OREANDA-NEWS. Fitch Ratings says that lower drilling volumes and a weakening rouble led to weaker 1H14 results yoy for Eurasia Drilling Company Limited (EDC, BB/Positive), a leading privately-owned Russian oil field services (OFS) company. At the same time, the US and EU sanctions on transfer of certain oil and gas equipment and technologies to Russia have had little impact on EDC's current operations. The Outlook on EDC remains Positive as Fitch expect the company to maintain and potentially improve its performance while keeping its funds from operations (FFO) net leverage below 1x in 2014-2017.

EDC reported mixed operating results in 1H14. While its horizontal metres drilled were up 22.8% yoy accounting for 22% of total metres drilled, up from 16% in 1H13, its total metres drilled were 2.763m, down 9.1% yoy. This followed the earlier decision of OJSC OC Rosneft, one of EDC's key customers in 2013, to developed in-house OFS capabilities and decrease its reliance on EDC. As a result, the share of Rosneft in EDC's total metres drilled dropped to 11% in 1H14, compared with 24% in 1H13. This also led to an increase in the share of OAO Lukoil (BBB/Negative) and JSC Gazprom Neft (GPN, BBB/Negative) in EDC's total metres drilled to 63% and 18% in 1H14, respectively, up from 57% and 11% in 1H13.

The US and EU-imposed sanctions have had limited impact on EDC's business in Russia. The company has stated that its US and EU suppliers of drilling equipment are able to continue their supplies and EDC does not operate in the sanctioned areas, ie, deep water, arctic offshore and shale production projects. However, EDC believes its future growth may suffer if the sanctions are extended to other areas, specifically, if its clients are unable to expand into shale drilling at the levels currently projected.

As EDC reports its results in US dollars while most of its business in roubles, the weakening of the Russian currency by 11.3% in 1H14 on 1H13 had a material impact on the company's operations. EDC reported drilling and related services revenues of USD1,549m in 1H14, down nearly 8% on 1H13. It generated USD392m in funds from operations (FFO) during the same period, down 6% yoy.

EDC's liquidity on 30 June 2014 was solid with USD599m in cash and equivalents that more than covered its short-term debt of USD111m on that date. On the other hand, 75% of its cash was held in roubles while only 23% of its borrowings were rouble-denominated, as the rest of the debt was US dollar-denominated. This makes EDC vulnerable to further depreciation of the rouble that has lost 8% against the US dollar since 30 June 2014. At 30 June 2014, EDC's total borrowings were USD1,140m, of which USD167m is due in 2015-2016.