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Rating Action:

Moody's changes Apache Corporation's outlook to positive

08 Jun 2022

New York, June 08, 2022 -- Moody's Investors Service ("Moody's") changed Apache Corporation's (Apache) rating outlook to positive from stable. Apache's Ba1 Corporate Family Rating (CFR), Ba1-PD Probability of Default Rating (PDR) and Ba1 senior unsecured notes rating were affirmed. The company's Speculative Grade Liquidity Rating (SGL) remains SGL-1.

"Apache's commitment to apply a substantial portion of its excess cash flow from high oil and gas prices to ongoing debt reduction supports the positive outlook," said Pete Speer, Moody's Senior Vice President. "The substantial debt reduction achieved to date and to come over the remainder of 2022 will greatly improve the company's financial flexibility and resilience, while its increased capital investment should enable Apache to return to sustainable growth in production and reserves."

Affirmations:

..Issuer: Apache Corporation

.... Corporate Family Rating, Affirmed Ba1

.... Probability of Default Rating, Affirmed Ba1-PD

.... Senior Unsecured Regular Bond/Debenture, Affirmed Ba1 (LGD4)

Outlook Actions:

..Issuer: Apache Corporation

....Outlook, Changed To Positive From Stable

RATINGS RATIONALE

Apache is poised to reduce debt by around $2.6 billion in 2022, bringing cumulative debt reduction since the end of 2020 to about $3.9 billion, or 44%. Most of this debt reduction was facilitated by tender offers for senior notes, the most recent completed in March 2022. The company also reduced leverage through the Altus Midstream merger transaction and deconsolidation of its debt and preferred stock burden. The company already sold down some of its equity ownership and Moody's expects Apache to sell its remaining 13% ownership in the renamed Kinetik Holdings Inc. (Kinetik Holdings LP, Ba1 stable) after its lockup expires in the first quarter of 2023, subject to market conditions. While the company's shareholder return framework pledges 60% of free cash flow to be returned to shareholders through a fixed dividend and share repurchases, 40% of free cash flow can be directed towards debt reduction.

Apache cutting its debt by almost half, substantial cost reductions, amendments to its concessions in Egypt that improve that asset's global competitiveness and its large position in the Permian Basin of the United States all strengthen the company's capacity to withstand negative credit impacts from carbon transition risk. While the financial performance of Apache will continue to be influenced by industry cycles, compared to historical experience, Moody's expects future profitability and cash flow in this sector to be less robust at the cycle peak and worse at the cycle trough because global initiatives to limit adverse impacts of climate change will constrain the use of hydrocarbons and accelerate the shift to less environmentally damaging energy sources. Apache's ongoing debt reduction combined with improved operating performance and stronger returns on capital could position the company to return to investment grade with a more resilient financial profile and more durable property portfolio to navigate the medium to long term risks from energy transition.

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 Egypt and the North Sea 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 debt reduction will close the gap in its leverage metrics compared to similarly rated peers, which helps mitigate its large asset retirement obligations in the North Sea and from legacy operations in the US Gulf of Mexico that are much larger than its Baa3 rated peers.

Apache's SGL-1 rating reflects its very good liquidity as underpinned by committed revolving credit facilities that mature in April 2027 and forecasted free cash flow generation. As of March 31, 2022, Apache had $144 million of cash. In April 2022, Apache's parent company, APA Corporation (APA), replaced Apache's $4 billion revolving credit facility due 2024 with two new five-year committed senior unsecured credit facilities that are guaranteed by Apache. One facility has $1.8 billion of committed borrowing capacity, with $680 million of outstanding borrowings and $20 million of letters of credit as of April 29, 2022. The other facility has GBP1.5 billion of committed borrowing capacity, with GBP748 million of letters of credit outstanding as of April 29, 2022, posted for asset retirement obligations in the UK North Sea. The company should continue to generate substantial free cash flow for the remainder of this year, repaying the revolver borrowings outstanding and early redeeming $123 million of senior notes due 2023 by the end of 2022. The credit facilities have one financial maintenance covenant for which APA has ample headroom for future compliance.

Apache's senior unsecured notes are rated Ba1, the same as the CFR. Apache guarantees APA's credit facilities, effectively rendering the credit facilities and Apache's senior notes pari passu with respect to the company's production and proved reserves. Both the credit facilities and senior notes are unsecured with no subsidiary guarantees beyond Apache's guarantee of the credit facilities. Apache's guarantee will be canceled once its has less than $1 billion of senior notes outstanding, which the company expects to achieve over time by migrating Apache's senior notes to APA Corporation to conclude the legal restructuring it initiated in early 2021 to move to a pure holding company structure more consistent with its globally diversified peers.

The outlook is positive based on Apache's expected free cash flow generation, debt reduction and increased capital investment to restore modest growth in the company's production and proved reserves.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

In order for a ratings upgrade to Baa3 to be considered, Apache has to reduce debt as expected and return to modest production and reserves growth at competitive returns. The company completing its legal restructuring to simplify its capital structure would also be supportive of an upgrade. A Leveraged Full-Cycle Ratio (LFCR) sustained above 1.5x, Retained Cash Flow (RCF)/Debt above 40%, and Debt/PD below $8/boe under Moody's medium term price assumptions could support a ratings upgrade.

Apache's ratings could be downgraded if its investment returns and financial leverage metrics deteriorate. An LFCR below 1x, RCF/Debt below 20%, or Debt/PD above $12/boe could result in a ratings downgrade.

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. 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 and appraisal program is underway in Suriname which is owned by another APA subsidiary, for which Apache holds a claim on that asset through an intercompany note.

The principal methodology used in these ratings was Independent Exploration and Production published in August 2021 and available at https://ratings.moodys.com/api/rmc-documents/74836. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

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 on https://ratings.moodys.com/rating-definitions.

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 issuer/deal page for the respective issuer on https://ratings.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 https://ratings.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://ratings.moodys.com/documents/PBC_1288235.

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 https://ratings.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 https://ratings.moodys.com.

Please see https://ratings.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 issuer/deal page on https://ratings.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

No Related Data.
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