Fitch Ratings has upgraded Devon Energy Corporation's (Devon) Issuer
Default Rating (IDR) to 'BBB+' from 'BBB'. The rating upgrade reflects
the robust credit profile of the company and the anticipated debt
reduction to occur in 2008.
In addition, Fitch has upgraded Devon's ratings as follows:
Devon Energy Corporation:
--Long-term Issuer Default Rating (IDR) to 'BBB+' from 'BBB';
--Senior unsecured notes to 'BBB+' from 'BBB';
--Preferred stock to 'BBB-' from 'BB+';
--Short-term IDR at 'F2';
--Commercial paper (CP) remains at 'F2'.
Devon Financing Corporation U.L.C.:
--Senior unsecured notes to 'BBB+' from 'BBB'.
PennzEnergy Company:
--Senior unsecured notes to 'BBB+' from 'BBB'.
Ocean Energy:
--Senior unsecured notes to 'BBB' from 'BBB-'.
The Rating Outlook has been revised to Stable.
The senior unsecured notes assumed in the Ocean Energy acquisition have
note been explicitly guaranteed by Devon and is the primary driver for
the one notch differential in the ratings.
Devon's ratings are supported by the company's sizable reserve base and
production profile, the significant cash generation coming from the
company's midstream operations, strong one- and three-year organic
reserve replacement rates at very competitive F&D cost and the company's
continued efforts to reduce debt. Additionally, Devon continues to have
a strong portfolio of upstream projects which are expected to enable the
company to continue to increase reserves and production. These
opportunities include lower risk reserves associated with the company's
onshore U.S. and Canada properties balanced against the longer-term
opportunities associated with the company's Gulf of Mexico (GOM) and
remaining international opportunities.
Offsetting concerns focus on the potential for the company to pursue
further acquisitions, increased shareholder friendly activities and
expectations of sizable capital expenditures to support long lead-time
projects which increase the company's exposure to near-term commodity
price falls. Mitigating factors to these concerns stem from the strong
performance of the company's existing asset base which is expected to
reduce the near-term need to pursue acquisitions. Additionally, strong
stock performance combined with the excess cash flows being generated in
the current robust commodity price environment reduce concerns related
to shareholder friendly activities.
Devon is one of the largest independent oil and gas producers in North
America with an estimated 2.5 billion barrels of oil equivalent (boe) of
proven reserves at year-end 2007. Devon also gathers, processes, and
markets its own and third party oil and gas production (including the
extraction of natural gas liquids from the gas production) through its
midstream business segment. In 2007, the midstream segment generated a
robust $509 million in EBITDA for Devon. Of note is that Fitch assigns
$750 million of debt to Devon's midstream business and given the strong
performance of the segment, this remains conservative. Credit metrics
have remained strong with EBITDAX-to-interest coverage of 15.2 times (x)
for the 12 months ending December 31, 2007 and leverage as measured by
debt-to-EBITDAX of 1.0x. Fitch estimates Devon's debt to boe of proven
reserves totaled $2.68/boe and debt to proven developed reserves was
$3.57/boe at year-end 2007. Both of these leverage metrics include an
equity credit for the DECS and allocation of debt to midstream
operations.
Fitch's rating definitions and the terms of use of such ratings are
available on the agency's public site, www.fitchratings.com.
Published ratings, criteria and methodologies are available from this
site, at all times. Fitch's code of conduct, confidentiality, conflicts
of interest, affiliate firewall, compliance and other relevant policies
and procedures are also available from the 'Code of Conduct' section of
this site.
