Moody’s Investors Service changed Anadarko Petroleum Corporation’s (Anadarko) rating outlook to positive from stable. Moody’s affirmed Anadarko’s Baa3 senior unsecured ratings and those of its guaranteed subsidiaries, including Kerr McGee Corporation and Union Pacific Resources. The Baa3 senior unsecured ratings and stable outlook of Western Gas Partners (WES) were not affected by this action.
“Anadarko’s strong operating performance and improving financial position support its positive outlook,” commented Pete Speer, Moody’s Vice-President. “We believe that the company’s legal contingencies are likely to become sufficiently defined within the next eighteen months to consider a positive rating action.”
Anadarko’s Baa3 senior unsecured ratings are supported by its proved reserve and production scale that is among the largest of all independent E&P companies and comparable to Baa1 and A3 rated peers. The company benefits from having nearly half of its production from oil and natural gas liquids, which offsets the effect of weak natural gas prices on its cash flows. The property base is well diversified in the US and has exposure to numerous international offshore oil and gas developments. Anadarko’s strong oil-weighted production and proved reserve growth trend in the US combined with its impressive offshore success around the world has led to rising cash flows from operations and asset sales, enabling the company to improve its leverage metrics while also building substantial cash balances.
The company’s ratings are restrained by the significant contingent liabilities related to the Tronox litigation and any residual liabilities related to Macondo. Anadarko’s cash balance of $4.6 billion at June 30, 2013 will be further bolstered by the proceeds of its recently agreed upon sale of a 10% interest in its Mozambique development for $2.64 billion that is expected to close around the end of this year. The rising cash balance and $5 billion committed revolving credit facility provide ample liquidity for larger than expected adverse litigation judgments.
The positive outlook is based on Moody’s expectation that any losses related to Tronox and Macondo are likely to be well within Anadarko’s cash balances with no significant detriment to its leverage metrics. If the Tronox contingency gets resolved or at least more clarified through judicial rulings, the company maintains its strong operating momentum and improving leverage trends, and replaces its current senior secured credit facility with an unsecured facility, then the ratings could be upgraded to Baa2. Debt/average daily production and debt/proved developed (PD) reserves were about $20,100/boe and $8.10/boe at June 30, 2013. “We expect these metrics to continue to improve through production and reserve growth, allowing Anadarko to sustain leverage on production and PD reserves comfortably below the $20,000/boe and $8/boe levels that are supportive of a Baa2 rating,” Moody’s said.
In the event that there are adverse rulings against Anadarko for Tronox or Macondo and the monetary damages are much larger than expected, Moody’s would expect the company to pursue the appeals process. Moody’s would re-evaluate the potential financial loss for Anadarko and consider the company’s potential for further sales of undeveloped properties or other assets to mitigate the effect of this loss on its debt levels and credit metrics. If debt/average daily production and debt/PD were to rise above $27,000/boe and $10/boe on a sustained basis then the ratings could be downgraded.
WES’ Baa3 senior unsecured ratings and stable outlook reflect its Ba1 stand-alone credit profile and a one-notch uplift for its strategic importance to Anadarko. In order for WES’ ratings to be upgraded, its stand-alone credit profile would have to strengthen sufficiently to support a Baa3 rating, in addition to the ratings of Anadarko being upgraded. Therefore this rating action on Anadarko had no effect on WES’ ratings and outlook.
Anadarko Petroleum Corporation is headquartered in The Woodlands, Texas and is among the largest independent exploration and production companies.
Source: Moody’s, October 04, 2013