Fitch Ratings has assigned a 'B'/'RR4' rating to
The proceeds of the issuance are to fund the company's announced tender offer for its
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
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
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
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
DERIVATION SUMMARY
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
Frontera's half-cycle production cost was
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
KEY ASSUMPTIONS
Fitch's Key Assumptions Within Our Rating Case for the Issuer Include
Fitch's price deck for Brent oil prices of
Vasconia discount to Brent average of
Average Production of 40,000boed between 2021-2023.
Peruvian production is suspended indefinitely.
Production costs averaging
Transportation costs averaging
SG&A cost averaging
Indefinite suspension of Peruvian asset over the rated horizon.
Average annual capex of
Annual dividends received from ODL of
Stock repurchase of 6.5 million (10% of outstanding) shares in 2021.
RATING SENSITIVITIES
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
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 '
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
DATE OF RELEVANT COMMITTEE
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG CONSIDERATIONS
Unless otherwise disclosed in this section, the highest level of Environmental, Social and Corporate Governance (ESG) Credit Relevance is a Score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
RATING ACTIONSENTITY/DEBT RATING RECOVERY
senior unsecured
LTB Ne w Rating RR4
VIEW ADDITIONAL RATING DETAILS
Additional information is available on www.fitchratings.com
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