Fitch Affirms Offshore Drilling Holding S.A. at 'B+'; Negative Watch Removed; Stable Outlook
OREANDA-NEWS. Fitch Ratings has affirmed Offshore Drilling Holding S.A.'s (ODH) long-term (LT)foreign and local currency Issuer Default Ratings (IDRs) at 'B+'. Simultaneously, Fitch has removed the ratings from Negative Watch and assigned a Stable Outlook.
KEY RATING DRIVERS
ODH's ratings are supported by the company's solid commercial relationship with Petroleos Mexicanos SA (Pemex, IDR 'BBB+'); its only customer, and its solid contractual position, evidenced by its recent extension of the Centenario and Bicentenario contracts, that contributes to the company's relatively stable and predictable cash flow generation.
The ratings also reflect the company's moderately high leverage, partial structural subordination and decreasing but still existing contract roll-over risk. Fitch forecasts leverage metrics to remain between 4.0x - 4.5x, consistent with the assigned rating over the rating horizon.
The Stable Rating Outlook reflects the decreased re-contracting risk during 2016 - 2017, given the company's contract extensions for Centenario and Bicentenario until 2017. This adds to the stability and predictability of the company's cashflow generation during the current significant weak market environment for offshore drillers.
Following the downward revision of Fitch's oil & gas price assumptions, the agency expects recovery for the offshore rig industry to take longer than previous expectations with dayrates and utilization rates improving by 2018.
SOLID RELATIONSHIP; STRONG OFFTAKER
ODH's ratings reflect the strong commercial relationship of the company and its shareholder, Grupo R, and Pemex. ODH currently owns three ultra-deepwater (UDW) sixth-generation dynamic positioning semisubmersible drilling rigs, which are contracted with Pemex at day rates ranging between USD365,000/day and USD489,000/day. Additionally, ODH was able to obtain long-term contracts with Pemex for two of its jackups, under a pressured global market for jackups. Fitch views this positively and as further evidence of the company's solid relationship with Pemex.
ROLL-OVER AND DAY RATES RISK
ODH is exposed to contract renewal risk given that the contracts for the three UDW drilling rigs expire before the maturity of the notes. The contracts for Centenario and Bicentenario have recently been extended until December 2017 at a dayrate of USD365,000/day, providing more certainty to the company's cashflow generation during 2016 - 2017 that may allow ODH to navigate the downcycle. Fitch has pushed back its recovery inflection point estimate into 2H' 2018 with a risk for further inflection point revisions. The rating incorporates Fitch's expectation that Pemex will re-contract these drilling rigs shortly before the contracts expire.
OIL PRICE PRESSURES
Offshore drillers continue to face depressed market conditions due to lower demand and a significant oversupply of rigs. The severe decline in oil prices has compounded the effects of the offshore rig oversupply cycle resulting in continued global market dayrate deterioration. Fitch believes that medium-term demand will rebound and absorb the newer high-quality assets. Fitch believes that an uptick in demand could lag supportive oil & gas price levels (estimated at $65 - $70/barrel for deepwater) by at least six-12 months. Moreover, Pemex may favor continuity and fostering relationships with its existing drilling providers under the right conditions.
PARTIAL STRUCTURAL SUBORDINATION
ODH's senior secured notes are guaranteed by the unencumbered restricted subsidiaries that own the Centenario and Bicentenario drilling rigs. The notes are currently structurally subordinated to a project-finance bank loan of approximately USD320 million, related to the financing of La Muralla IV. This bank debt has certain cash-sweep provisions restricting cash flow distributions to ODH. The bank loan amortizes through 2018 and once it is repaid, La Muralla IV will become a co-guarantor for the notes.
MODERATELY HIGH LEVERAGE
Fitch expects consolidated leverage to range between 4.0x and 4.5x, with the exception of years when the company adds financial debt to fund acquisitions without reporting a full year of operational revenues for the new assets. During the LTM ended Sept. 30, 2015, ODH's consolidated leverage was 3.9x. As of Sept. 30, 2015, total debt was USD1.3 billion, slightly down from USD1.52 billion, as of year-end 2013, and LTM EBITDA, as of the end of June 2015, was USD331 million. Fitch expects leverage to sharply decline below 3.0x once the five jackups have reported a full year of operations.
Fitch's key assumptions within Fitch's rating cases for ODH include:
Fitch Base Case:
--Brent oil price that trends up from $45/barrel in 2016 to a longer-term price of $65/barrel;
--Current contracted backlog is forecast to remain intact with no renegotiations contemplated for both the ultra-deepwater rigs and jackups;
--After expiration of the contracts for the semisubs, Centenario and Bicentenario are re-contracted in 2018 at the $365 thousand, considering the negotiated floor within the contracts;
--2 Jackups start operations during the 1Q2016 at day rate of $130 thousand, the remaining 3 units start operations in 2016 at the same rate;
--Increased capital expenditures of approximately $1 billion during 2016 due to the financing of the Jack Ups;
--Regular maintenance capex of approximately $90 million during the next 5 years;
--No dividend payments forecasted.
Fitch Stress Case makes the following key adjustments to the Fitch Base Case:
--Brent oil price that trends up from $35/barrel in 2016 to a longer-term price of $45/barrel;
--Starting in 2017, renegotiations are considered and market dayrates are assumed to be $200,000 for higher specification ultra-deepwater rigs and $90,000 for the jackups;
--Rigs performance is assumed to deteriorate with declining uptime levels to 90% on average starting this year.
Future developments that may, individually or collectively, lead to a negative rating action include:
--Through-the-cycle consolidated debt/EBITDA of 5x or above on a sustained basis;
--Contracts are not rolled over within six months after expiration or contracted day rates experience further pressure and are significantly lower than current market dayrates;
--The company faces delays of six months or greater contracting new equipment after it is delivered.
No positive rating actions are currently contemplated over the near-term given the weak offshore oilfield services outlook.
Future developments that may, individually or collectively, lead to a positive rating action include:
--Through-the-cycle consolidated debt/EBITDA decreases below 4.0x on a sustained basis;
--The company contracts all its drilling equipment with very limited to none out-clauses and with improved fixed day rates suggesting strengthening market conditions.
ODH's liquidity position is supported by the company's stable and predictable cash flow generation coupled with a lengthened debt maturity profile. ODH's liquidity position is further supported by its cash on hand, which as of Sept. 30, 2015, was approximately USD138.5 million. The company also maintains a one-year interest reserve account for the 2020 notes and La Muralla IV in an amount equal to USD106.2 million. This favourably compares with the company's short-term needs of USD80.8 million to repay short-term debt. Manageable amortizations of approximately $100 - $160 million per year are expected for the next four years which are expected to be covered with cash on hand and FCF.
FULL LIST OF RATING ACTIONS
Fitch has affirmed ODH's ratings as follows:
--LT Foreign and local currency IDRs at 'B+'; Stable Outlook
--Senior secured notes at 'BB-'; Recovery Rating 'RR3'.