Fitch Ratings has upgraded the ratings on Pioneer Natural Resources Co. (Pioneer, NYSE: PXD) to 'BBB-' from 'BB+'. A full list of rating actions follows at the end of this release. The Rating Outlook is Stable.
Key Rating Drivers
Pioneer's ratings and Stable Outlook are supported by the company's long-lived onshore reserve base, consistent production growth, and valuable leasehold acreage positions in key oil and liquids basins, the Permian and the Eagle Ford.
Management has established a track record of willingness to defend its target leverage ratio of no more than 1.75 net debt to operating cash flow and to fund growth capex with means other than debt. This track record has included two separate common equity raises ($489.5 million in Q4 2011 and $1.32 billion in Q1 2013), two joint venture asset sales in key positions ($1.1 billion in proceeds from the Eagle Ford JV in 2010 and $1.7 billion in proceeds from the South Wolfcamp JV in 2013), and a robust hedging program.
Concerns include relatively high leverage for an investment grade exploration and production company, high capex investment required to fund growth, and the risk of a macroeconomic scenario that involves materially and persistently lower oil prices in the long run.
The company's controlled subsidiary master limited partnership (MLP), Pioneer Southwest Energy Partners L.P. (NYSE: PSE) also presents a potential risk. While it is not management's current plan, large asset drop downs to the MLP could be considered in order to pursue preferential tax treatment. Such a change in strategy could create structural subordination for PXD note holders and could be credit negative if combined with equity friendly uses of the proceeds such as a share buyback or dividend.
Looking forward, capital expenditures are expected to remain high based on recent drilling success, acceleration in the Horizontal Wolfcamp Shale. Management's capital budget for 2013 is $3 billion. The capital expenditure carry provided by Reliance in the Eagle Ford joint venture ran out at the end of 2012 and Eagle Ford capex in the plan is up significantly from $130 to $575 million for 2012 and 2013 respectively.
While production growth and hedges should support cash flows to fund this program in a lower oil price scenario, it is important to note that most of the company's oil hedges are three way collars. In Pioneer's case these hedges will only provide up to a maximum of approximately $18 of support per barrel if WTI prices fall below approximately $75 per barrel.
FCF is expected to be approximately negative $1 billion 2013. However the recent $1.3 billion common equity raise and announcement of the $1.7 billion South Wolfcamp JV (expected to close in Q2 2013) should allow the company to fund this deficit and pay down some debt relative to 2012 year end levels.
Fitch would expect beyond 2013 that Pioneer will continue to outspend cash flow to fund its major drilling programs but that if FCF negative then management will continue to target net debt to operating cash flow 1.75(x). Fitch expects this would be met from a combination of production growth, asset sales (or joint ventures), and/or common equity issuances.
For the latest 12 months (LTM) ending Dec. 31, 2012, Pioneer's adjusted EBITDA was $2.1 billion which resulted in leverage, as measured by debt-to-EBITDAX, of 1.7x. Debt/flowing barrel of production was approximately $22,600 at Dec. 31, 2012 using fourth quarter average production of 165 thousand barrels of oil equivalent per day.
Pioneer maintains liquidity from cash and equivalents ($229 million at Dec. 31, 2012); its $1.5 billion credit facility due 2017; and operating cash flows of $1.8 billion during the LTM period, which are supported by significant hedge positions going forward. These calculations are not pro forma for the company's $1.3 billion equity raise and conversion of $240 million of convertible notes in 2013.
Current maturities are minimal; however, Fitch expects the $480 million of convertible notes due 2038 will be addressed in 2013.
According to Pioneer $240.6 million in principal were converted in January and February of 2013, and the company anticipates redeeming all remaining notes in 2013. Further Pioneer has stated that in general, upon conversion of a convertible senior note, the holder will receive cash equal to the principal amount and common stock for the conversion value in excess of the principal amount. Fitch estimates this would total $500 million in cash for the principal and roughly $400 million in additional common equity for the excess conversion value (which would vary depending on Pioneer's stock price).
Other than the convertible notes, the next maturity will be $455 million of 5.875% senior notes due in 2016.
Liquidity is solid 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's $1.5 billion senior unsecured credit facility contains a total debt-to-book capitalization maximum of 60%.
Negative: Future developments that may, individually or collectively, lead to negative rating include:
--Failure to execute on production growth expectations and a significant negative revision in expectations for horizontal drilling in the Permian basin.
--A material deviation from management's targeted leverage of less than 1.75x net debt to operating cash flow. In particular, material capex increases, dividends or share repurchases above and beyond growth in cash flow from operations that result in more negative free cash flow prospects and increased leverage.
--Large asset drop downs to the MLP subsidiary that signal a change in management strategy and increase risk of structural subordination.
--A large debt financed acquisition that would significantly increase leverage.
--Macro events outside the company's control such as a large and sustained decrease in oil prices.
Positive: Pioneer would need to continue to defend its balance sheet and execute on production growth expectations for the intermediate term. In particular this would require reduced leverage significantly below 1.5x debt to EBITDA and $20,000 debt per boe of production per day, and reduced negative free cash flow.
Fitch upgrades Pioneers ratings as follows:
--Long-term Issuer Default Rating to 'BBB-' from 'BB+';
--Senior unsecured credit facility to 'BBB-' from 'BB+';
--Senior unsecured notes to 'BBB-' from 'BB+'.
The Outlook is revised to Stable from Positive.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' dated Aug. 8, 2012.
Applicable Criteria and Related Research
Corporate Rating Methodology
Daniel Harris, +1-312-368-3217
Fitch Ratings, Inc.
70 W. Madison St.
Chicago, IL 60602
Sean T. Sexton, CFA, +1-312-368-3130
Mark C. Sadeghian, +1-312-368-2090
Brian Bertsch, +1-212-908-0549 (New York)
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