Fitch: Anton's Order Book Growth Positive, but High Liquidity Risks Remain
OREANDA-NEWS. Fitch Ratings says Anton Oilfield Services Group's (Anton, CCC) operational outlook is more stable following the increase in its order book, mainly due to new contracts from outside China. However, the company still faces high near-term liquidity and refinancing risks, which drive the company's near-term credit profile.
Anton said on 22 April that order backlog rose to CNY3.5bn at end-March 2016 from CNY2.8bn at end-2015. Fitch estimates that over 75% of the new orders in 1Q16 were from Iraq (B-/Negative), and contracts from that country now account for more than half of Anton's current order book.
Fitch believes the Iraqi contracts, which yield higher margins than domestic Chinese contracts, could support gradual growth in Anton's earnings. In addition, receivable collection is also quicker in Iraq, at around 100 days as management disclosed, compared with 256 days for the company in 2015. Nonetheless, geopolitical risk is high in Iraq. Anton also faces more competition as many oilfield services (OFS) operators are seeking new businesses in Iraq due to significant contract reductions in more mature markets.
The domestic Chinese OFS market remains difficult. Even state-owned OFS companies, which benefit from affiliations with the domestic national oil companies, are finding it challenging to grow their order books. Anton's competitive edge is in unconventional projects, which experienced the most significant cuts in investments by the national oil companies in light of poor project economics amid low oil prices. Fitch expects this situation to persist for the short to medium term, which will impact Anton's business prospects in this more mature market.
Fitch believes a meaningful improvement in Anton's credit profile hinges on the company's ability to materially speed up accounts receivable collection, so that it can accumulate cash and reduce its refinancing and liquidity risks. Anton's trade receivable turnover has been at over 230 days since 2H14 due to slower payments from its major domestic customers. This compared with 150 days in 2013.
Anton has turned to more short-term debt, which stood at CNY675m at end-2015. This, and the next major maturity of its long-term debt of CNY200m in June 2016, has resulted in high refinancing risks for Anton. The company's unencumbered cash balances were at CNY458m at end-2015, which covers only about half of its near-term debt maturities.
A potential sale of a 40% stake in its Iraqi subsidiary for CNY700m, which Anton announced on 17 April, could raise cash to support its funding needs. Nonetheless, a final contract for the transaction has yet to be signed, and the payment terms, timeline and final amount have yet to be fixed. From a longer-term cash flow perspective, the disposal entails cash leakage to the other shareholder of its Iraqi operations, which is set to become a major source of cash for Anton in the next two to three years.