OREANDA-NEWS. Hilong Holding Limited's (Hilong, BB-/Negative) 2015 results show that its diversification into offshore engineering services has offset the declining revenue and profit of its existing portfolio during the downturn in the oil and gas industry, Fitch Ratings says. Hilong has also managed its working capital and capex effectively to deleverage, resulting in a performance that is better than many of its domestic peers. However, it is still not clear whether the company can sustain its 2015 performance in an industry slump that is likely to be prolonged.

Hilong's total revenue in 2015 fell by only 4% while its adjusted EBITDA margin fell to 22% (2014: 28%). The revenue stability was driven almost entirely by the contribution from the new offshore engineering services segment. This segment, which comprises large-scale offshore construction, pipe laying and structure installation, accounted for 24% and 18% of the company's revenue and EBITDA, respectively, in 2015.

In contrast, its existing businesses of oilfield equipment manufacturing, line pipe technology and oilfield services reported revenue and EBITDA declines of 26% and 19%, respectively, which are more in line with that of industry peers.

However, Hilong has not yet established a stable order book for the new offshore engineering business, which raises the risk of volatility. This segment booked CNY412m in revenue in 1H15, but this fell sharply to CNY178m in 2H15. The company is a new entrant to the market and could be more adversely affected by any negative developments in the operating environment.

Hilong's management has shown commitment to deleverage and adopt a conservative financial policy. The company managed to reduce its working capital by 10% and capex by 76%, resulting in a net debt reduction of 2.6%. It could generate positive free cash flow in 2016 if capex remains low and its operating cash flows do not decline.

Fitch would consider revising the Outlook on Hilong back to Stable from Negative if its revenue shows signs of sustained recovery, while the company's margin and leverage remain stable. However, Fitch may take negative rating action if its EBITDA margin declines to below 20% or FFO net leverage increases to above 4x on a sustained basis (2015F: 3.6x).