Issuer Default Rating (IDR) 'BBB';
Senior unsecured 'BBB';
Preferred stock 'BB+';
Commercial paper 'F2'.
Fitch has also affirmed the 'BBB' rating on the notes assumed from the acquisition of the PennzEnergy Company which are held at the parent level by Devon and the 'BBB-' rating on the senior unsecured debt assumed in the acquisition of Ocean Energy, which is not explicitly guaranteed by Devon. Fitch has withdrawn the 'BBB-' rating on the company's senior unsecured debt assumed in the acquisition of Anderson Exploration after the notes were repaid in August. Additionally, Fitch has revised the Rating Outlook on Devon and other affected entities to Positive from Stable.
Devon recently announced two additional successes in it deepwater Gulf of Mexico (GOM) exploration program including its fourth deepwater oil discovery with the Kaskida well on Keathley Canyon block 292 in about 5,860 feet of water. The Kaskida well encountered 800 net feet of hydrocarbon-bearing sands and is believed to be the largest lower-tertiary find Devon has announced to date. The second announcement made by management in recent weeks was the successful production test of the Jack #2 well on Walker Ridge block 758 in the Gulf of Mexico. The well successfully flowed 6,000 barrels of oil a day in an extended test of the well. Devon has a 25% working interest in Jack and Chevron is operator with a 50% working interest. Devon currently has 273 deepwater blocks under lease with 19 identified exploratory prospects already. The recent announcements highlight the potential for Devon's deepwater GOM exploration program to more than double the company's reserve base and provide management with increased visibility to future reserve adds for many years to come. Both of these recent announcements, coupled with the company's robust 194% organic reserve replacement rate in 2005 and expectations of another strong organic reserve replacement rate in 2006 have resulted in Fitch revising the company's rating outlook to positive.
Devon's ratings continue to be supported by the company's sizable reserve base and production profile, the significant cash generation coming from the company's midstream operations and the efforts to reduce debt in recent years, including the recent repayment of maturities in August 2006 of the $500 million, 2.75% notes and the $200 million (Canadian), 6.55% Anderson notes. The company has also suspended the ongoing share repurchase program that began in 2005 at least until later in 2006. Devon had repurchased 6.5 million shares of the 50 million share program for $387 million prior to the Chief announcement.
Concerns are primarily focused on Fitch's expectation that the company will pursue further acquisitions or further shareholder friendly activities.
Devon is one of the largest independent oil and gas producers in North America with an estimated 2.1 billion boe of proven reserves at year-end 2005. 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 2005, the midstream segment generated a robust $452 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 is appropriate. Equity credit of 75% has also been assigned to the approximately $700 million of debt exchangeable into Chevron stock. Credit metrics have remained strong with EBITDAX-to-interest coverage of 16.5 times (x) for the 12 months ending June 30, 2006 and leverage as measured by debt-to-EBITDAX of 1x (which does not reflect the August debt maturities). At year-end 2005, Devon's debt to boe of proven reserves totaled $2.53/boe and debt to proven developed reserves was $3.34/boe.
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