Fitch Downgrades Pacific Rubiales to 'BB'; Outlook Revised to Negative
The downgrade reflects the negative effect the decline in oil prices have on Pacific Rubiales' credit profile. Medium and long-term production and reserve replacement will likely be affected by the steep decrease in prices seen in recent months. This in turn will force Pacific Rubiales to reduce capital expenditures significantly. Pacific Rubiales credit metrics will also deteriorate in 2015 and 2016; leverage, as measured by total-debt to EBITDA for the next two years would rise to or above 4.0x under Fitch's revised price deck for WTI oil prices of \$50/bbl for 2015 and \$60/bbl for 2016.
The Outlook revision to Negative reflects further potential long-term effects the reduction in capex may have on the company's ability to replace the production from the Pirir-Ruibiales field with new fields. Fitch's previous base case assumed that the Pirir-Rubiales field, which today accounts for approximately 35% of Pacific Rubiales' total production, reverts back to Ecopetrol in the middle of 2016 and that Pacific Rubiales production declines in 2017 as a result of this. The decrease in production in light of Fitch's revised price deck could be more severe than initially anticipated given the capex reduction Pacific Rubiales will have to implement over the next two years.
Under Fitch's price deck assumption for 2015, Pacific Rubiales' liquidity position will be pressured but would still be manageable. Further price decreases could trigger covenants embedded in Pacific Rubiales' indebtedness. As of Sep. 30, 2014, Pacific Rubiales reported \$478 million of cash on hand and approximately \$158 million of short-term debt and the remaining debt had a manageable amortization schedule.
Fitch estimates Pacific Rubiales' FCF would break even at oil prices of between \$60/bbl-\$65/bbl for the next 24 months. This assumes cash costs are successfully cut per barrel by 15% and capex trimmed back to \$1 billion/year. Under this scenario, Pacific Rubiales' net leverage would range between 3.2x and 4.2x. If current prices of \$50/bbl are sustained for the next 24 months, EBITDA margins could decrease to the low 20% level, FCF would turn negative and leverage could reach 6.0x-7.0x and result in further negative rating actions.
A negative rating action would be triggered by any combination of the following events:
--A sustained leverage above 3.5x, which could be driven by either a decrease in production as a result of capex curtailment or persistent low oil prices;
--A significant reduction in the reserve replacement ratio could affect Pacific Rubiales' credit quality given the current relatively low proved reserve life of approximately 8.3 years
A positive rating action is unlikely in the medium term.