OREANDA-NEWS. Fitch Ratings expects an extended period of low oil prices over the next 12 to 18 months to pressure the liquidity position of Pacific Rubiales Energy Corp. (Pacific Rubiales; IDR 'BB+', Outlook Stable) and force the reduction of capex to preserve liquidity. The effect of cutting capex over a prolonged period could compromise the company's long-term viability given its relatively low reserve life.

Fitch will monitor Pacific Rubiales' actions to preserve liquidity and manage capital expenditures over the next three to six months and assess the impact of these actions on the company's long term credit profile. Positively, the company's credit profile benefits from its manageable amortization schedule with no significant debt amortizations until 2019. Annual interest expenses of approximately USD250 million can be met with the estimated USD1 billion of EBITDA generation at current prices of approximately USD50/bbl and USD478 million of cash on hand as of September 2014. Furthermore, the company has a USD1 billion undrawn committed credit line.

Pacific Rubiales' ratings may be downgraded should oil prices remain at current levels for the next six to 18 months. More specifically, the ratings could be downgraded if adjusted leverage is sustained above 2x; if the reserves replacement ratio declines; and/or if production and reserves decline. Pacific Rubiales' ratings will also be pressured if the company reinstates its dividend or equity buy-back programs during the current low oil price environment.

Fitch anticipates that near-term crude prices will remain below its long-term price assumption of USD75/bbl. Under current crude price scenarios, Fitch believes Rubiales will trim capex to USD1 billion/year, which would allow the company to be FCF break-even if WTI average USD60/bbl during 2015. The company reported 2015 guidelines for FFO of between USD1.1 billion and USD1.3 billion and the same range for capex. Under a sustained sub-USD60/bbl scenario that extends for 12 or 24 months, the company's credit quality would be significantly hindered and its ratings will face downward pressure. Under this scenario, the company's leverage levels for the next two years would rise to above 4x Net Debt/EBITDA, which would place it above the company's covenant restrictions that would prevent it from issuing additional debt (maintenance covenants prevent the company from issuing debt should total debt to EBITDA exceeds 3.5x).

A prolonged reduction of capex to preserve liquidity would compromise the company's long-term viability given its relatively low reserve life. Pacific Rubilaes proved reserve (1P) life is estimated to be currently between 8.0 and 8.5 years. Fitch sees reserve live below 10 years to be commensurate with a high yield credit profile. Pacific Rubilaes leverage, as measured by total debt to 1P reserves is estimated at approximately USD10/bbl. A prolong reduction in capex to preserve liquidity would likely affect the company's reserve replacement ration, which in turn could reduce the company's reserve life and increase reserve based leverage, thus deteriorating its credit quality.

The recent severe decline in the company's equity value could create incentives for shareholders to pressure the company to restructure debt in order to increase shareholders value. This risk is mitigated by the lack of shareholder concentration and the company's long-term amortization profile and low interests. Currently, no shareholder possesses more than 19% of the company's shares. Under Canadian law, if a shareholder increases its participation to 20% or more, it has to make a tender offer for the remaining shares it does not own. Under this case, the ability of a single shareholder to impose a debt restructuring on the company increases and Pacific Rubiales rating could be downgraded. Since the end of August of 2014, Pacific Rubiales market capitalization has decline more than 75%. Pacific Rubiales market capitalization remains in excess of USD1 billion.