Fitch: QGOG Constellation's Ratings Unaffected by Adverse Market Conditions
OREANDA-NEWS. Fitch Ratings does not expect any immediate negative ratings impacts on QGOG Constellation S.A.'s (Constellation) ratings despite the deteriorating environment for offshore drillers. Offshore drillers continue to face depressed market conditions due to lower demand and a significant oversupply of rigs, including new-builds. The roughly 70% drop in oil prices has compounded the effects of the offshore rig oversupply cycle resulting in continued market day-rate's deterioration.
Constellation's credit quality is insulated from the current deteriorating environment for the offshore drillers. The vast majority of Constellation's offshore rigs, which are the main contributors of cash generation for the company, are expected to remain fully contracted until 2018. Fitch does not expect Petrobras to early terminate these contracts due to the excellent historical rigs operating performance. Under Fitch's base case assumption of an average uptime rate of 94% and not assuming renegotiation of any existing contracts, Fitch forecasts the company will remain FCF positive with leverage sharply declining below 2.0x by 2018.
Fitch currently rates Constellation 'BB-' with a Negative Rating Outlook. Constellation's ratings reflect is consistent deleveraging. The self-amortizing nature of the secured debt at the operating company (OpCo) is rapidly improving the company's consolidated capital structure and improving cash flow distribution to the holding company (HoldCo) as debt fully amortizes. During 2014, the Olinda Star drill rig became the first of the company's operating assets to pay its debt in full, which improved cash flows to the holding company. Over the next two years, at least two additional assets may fully repay their OpCo level debt, further improving cash flows to the HoldCo and eliminating structural subordination.
The Negative Outlook reflects the negative impact a prolonged ban could have for the company as it could prevent Constellation from renewing its contracts with Petrobras. Recently, the company received a notification from the Brazilian General Comptroller (CGU) indicating that it has been removed from the list of companies under investigation related to Petrobras contracting practices with its suppliers. This exclusion from the CGU gives the company the ability to participate in new tenders and the option to renew current its contracts with Petrobras once the company receives formal confirmation from Petrobras. A resolution of the contracting ban with Petrobras could result in revising the Negative Outlook.
Constellation ratings could also be negatively affected by the following: a prolonged ban on entering into contracts or participating in bidding processes, failure to lower leverage to below 4.0x, or pressure on credit metrics as a result of an aggressive growth strategy.se disclosures are updated on a daily basis.