OREANDA-NEWS. S&P Global Ratings today said it lowered its long-term corporate credit rating on Calgary, Alta.-based oilfield services provider Calfrac Well Services Ltd. to 'CCC+' from 'B'. The outlook is negative.

At the same time, S&P Global Ratings lowered our issue-level rating on Calfrac Holdings L. P.'s senior unsecured debt to 'CCC' from 'B'. S&P Global Ratings also revised its recovery rating on the debt to '5' from '3'. The '5' recovery rating indicates our expectation of modest (10%-30%; at the lower end of the range) recovery in a default scenario.

Based on the persistent weakness in hydrocarbon prices and continued low levels of industry activity, we expect that Calfrac's operating performance will continue to lag below our previous expectations and will result in dramatic deterioration in cash flow metrics. "The company's cash on hand and current availability under its committed revolving credit facility should be able to support all its funding requirements through 2017, but we view this funding strategy as characteristic of an unsustainable capital structure," said S&P Global Ratings credit analyst Michelle Dathorne.

S&P Global Ratings derives its 'CCC+' corporate credit rating on Calfrac from:The weak business risk and highly leveraged financial risk profile assessments of the company; andThe application of the 'CCC' criteria in light of our estimate of negative EBITDA generation in 2016, and very elevated leverage in 2017, with our fully adjusted debt-to-EBITDA exceeding 30x in 2017. As a result of the material deterioration in cash flow and leverage metrics, we believe financial commitments and the company's capital structure could be unsustainable. Calfrac's weak business risk profile reflects our assessment of the company's inability to maintain stable margins and returns through cost reductions in the low commodity-price environment. In our opinion, the high fixed costs in Calfrac's overall cost structure relative to that of other oilfield services companies has accelerated margin erosion, which in turn has weakened the company's operating efficiency and profitability profiles. Persistent weak industry conditions, combined with material oversupply of equipment, will continue to pressure Calfrac's EBITDA during our 12-month outlook period. The combination of low equipment utilization, pricing pressures, and the high fixed component in the company's cost structure have resulted in significantly lower operating margins compared with those it realized at stronger hydrocarbon prices. Specifically, we are projecting Calfrac's revenue to drop more than 50% in 2016 and expect negative EBITDA generation in 2016. Nevertheless, we believe the company's geographic diversification and well-established customer relationships somewhat offset these weaknesses and should support modest improvement in operating performance beyond 2016.

The highly leveraged financial risk profile reflects our assessment of Calfrac's elevated forecast debt-to-EBITDA and funds from operations (FFO)-to-debt ratios. Under our base-case scenario, we expect core leverage ratios to deteriorate significantly due to the projected negative EBITDA in 2016. We expect earnings to be modestly positive in 2017, given our expectation of improving industry conditions, but remain weak, with FFO-to-debt remaining negative and debt-to-EBITDA remaining well above 30x. We further expect the company to continue scaling back its capital spending to preserve liquidity and financial flexibility in these depressed market conditions.

The negative outlook reflects S&P Global Ratings' view of Calfrac's continued credit profile deterioration. Given the very high debt leverage and weak core ratios, we view the company's overall capital structure as unsustainable. Based on Calfrac's cash on hand and availability under its committed revolving credit facility, the company should be able to support all its funding requirements in the next 12 months.

We would lower the rating if Calfrac's liquidity position deteriorated such that the company was not able to meet its financing and maintenance capital spending requirements. This could occur if Calfrac lost access to a sizable portion of its credit facility availability.

We could revise the outlook to stable if an improved industry operating environment strengthens the company's liquidity position, such that it would be able to fully fund its financing and capital spending requirements from operating cash flow.