CHICAGO--(BUSINESS WIRE)--Fitch rates Pacific Rubiales Energy Corp's (Pacific Rubiales) USD300 million reopening of the company's senior unsecured notes due 2021 'BB+'. Pacific Rubiales expects to use the proceeds to fund the acquisition of Petrominerales Ltd. as well as for its capital investment program and general corporate purposes.
Key Rating Drivers:
Pacific Rubiales' ratings are supported by the company's leadership position as the largest independent oil and gas player in Colombia and its strong management with recognized expertise in heavy oil exploration and production. The ratings also reflect the company's strong liquidity and adequate leverage. The company faces developing risks associated with increasing production from existing fields in order to offset decrease in production expected for 2016, when the production agreement for its main producing field expires. Pacific Rubiales' credit quality is tempered by the company's small scale, production concentration and relatively small reserve profile. The company also benefits somewhat from its partnerships with Ecopetrol (rated with a 'BBB-' Issuer Default Rating by Fitch), Colombia's national oil and gas company, which supports Pacific Rubiales' investments and shares production.
Solid Financial Profile:
The company's ratings reflect its adequate financial profile characterized by low leverage and strong interest and debt service coverage. As of the last 12 months (LTM) ended Sept. 30, 2013, the company reported leverage ratios, as measured by total net debt-to-EBITDA and total debt-to-total proved reserves, of 0.8x and USD6.4 per barrels of oil equivalent (boe), respectively. As of Sept. 30, 2013, debt of approximately USD2.1 billion was composed mostly of senior unsecured notes due 2021 and 2023. Also as of the LTM ended Sept. 30, 2013, Pacific Rubiales reported EBITDA, as measured by operating income plus depreciation and stock-based compensation, of USD2.2 billion.
Piriri-Rubiales Concession Expires in 2016:
Although Pacific Rubiales' production and reserves profile has significantly improved in recent years, the expiration of the Piriri-Rubiales production agreement in 2016 is expected to have a significant impact on the company's financial results. As a result of the expiration of the production agreement in 2016, Fitch expects Pacific Rubiales' production level for 2017 to be in line with that of 2012 or below current production. This field currently represents 55% of total net production, down from 75% in 2010. The company is expected to be able to replace Piriri-Rubiales production by 2017 given the company's recent diversification efforts and high reserve replacement ratios, coupled with its proven track record of increasing production. The rating does not incorporate the possibility of extending production from this field past its expiration date. As of December 2012, this field represented approximately 19% of the company's total proved and probable reserves of 514 million boe; excluding the Piriri-Rubiales resources, debt-to-reserves (1P) are still low at approximately USD8.8 per boe.
Petrominerales Acquisition Neutral for Credit Quality:
Pacific Rubiales' intended acquisition of Petrominerales Ltd. is expected to be credit neutral, as the transaction is believed to marginally increase leverage and somewhat increase its production diversification. On Sept. 29, 2013, Pacific Rubiales entered into an agreement to acquire all outstanding common shares of Petrominerales. The total purchase price of approximately USD1.6 billion includes a USD961 million cash payment and Pacific Rubiales' assumption of USD697 million of debt. The company expects to finance the acquisition using cash on hand and short-term financing from its committed credit lines. As a result, Pacific Rubiales' 2012 pro forma leverage would have been 1.2x (after giving effect to the incremental debt), from approximately the 0.7x as reported. Following the acquisition, the company intends to divest some of Petrominerales asset, especially some investments in pipelines in Colombia, to raise approximately USD300 million to USD400 million of cash and reduce debt related to the acquisition.
Improving Operating Metrics:
Operating metrics for the company have been improving rapidly and its growth strategy is considered somewhat aggressive. During 2012, the company reserve replacement ratio was 398% and its current 2P reserve life index is approximately 14 years using current production levels. During the past two years the company increased gross and net production to approximately 310,471 boe/d and 127,728 boe/d, respectively, from approximately 235,796 boe/d and 92,611 boe/d as of June 2012. As of December 2012, Pacific Rubiales' proved (1P) and proved and probable (2P) reserves, net of royalties, amounted to approximately 336 million and 514 million bbls, respectively. The company's reserves are composed of heavy crude oil (59%) and natural gas and light and medium oil (41%). Pacific Rubiales has a significant number of exploration prospects which will require significant funds to develop. In the short term, the company plans to devote its efforts to develop the Quifa, Sabanero and CPE-6 blocks, which surround and are near the Piriri-Rubiales block.
Capex to Pressure Free Cash Flow:
Free cash flow (FCF; cash flow from operations less capital expenditures and dividends) has been negative given the company's growth strategy. Pacific Rubiales' significant capital expenditure plans over the next few years could continue to pressure FCF in the near term. Increasing production at the Piriri-Rubiales and the surrounding Quifa block are expected to account for the bulk of the company's capital expenditure, which is expected to be approximately USD6.5 billion between 2012 and 2016, excluding the Petrominerales acquisition. By the year 2017 and after the expiration of the Piriri-Rubiales concession, leverage could increase to approximately 1.0x to 1.5x as a result of the decrease in production and lower oil prices considered under Fitch's base case scenario.
Strong Liquidity Position:
The company's current liquidity position is considered strong, characterized by strong cash flow generation and manageable short-term debt obligations. As of Sept. 30, 2013, cash on hand amounted to approximately USD376 million, while short-term debt was USD189 million. The company also has two revolver credit facilities totaling USD700 million and as of Sept. 30, 2013, it had drawn down approximately USD92 million.
Rating Sensitivities:
A rating downgrade would be triggered by any combination of the following events: sustained adjusted leverage above 2x, driven by increase in debt for exploration combined with a low success rate of discoveries; an increase in royalties that significantly cripples the company's financial profile (no changes in royalties are expected in the near future); and/or a decline in production and reserves. Pacific Rubiales' ratings could also be pressured if the company fails to increase production to replace the significant contribution of the Pirir-Rubiales field by the time the concession expires.
Although a positive rating action is unlikely in the medium term given the current developing risks associated with the company, factors that could result in a positive rating action include increased diversification of the production profile, consistent growth in both production and reserves, and positive FCF generation.
Additional information is available at www.fitchratings.com.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 5, 2013).
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.