CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned 'BBB' ratings to Devon Energy Corporation's (Devon) senior notes issuance due 2015, 2016 and 2018. Devon's Rating Outlook is Stable.
Devon is issuing unsecured debt in a four-part offering to help finance its planned $6 billion acquisition of GeoSouthern Energy Corporation's Eagle Ford assets. Devon is selling $500 million in floating rate notes due 2015 and $350 million in floating rates due 2016. In addition, the company is selling $650 million in fixed rate notes due 2016 and another $750 million in fixed rate notes due 2018.
KEY RATING DRIVERS
The ratings reflect Devon's position as a very large diversified exploration and production company; its low cost reserve position and production profile; and its moderate leverage and conservative operational and financial strategy. Pro-forma for the GeoSouthern transaction, Devon's proven reserve base will exceed three billion barrels of oil equivalent (boe) and its daily production will exceed 700,000 boe/d. Also as a result of the transaction, Devon's net debt will effectively double and net debt to EBITDA is expected to rise from approximately 1.0X to be between 1.5 - 2.0X pro-forma for the transaction. Gross debt is expected to be approximately 13 billion.
The GeoSouthern acquisition has positive aspects to it in that it further expands the company's portfolio into higher margin crude production and will be self-funding while providing volume growth on a go forward basis. Additionally, the transaction should allow Devon to be free cash flow neutral on a corporate wide basis in the near-to-intermediate term.
Devon has indicated that it will be divesting assets it deems 'non-core' in the intermediate term in an effort to optimize it portfolio. Proceeds are expected to be used to help de-lever and retire acquisition related debt over time. The pace of asset sales and performance of Devon's portfolio will determine any future positive rating actions.
Devon's liquidity is provided by cash on hand (estimated to be $2 - $2.5 billion pro-forma as of close of the transaction), the company's $3 billion CP program and its $3 billion revolving credit facility due 2018. The credit facility contains one material financial covenant that requires the company's ratio of total funded debt to total capitalization to be less than 65%. At Sept. 30, 2013, the company was in compliance with this covenant with a debt to capitalization ratio of 22.4%. Fitch anticipates the company will continue to have meaningful headroom post-closing. Near-term maturities other than its existing commercial paper balances are $500 million in senior notes due in January of 2014 and the $500 million in floating rates notes just issued due in 2015.
RATINGS SENSITIVITIES
Positive: Future developments that could, individually or collectively, lead to positive rating actions include:
--De-levering over time and returning closer to previous credit metrics levels;
--Consistent strong reserve replacement with competitive finding and development costs;
--Demonstrating positive or neutral free cash flow after capex and dividends.
Negative: Future developments that could, individually or collectively, lead to negative rating action include:
--Another leveraging acquisition;
--Material and sustained negative free cash flow that results in higher leverage;
--Levered share repurchases or major dividend increases;
-- Material disappointments in reserve replacement or production levels.
Fitch rates Devon as follows:
Devon Energy Corporation
--Long-term IDR 'BBB';
--Senior unsecured notes 'BBB';
--Senior unsecured credit facility 'BBB';
--Short-term IDR 'F2';
--Commercial paper (CP) 'F2'
Devon Financing Corporation U.L.C.
--Long-term IDR 'BBB';
--Senior unsecured notes 'BBB'.
Ocean Energy
--Long-term IDR 'BBB-';
--Senior unsecured notes 'BBB-'.
The Rating Outlooks for Devon and Ocean are both Stable.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Relevant Research:
--'Crossover Credits in Natural Resources-Migration Catalysts 2003 - 2013' (Oct. 31, 2013)
--Investor FAQs--Recent Questions on E&P, Refining, and Drilling and Services Sectors (Aug. 12, 2013);
--'Corporate Rating Methodology Including Short-Term Ratings and Parent and Subsidiary Linkage' (Aug. 5, 2013);
--'Updating Fitch's Oil and Gas Price Deck' (July 29, 2013);
--'Energy Handbook--Upstream Oil & Gas' (June 28, 2013);
--'Full Cycle Cost Survey for E&P Producers-2012 Numbers Up, but Adjustments Tell a Different Story' (May 28, 2013).
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=811629
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