Nueva York.- Fitch Ratings asignó hoy una calificación de ‘B’ / ‘RR4’ a los bonos senior no garantizados a siete años propuestos por Frontera Energy Corporation (TSX: FEC) (antes conocida como Pacific Exploration & Production) por 350 millones de dólares.
Los recursos de la emisión son para financiar la oferta pública anunciada por la compañía para recompraer sus bonos senior no garantizados de US$ 350 millones al 9,70% con vencimiento en junio de 2023. Fitch actualmente califica las calificaciones de incumplimiento de emisor (IDR) en moneda local y extranjera de Frontera en ‘B’ con una perspectiva estable.
La compañía ha implementado una política de cobertura dinámica para compensar el mayor costo de producción, que es causado por los contratos de transporte de compra o venta. Fitch estima que las acciones de la compañía mejoraron la vida útil de las reservas probadas (1P) a 6.2 años en 2020 en comparación con 4.4 años en 2019. El apalancamiento bruto, definido como deuda total / Ebitda, se estima en 3.8x en 2020 y se espera que sea 1.6x en 2021 con un apalancamiento neto esperado por debajo de 1.0x durante el horizonte calificado.
Fitch Ratings has assigned a ‘B’/’RR4’ rating to Frontera Energy Corporation’s proposed $350 million seven year senior unsecured notes.
New York – The proceeds of the issuance are to fund the company’s announced tender offer for its $350 million 9.70% senior unsecured notes due June 2023. Fitch currently rates Frontera’s Foreign and Local Currency Issuer Default Ratings (IDRs) at ‘B’ with a Stable Outlook.
Frontera’s ratings and Outlook reflect a small and concentrated production profile, improved cost production profile preserving its reserve life, and strong liquidity and leverage profile. Collectively, the actions taken by Frontera have strengthened its position to absorb shocks in Brent prices, which were distressed in 2Q20.
The company has implemented a dynamic hedging policy to offset higher production cost, which is caused by take-or-pay transportation contracts. Fitch estimates the company’s actions improved proved (1P) reserve life to 6.2 years in 2020 compared with 4.4 years in 2019. Gross leverage, defined as to total debt/Ebitda, is estimated to have been 3.8x in 2020 and expected to be 1.6x in 2021 with net leverage expected to be below 1.0x over the rated horizon.
KEY RATING DRIVERS
Cost Production Profile: Fitch believes Frontera Energy’s cost-cutting initiative and reduction in production volumes in 2020 were positive actions taken to preserve the company’s strong credit and liquidity profiles. This is evidenced by a decline in half-cycle costs in 2020 to $28.60 per barrel (bbl) down from $30.60/bbl in 2018. Frontera’s production profile is higher than peers, which mainly explains a fixed transportation cost estimated to average $11.00/bbl over the rated horizon limiting its profitability when compared with Colombian peers. The company’s current hedging contracts for roughly 50% of total production offset the higher costs and protect it from price volatility.
Strong Leverage Profile: Frontera’s gross leverage, defined as total debt/EBITDA, is strong for its rating category. Fitch estimates gross leverage will be 1.6x in 2021, assuming an EBITDA of $330 million in 2021 and total debt of $540 million for YE 2021. Total debt/proved developed producing (PDP) is expected to be $19.72/bbl by YE 2021 and total debt/1P is expected to be $5.00 in 2021. Ebitda/ interest expense is estimated to be 8.0x in 2021 and average nearly 7.0x over the rated horizon.
Small Production Profile: Frontera’s ratings are constrained by its production size expected to average 40,000bbld over the rated horizon that is evenly split between light and heavy crude. The company has a concentrated production profile where Quifa represents 68% (27,578bbld) of daily production followed by Guatiquia at 27% (10,850) and CPE-6 at 6% (2,375bbld). The company operates all three blocks and owns 100% of both Guatiquia and CPE-6 and has a joint venture, working interest of 60%, with Ecopetrol for Quifa.
Improved Reserve Life: Frontera’s swift adjustment to decrease production to an average of 43,000 barrels of oil equivalent per day (boed) in 2020, a 40% decline from a 2019 average of 70,875boed, materially improved its 1P reserve life to 6.5 years from 4.4 year in 2019.
Fitch does not expect Frontera will revert to its previously weaker reserve life, as the pricing environment over the rated horizon for Brent does not warrant the amount of capex needed to increase production to previous levels in Colombia of 61,000boed. The company has suspended production of its Block 192 in Peru, and Fitch is assuming this block will be closed indefinitely.
Frontera Energy’s credit and business profile is comparable to other small independent oil producers in Colombia. The ratings of Geopark (B+/Stable) and Gran Tierra Energy International Holdings Ltd. (CCC) are all constrained to the ‘B’ category or below, given the inherent operational risk associated with small scale and low diversification of oil and gas production.
Frontera’s production profile compares favorably with other ‘B’ rated Colombian oil exploration and production companies. Over the rated horizon, Fitch expects Frontera’s production will average 40,000bbld slightly less than Geopark with an average of 45,000bbld and higher than Gran Tierra at 30,000bbld. Frontera’s PDP reserve life is 1.6 years and 6.2 years for 1P in 2020 is below Geopark at 4.0 years for PDP and 7.4 years for 1P, while Gran Tierra is at 5.7 years for PDP and 9.5 years for 1P.
Frontera’s half-cycle production cost was $28.60/bbl in 2020 and full-cycle cost was $42.20/bbl higher than Geopark, who is the lowest cost producer in the region at $13.60/bbl and $23.40/bbl and Gran Tierra at $24.50/bbl and $42.60/bbl. Frontera’s higher production cost is mainly attributed to a fixed transportation cost estimated to average $11.00/bbl.
Frontera’s strong capital structure is expected to have gross leverage that will average 1.5x over the rated horizon and pro forma total debt/PDP of $19.93/bbl and total debt/1P of $4.98/bbl. Geopark is forecast to have gross leverage of 3.3x and debt/PDP of $10.24/bbl and 1P of $5.48/bbl, while Gran Tierra’s metrics are at 7.8x, $20.38/bbl and $12.16/bbl, respectively.
Fitch’s Key Assumptions Within Our Rating Case for the Issuer Include
Fitch’s price deck for Brent oil prices of $58.00/bbl in 2021 and $53.00/bbl in the long term.
Vasconia discount to Brent average of $5/bbl over the rated horizon.
Average Production of 40,000boed between 2021-2023.
Peruvian production is suspended indefinitely.
Production costs averaging $11.50/bbl.
Transportation costs averaging $11.00/bbl.
SG&A cost averaging $2.50/bbl.
Indefinite suspension of Peruvian asset over the rated horizon.
Average annual capex of $250 million between 2021-2023.
Annual dividends received from ODL of $25 million per year through 2023.
Stock repurchase of 6.5 million (10% of outstanding) shares in 2021.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Net production maintained at 45,000boed or more, while maintaining a 1P reserve life of seven years or greater;
Maintain a conservative financial profile with gross leverage of 2.5x or below and total debt/1P reserves of $8/bbl or below.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Sustainable production size declines to below 30,000boed;
1P reserve life declines to below seven years on a sustained basis;
A significant deterioration of credit metrics to total debt/EBITDA of 3.0x or more;
A persistently weak oil and gas pricing environment that impairs the longer-term value of its reserve base;
Sustained deterioration in liquidity and operating profile, particularly in conjunction with more aggressive dividend distributions than previously anticipated.
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from ‘AAA’ to ‘D’. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
LIQUIDITY AND DEBT STRUCTURE
Strong Liquidity: Fitch views the company’s liquidity position as strong, supported by cash on hand and a manageable debt amortization profile. As of March 31, 2021, Frontera reported $337 million of unrestricted cash, of which $89.1 million is restricted. Frontera has $52 million LOC.