TEXT-Fitch raises Pacific Rubiales' IDRs to 'BB+'

Wed Oct 31, 2012 3:53pm EDT
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Oct 31 - Fitch Ratings has upgraded Pacific Rubiales Energy Corp.'s 
(Pacific Rubiales) foreign and local currency Issuer Default Ratings (IDRs) to
'BB+' from 'BB'. The rating action affects approximately USD900 million of
outstanding senior unsecured notes with final maturity in 2016 and 2021. The
Rating Outlook is Stable.

The rating action reflects the company's successful production and reserve
diversification efforts as well as its proven track record of increasing
production while maintaining adequate reserve replacement ratios. The rating
action also takes into consideration the company's lower business risk as a
result of the completion of several key infrastructure projects, including the
expansion of its oil pipeline to transport production. The company's increased
production diversification mainly comes from the additional production from the
Quifa block, which has a concession that expires in 2031. Future diversification
is expected to come from the CPE-6 block, which has a base case net prospective
resource of 169 million barrels of oil equivalent (boe).

Pacific Rubiales' ratings are supported by the company's position as the largest
independent oil and gas player in Colombia and its management team that has
significant expertise in heavy oil exploration and production. The ratings also
reflect the company's strong liquidity and low leverage. Pacific Rubiales'
credit quality is tempered by the company's small scale, production
concentration and relatively small reserve profile. The company also benefits
somewhat from its partnerships with Ecopetrol (IDR rated 'BBB-' by Fitch),
Colombia's national oil and gas company, which shares is Pacific Rubiales'
investments and production.

Solid Financial Profile:

The company's ratings reflect its adequate financial profile characterized by
low leverage and strong interest and debt service coverage. As of the last 12
months (LTM) ended June 30, 2012, the company reported leverage ratios, as
measured by total debt to EBITDA and total debt-to-total proved reserves of 0.5
times (x) and USD2.7 per boe, respectively. As of June 30, 2012, debt of
approximately USD1.1 billion was primarily composed of approximately USD803
million of senior unsecured notes, USD193 million drawn from the company's
revolving credit facility and the balance was composed of other financial
obligations, including capital lease obligations. As of the LTM ended June 30,
2012, Pacific Rubiales reported an EBITDA, as measured by operating income plus
depreciation and stock-based compensation, of USD2.1 billion.

Piriri-Rubiales Concession Expires in 2016:

Although Pacific Rubiales production and reserves profile has significantly
improved in recent years, the expiration of the Piriri-Rubiales production
agreement in 2016 is expected to have a significant impact on the company's
financial results. As a result of the expiration of the Piriri-Rubiales
production agreement in 2016, Fitch expects Pacific Rubiales production level
for 2017 to be in line with that of 2011 or below current production; during
2010, this field represented approximately 75% of total net production, and
nowadays it represents approximately 62% of production. The company is expected
to be able to replace Piriri-Rubiales production by 2017 given the company's
recent diversification efforts and high reserve replacement ratios, coupled with
its proven track record of increasing production. The rating does not
incorporate the possibility of extending production from this field past its
expiration date. As of December 2011, this field represented approximately 30%
of the company's total proved and probable reserves of 407 million boe;
excluding Piriri-Rubiales resources, debt-to reserves are still low at
approximately USD3.6 per boe.

Improving Operating Metrics:

The operating metrics for the company have been improving rapidly and its growth
strategy is considered somewhat aggressive. During 2011, the company reserve
replacement ratio was 550% and its current proved reserve life index is
approximately 9.4 years using current production levels. During the past two
years, the company increased gross and net production to approximately 232,245
boe/d and 92,611, from approximately 221,896 boe/d and 88,092 boe/d as of June
2011, respectively. As of December 2011, Pacific Rubiales' proved (1P) and
proved and probable (2P) reserves, net of royalties, amounted to approximately
319 million and 407 million bbls, respectively. The company's reserves are
composed of heavy crude oil (80%) and natural gas and light and medium oil
(20%). Pacific Rubiales has a significant number of exploration prospects, which
will require significant funds to develop. In the short term, the company plans
to devote its efforts developing the Quifa, Sabanero and CPE-6 blocks, which
surround and are near Rubiales-Piriri block, and should eventually replace
Piriri-Rubiales block.

Negative Free Cash Flow Due to Large Capex:

Free cash flow (cash flow from operations less capital expenditures and
dividends) has been negative given the company's growth strategy. For the LTM
ended June 30, 2012, free cash flow was positive for the first time since 2007
standing at USD28 million. Pacific Rubiales' significant capital expenditures
plans over the next few years could continue to pressure free cash flow in the
near term. Increasing production at the Piriri-Rubiales and the surrounding
Quifa block are expected to account for the bulk of the company's capital
expenditure, which is expected to be approximately USD6.5 billion between 2012
and 2016. By the year 2017 and after the expiration of the Piriri-Rubiales
concession, leverage might increase to approximately 1.0x as a result of
decrease in production and lower oil prices considered under Fitch's base case

Strong Liquidity Position:

The company's current liquidity position is considered strong, characterized by
robust cash on hand, strong cash flow generation and manageable short-term debt
obligations. As of the LTM ended June 30, 2012, Pacific Rubiales funds from
operations (FFO) generation was USD1.4 billion and its cash on hand was USD572
million, while its short-term debt amounted to USD211 million. The company has
two revolving credit facilities totaling USD700 million. Going forward, the
company is expected to have a manageable debt amortization, although its
liquidity position will be somewhat weaker due to its aggressive capital
expenditure plant that will demand significant financial resources. Capital
investments are expected to be funded for the most part with internal cash flow

Rating Drivers

A rating downgrade would be triggered by any combination of the following
events; A sustained adjusted leverage above 3x, driven by increase in debt for
exploration combined with a low success rate of discoveries; an increase in
royalties that significantly cripples the company's financial profile (no
changes in royalties are expected in the near future) and/or a decline in
production and reserves.

Factors that could result in a positive rating action include an increased
diversification of the production profile of the company, consistent growth in
both production and reserves, positive free cash flow generation and/or the
extension of the Rubiales-Piriri concession which expires in 2016.

Additional information is available at 'www.fitchratings.com'. The ratings above
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (Aug. 8, 2012).

Applicable Criteria and Related Research:
Corporate Rating Methodology