Various Rating Actions Taken On Five European Oil Field Services Companies Owing To The Precipitous Drop In Oil Prices

Transcription

1 Various Rating Actions Taken On Five European Oil Field Services Companies Owing To The Precipitous Drop In Primary Credit Analysts: Christophe Boulier, Milan ; Simon Redmond, London (44) ; Beatrice de Taisne, CFA, London (44) ; Standard & Poor's recently updated its oil price assumptions, revising down its prices for Brent to $55-$65 per barrel for The precipitous declines in spot and futures prices for Brent are resulting in reduced demand for oil field services and drillers, and placing significant pressure on pricing, dayrates, and margins. We have therefore updated our forecasts for oil field services companies, and are consequently taking a number of rating actions in the oil field services sector. LONDON (Standard & Poor's) Jan. 22, Standard & Poor's Ratings Services said today that it had taken the following rating actions on five European oil field services (OFS) companies: We revised the outlook on oil services and construction company Petrofac Ltd. to negative from stable and affirmed the 'BBB+/A-2' corporate credit ratings and 'BBB+' secured debt ratings. We affirmed our 'BB-' corporate credit and secured debt ratings, and the 'B' short-term corporate credit rating on offshore driller Seadrill Partners LLC, with a stable outlook. We lowered our corporate credit rating on Norwegian seismic group Petroleum Geo-Services ASA to 'B+' from 'BB-'. The outlook is negative. We also lowered the issue ratings on its secured term loan and unsecured notes to 'B+' from 'BB-'. We downgraded French seismic group CGG to 'B' from 'B+'. The outlook is negative. We also lowered the issue ratings on CGG's U.S. and French revolving credit facilities (RCFs), and its senior secured credit JANUARY 22,

2 facility, RCF, and term loan to 'B+' from 'BB-', and on its unsecured facilities to 'B' from 'B+'. We revised the outlook on U.K.-based oil field services company Expro Holdings U.K. 3 Ltd. to stable from positive and affirmed the 'B-' corporate credit rating. We also affirmed the 'B' rating Expro's senior secured RCF and term loan B, and affirmed the 'CCC+' rating on its mezzanine facility. The rating actions take into account our view of decreasing headroom in credit metrics as a result of the precipitous and severe decline in oil prices, which we think will lead to meaningful reductions in exploration and production (E&P) capital spending in 2015 and We believe that capital spending for E&P companies could fall by 10% to 25% on average, affecting OFS companies' top lines and margins. Lower spending will affect some companies more than others, but we expect nearly all companies will face weaker credit metrics over the next months. The key differentiating factors between these companies are their current contract backlogs, which may or may not provide visibility in 2015 and 2016; headroom on credit metrics requirements at the existing rating level; ability and willingness to curb capital spending and costs further; and their liquidity positions. We recognize current spot oil prices are lower than our $55 per barrel (bbl) Brent average price assumption in We still expect some improvement in 2016 and thereafter, as oil companies are curbing production of high-cost wells and postponing new capital spending, although uncertainty also remains on OPEC's future decisions. Our oil price assumptions for 2017 and beyond are recovering at $80/bbl. Petrofac Ltd.(BBB+/Negative/A-2) The outlook revision reflects our revised forecasts for 2014, our more pessimistic outlook for 2015 and 2016 because of weakening demand and heightened price competition across Petrofac's businesses in light of recent crude oil price declines, as well as greater uncertainty surrounding our base-case forecast. We project profitability and credit measures will be lower than we previously expected and weak for the ratings, including funds from operations (FFO) to total debt potentially well below 60% in 2014 and Petrofac reported a $21 billion backlog as of Sept. 30, 2014, and this, together with the recently announced $4 billion Kuwaiti project, provides some visibility on medium-term revenues. We note, however, that Petrofac's operational execution and performance has met with some setbacks in We anticipate that free cash flow will likely remain negative after capital investment and dividends in the coming years. We recognize that this also depends on working capital changes, which can be material. We believe Petrofac's debt is unlikely to reduce materially in the near term and therefore we could lower the rating if leverage is forecast to remain materially below the threshold of 60% of FFIO to debt, which is what we see as comfortable for the ratings. JANUARY 22,

3 An outlook revision to stable would most likely have to be preceded by a reduction in net debt and strengthening in cash flow leverage measures. Petrofac would also need to demonstrate some business resilience in the context of the current industry downturn. Seadrill Partners LLC (BB-/Stable/B) The affirmation primarily reflects Seadrill Partners' contract backlog until at least early 2017 for all but one of its vessels. We note that, from 2016, if, the current oversupply of vessels, lower dayrates, and heightened competition persists, downside pressure would increase. We do not see an upgrade as likely in the near term. We could raise the ratings, however, if FFO to adjusted debt reaches more than 30% on a sustained basis and discretionary cash flow is at least breakeven. This could happen if operating performance is stronger than our base-case assumption and the increased assets at Seadrill Partners are funded prudently. We could consider a negative rating action if we observe a deterioration in operating performance, such that FFO to debt declines to below 20% on a sustained basis and debt to EBITDA increases to more than 4x. This would be exacerbated if utilization falls or if the predictability or profitability of operations weakens materially at Seadrill Partners or Seadrill Ltd. We could also take a negative rating action if we believe Seadrill Partners is likely to be disadvantaged or adversely impacted by Seadrill Ltd. Petroleum Geo-Services ASA (B+/Negative/--) The downgrade reflects the decline in our base-case forecast of EBITDA, cash flows, and credit metrics for Petroleum Geo-Services ASA (PGS), as a result of challenging industry conditions characterized by unfavorable supply-and-demand and pressure on pricing. We also take into account our view of very limited cash flow visibility, since numerous clients--oil and gas producers--have yet to decide on their budgets amid the highly uncertain and volatile 2015 and 2016 oil prices. We now forecast that FFO to debt will be, on average, in the high teens in , versus 20% or slightly higher before, which is not commensurate with the 'BB-' rating in our view. Additionally, we project negative discretionary cash flow as we believe that PGS will be hampered in its ability to further reduce capital expenditures because it plans to add two new build vessels to its fleet of vessels in However, we anticipate that PGS will continue to manage liquidity adequately and adhere to its financial targets, including keeping reported net debt to EBITDA below 2x. We could lower the rating if we anticipate that PGS will suffer a sustainable decline in FFO to debt to less than 12%. This could happen if market conditions further deteriorate, such that revenues are materially affected, or if margins decline more than we anticipate, due, for instance, to operational issues, competitive pressure, or an unfavorable supply-demand balance. JANUARY 22,

4 We could revise the outlook to stable if we see a pick up in demand for seismic services or more visibility on sales. We would need to foresee that FFO to debt would not deteriorate to the low teens. A stable outlook would be underpinned by our perception that management continued to be committed to its financial policies, including reported net debt to EBITDA below 2x at all times. We would also consider positive discretionary cash flows as a supporting factor. CGG (B/Negative/--) The downgrade reflects our view that CGG is suffering from deteriorating market conditions characterized by lower demand than we anticipated and fierce competition at a time where it is implementing a major strategic restructuring plan. We also take into account our view of very limited visibility on future cash flows, since many of CGG's clients--oil and gas producers--have yet to decide on their budget amid the highly uncertain and volatile 2015 and 2016 oil prices. We anticipate weak metrics for the rating in 2014, with FFO to debt below 10%, despite a strong fourth-quarter 2014, owing in particular to solid multiclient sales. Although we assume that metrics will improve in 2015, including adjusted FFO to debt to about 10%, we do not think that they will be commensurate with the 'B+' rating. We could lower the rating if FFO to debt does not improve over 2015 as much as we anticipate, that is to at least 10%. An inability to improve margins, further deterioration of the supply-demand balance, or negative free operating cash flow (FOCF) would also add to downward rating pressure. Other risk factors include reduced covenant headroom (under its RCF) in case of an unexpected, larger-than-assumed decline in EBITDA, although we assume that covenant headroom at year-end 2014 was ample further to the covenant reset in September We would consider revising the outlook to stable if credit metrics strengthen such that FFO to debt is sustainably above 12% from 2015, if we gain more visibility on the company's cash flow generation which could be supported by an improved backlog and a track record of improved EBITDA margins over multiple quarters, and if liquidity remains at least adequate. Expro Holdings U.K. 3 Ltd. (B-/Stable/--) The outlook revision reflects our view that Expro Holdings U.K. 3 Ltd.'s credit metrics will not strengthen as materially and quickly as we anticipated previously, with FFO to debt below 10% and debt to EBITDA higher than 5x, respectively, in fiscal years 2015 and 2016 (ending March 31), compared with about 10% and 4.5x-5.0x in our previous base case. We anticipate that Expro will achieve only low, single-digit growth in fiscal years 2015 and 2016, supported by an order backlog of $2.1 billion as of Dec. 31, We anticipate that the fiscal 2015 EBITDA margin will weaken because of a combination of pressure on bid pricing and restructuring costs, but this could recover starting in fiscal 2016, provided that industry conditions do not deteriorate further. We would see downside rating pressure if liquidity deteriorates materially and JANUARY 22,

5 in particular if we see a heightened risk of breach of the leverage covenant. Our updated base case results in modest leeway in fiscal Other risk factors include significant deterioration of credit metrics, coupled with persistent negative FOCF. This could result from major operational underperformance, further degradation of market conditions, or substantially higher capital expenditures than we currently anticipate. We would see rating upside if we considered that Expro could achieve and sustain improvement in FFO to debt to above 12% and debt to EBITDA to below 5x, with FOCF becoming positive. This could happen if there is a material improvement, for example, in the company's backlog or in industry conditions. RELATED CRITERIA AND RESEARCH Related criteria Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Dec. 16, 2014 Key Credit Factors For The Oilfield Services And Equipment Industry, April 16, 2014 Key Credit Factors For Contract Drilling, April 16, 2014 Corporate Methodology, Nov. 19, 2013 Group Rating Methodology, Nov. 19, 2013 Corporate Methodology: Ratios And Adjustments, Nov. 19, 2013 Key Credit Factors For The Engineering And Construction Industry, Nov. 19, 2013 Methodology: Management And Governance Credit Factors For Corporate Entities And Insurers, Nov. 13, 2012 Use Of CreditWatch And Outlooks, Sept. 14, 2009 Criteria Guidelines For Recovery Ratings On Global Industrial Issuers' Speculative-Grade Debt, Aug. 10, Corporate Criteria: Rating Each Issue, April 15, 2008 Related research Standard & Poor's Revises Its Crude Oil And Natural Gas Price Assumptions, Jan. 9, 2015 RATINGS LIST To From Petrofac Ltd. Corporate Credit Rating BBB+/Negative/A-2 BBB+/Stable/A-2 Senior Secured BBB+ BBB+ Seadrill Partners LLC Corporate Credit Rating BB-/Stable/B BB-/Stable/B Senior Secured BB- BB- JANUARY 22,

6 Petroleum Geo-Services ASA Corporate Credit Rating B+/Negative/-- BB-/Negative/-- Senior Secured B+ BB- Senior Unsecured B+ BB- CGG Corporate Credit Rating B/Negative/-- B+/Negative/-- Senior Secured B+ BB- Senior Unsecured B B+ Expro Holdings U.K. 3 Ltd. Corporate Credit Rating B-/Stable/-- B-/Positive/-- Senior Secured B B Subordinated CCC+ CCC+ Additional Contact: Industrial Ratings Europe; Corporate_Admin_London@standardandpoors.com Complete ratings information is available to subscribers of RatingsDirect at and at spcapitaliq.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at Use the Ratings search box located in the left column. Alternatively, call one of the following Standard & Poor's numbers: Client Support Europe (44) ; London Press Office (44) ; Paris (33) ; Frankfurt (49) ; Stockholm (46) ; or Moscow 7 (495) JANUARY 22,

7 Copyright 2015 Standard & Poor's Financial Services LLC, a part of McGraw Hill Financial. All rights reserved. No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor's Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an "as is" basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT'S FUNCTIONING WILL BE UNINTERRUPTED, OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages. Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P's opinions, analyses, and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw, or suspend such acknowledgement at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal, or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof. S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain nonpublic information received in connection with each analytical process. S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, (free of charge), and and (subscription) and (subscription) and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at JANUARY 22,