million at March 31, 2010); its $1.5 billion credit facility ($1.3 billion of availability at March 31, 2010); and operating cash flows of $818 million during the LTM period which are supported by significant hedge positions. Additional cash inflows from the recently announced and closed joint venture with Reliance Industries will provide immediate cash inflows of $266 million combined with $879 million of drilling carries. Current maturities are minimal, with the only maturity facing the company coming in 2012 with the expiration of the company's credit facility (a $1.5 billion facility with $125 million of outstanding borrowings and $104.2 million of undrawn letters of credit. In addition, since Fitch includes 100% of VPP balances in the debt calculations, debt levels will fall associated with VPP amortizations going forward. This includes approximately $90 million in 2010 and $45 million in 2011. Total VPP obligations at March 31, 2010 were $177.2 million.
Additional liquidity is available to the company as a result of Pioneer Southwest. The presence of the master limited partnership (MLP) benefits the parent company because of its ability to 'drop down' or sell assets to the MLP and the existence of a $300 million revolving credit facility at the MLP to finance these purchases. Note that the MLP currently has $69 million of outstanding borrowings on the facility. Additionally, Pioneer has the ability to sell additional units in the MLP to the public to raise additional capital without diluting Pioneer shareholders (Pioneer continues to own approximately 61.9% of LP units while also retaining the 0.1% GP units).
Liquidity remains strong at Pioneer, and the company remains in compliance with all debt covenants. All of Pioneer's borrowings have covenants, with the most restrictive covenants being associated with the company's senior unsecured credit facility. Pioneer amended its $1.5 billion senior unsecured credit facility effective April 29, 2009 to provide the company additional financial flexibility. The amendment resulted in a change to the ratio of the net present value of the company's oil and gas properties to total debt, from a minimum of 1.75x to 1.5x through March 31, 2011. From March 31, 2011 through April 2012, the covenant will revert back to 1.75x. In addition, Pioneer is able to include in the calculation of the present value of its oil and gas properties 75% of the market value of its ownership of LP units of Pioneer Southwest Energy Partners L.P. (Pioneer Southwest; NYSE: PSE).
Pioneer is a large independent oil & gas exploration and production company with operations in the U.S. (Permian Basin, Mid-Continent, Rockies, Gulf Coast & Alaska) and Africa (Tunisa and South Africa). At year-end 2009, the company had approximately 899 MMBOE of proven reserves.
These rating actions reflect the application of Fitch's current criteria reports which are available at 'www.fitchratings.com' and specifically include the following reports:
--'Corporate Rating Methodology' dated Nov. 24, 2009;
--'Oil and Gas Sector Exploration and Production Rating Methodology' dated Oct. 16, 2009.
Additional information is available at 'www.fitchratings.com'.
Posted: July 1, 2010
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