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Rating Action:

Moody's downgrades Apache to Ba1, outlook negative

18 May 2020

New York, May 18, 2020 -- Moody's Investors Service ("Moody's") downgraded Apache Corporation's (Apache) senior unsecured ratings to Ba1 from Baa3, and its commercial paper rating to Not Prime from Prime-3. Moody's concurrently assigned a Ba1 Corporate Family Rating (CFR), a Probability of Default Rating of Ba1-PD, and a Speculative Grade Liquidity Rating of SGL-2 to Apache. The outlook was changed to negative. These actions conclude the ratings review initiated on March 20, 2020.

"The downgrade of Apache to Ba1 reflects our expectation of higher leverage on production and reserves that we don't expect to reverse over the medium term," said Pete Speer, Moody's Senior Vice President. "The company's returns and cash flow based leverage metrics will improve in line with the recovery in oil prices, but those metrics position Apache more in line with Ba1 rated E&P peers."

Downgrades:

..Issuer: Apache Corporation

....Senior Unsecured Shelf, Downgraded to (P)Ba1 from (P)Baa3

....Commercial Paper, Downgraded to NP from P-3

....Senior Unsecured Notes, Downgraded to Ba1 (LGD4) from Baa3

Assignments:

..Issuer: Apache Corporation

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

.... Speculative Grade Liquidity Rating, Assigned SGL-2

.... Corporate Family Rating, Assigned Ba1

Outlook Actions:

..Issuer: Apache Corporation

....Outlook, Changed To Negative From Rating Under Review

RATINGS RATIONALE

The downgrade to Ba1 reflects both Apache's relatively weak credit metrics for its Baa3 rating prior to the oil price collapse and Moody's expectations of significant production and proved reserve declines that will increase its leverage on production and reserves in 2020 and 2021. The severe drop in oil and NGL prices and already low gas prices will drive very weak cash flow based credit metrics in 2020, with an uncertain pace of improvement in commodity prices and cash flow in 2021. The company has substantially reduced its dividend and heavily cut capital spending with the objective of minimizing negative free cash flow in 2020 and to generate free cash flow as oil and gas prices recover to reduce debt. These decisive steps will enable the company to maintain solid liquidity and achieve some debt reduction in 2021.

However, the low capital reinvestment will lead to declining production and reserves that will result in leverage on production and reserves that are not supportive of an investment grade rating. Moody's also expects that Apache's cash flow based leverage metrics will be weaker than most Ba1 rated peers even when oil prices eventually recover to or exceed $50 per barrel.

The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. The exploration and production (E&P) sector has been one of the sectors most significantly affected by the shock given its sensitivity to demand and oil prices. More specifically, the weaknesses in Apache's credit profile have left it vulnerable to shifts in market sentiment in these unprecedented operating conditions and Apache remains vulnerable to the outbreak continuing to spread and oil prices remaining weak. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. Today's downgrade reflects the impact on Apache of the breadth and severity of the oil demand and supply shocks, and the broad deterioration in credit quality it has triggered.

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. The company's exposure to oil, natural gas and natural gas liquids (NGLs) provides it with flexibility in capital allocation in line with cyclical swings in profitability and returns between liquids and gas. 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 two 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 Baa3 and Ba1 rated peers even prior to the oil price collapse in March 2020. From 2017 to 2019, Apache heavily invested in the delineation, development and midstream infrastructure build out for its Alpine High play in the Delaware Basin within the Permian. This asset holds substantial resource potential but it is not economic in the weak NGL and natural gas price environment that took hold in the latter half of 2019. This investment has weighed on the company's investment returns and leverage metrics, which have lagged the improvement demonstrated by similarly rated peers.

The negative outlook reflects the uncertain pace of recovery in oil prices in the latter half 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.

Apache's SGL-2 rating denotes good liquidity as underpinned by its $4 billion committed revolving credit facility that matures in March 2024. As of March 31, 2020 there was approximately $2.95 billion of availability on the revolver after taking into account $250 million of borrowings outstanding and factoring in around $800 million of letters of credit that were posted in early April 2020 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 no debt maturities in 2020, followed by $293 million maturing in February 2021, $463 million in April 2022, and $181 million in January 2023. Therefore the company has ample availability for debt maturities through 2023 and potential negative free cash flow under our base commodity price assumptions.

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 RATINGS

Apache's ratings could be downgraded if commodity prices remain very 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.

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 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.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

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

No Related Data.
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