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
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same series, category/class of debt, security or pursuant
to a program for which the ratings are derived exclusively from existing
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support provider and in relation to each particular credit rating action
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provides certain regulatory disclosures in relation to the provisional
rating assigned, and in relation to a definitive rating that may
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to rated entity, Disclosure from rated entity.
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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
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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
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JOURNALISTS: 1 212 553 0376
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