DBRS Updates Anadarko Petroleum Corporation and Kerr-McGee Corporation Rating Report

DBRS has today updated the rating report of Anadarko Petroleum Corporation (Anadarko or the Company) and Kerr-McGee Corporation (Kerr-McGee). The Senior Unsecured Debt ratings of both companies are one notch below that of the Issuer Rating of Anadarko (BBB), given that the existing five-year, $5 billion secured credit facility ranks ahead of the Unsecured Notes and Debentures. The credit quality of the Company is based on its (1) large asset base, (2) balanced production between oil and gas and (3) low political exposure owing to its largely North American operations. Despite these strengths, Anadarko’s rating is limited by: (1) higher-risk exploration and development in deepwater drilling, (2) high operational risk and (3) a relatively high cost base compared to its peers.

Although Anadarko has benefited from favourable pricing for both crude oil and natural gas liquids, its financial profile was negatively impacted (adjusted debt-to-capital increased to 50.6% for 2011) by the 2011 payment of $4 billion ($2.5 billion funded through debt and $1.5 billion through internally generated cash flow and asset disposals) to BP p.l.c. (BP) to settle current and future claims against Anadarko associated with the Deepwater Horizon oil spill in the Gulf of Mexico in April 2010. The settlement agreement does not provide for indemnification by BP against fines and penalties, punitive damages or certain other claims, none of which Anadarko considers a material financial risk to the Company.

Despite increased capex for 2012 ($6.6 billion to $6.9 billion estimated), operating cash flow is expected to fully support capex and dividends based on current results, with any surplus expected to be used for debt repayment. In addition, as a result of the recently announced settlement in the Algeria Exceptional Profits Tax (TPE) dispute, approximately $1.8 billion in barrels of oil is to be transferred to Anadarko over a period of 12 months, along with increased net production to Anadarko through changes to the Production Sharing Agreement. Proceeds as a result of the settlement are expected to be used for debt repayment, to strengthen the Company’s financial profile.

Anadarko is also a defendant in litigation involving the bankruptcy of a former subsidiary of Kerr-McGee, for damages of up to $14.5 billion.

Notes:
All figures are in U.S. dollars unless otherwise noted.

DBRS notes that the supplemental indentures for Kerr-McGee’s Senior Unsecured Notes and Debentures contain provisions for removal of the guarantee in the event that Kerr-McGee is required to be a reporting entity some time in the future. The guarantee could fall away as a result of (1) a court order requiring Kerr-McGee to be a reporting entity or (2) Kerr-McGee being required to resume filing under the Securities Exchange Act. Anadarko has no ability to unilaterally trigger the removal of the guarantee by making Kerr-McGee a reporting entity, and as long as Kerr-McGee is non-reporting, the guarantee will remain in place. Under either of the above scenarios, DBRS would review Kerr-McGee to determine an appropriate rating level. It is also possible that the ratings for Kerr-McGee and Anadarko could separate and be different at some point in the future as a result of this issue.

The applicable methodology is Rating Oil and Gas Companies (April 2011), which can be found on our website under Methodologies.