Fitch Ratings has downgraded Weatherford International plc (Weatherford;
NYSE: WFT) and its subsidiaries' long-term Issuer Default Rating (IDR)
and senior unsecured ratings to 'BB' from 'BBB-'. The Rating Outlook
The downgrade reflects Fitch's lower and longer services recovery
profile assumption resulting in the forecasted leverage profile
remaining above our through-the-cycle levels for a 'BBB-'/'BB+' credit
over the rating horizon. Fitch expects Weatherford's cash flow and
leverage profiles to be significantly weaker than previously forecast.
Fitch's base case currently forecasts 2015 debt/EBITDA of 5.6x compared
to our previous April estimate of 3.2x. The difference is mainly a
result of less than expected debt reduction and lower activity and
pricing pressure during the second half of 2015. Leverage metrics are
currently forecast to increase further to 6.4x in 2016 with incremental
oil & gas price-driven leverage metric improvements thereafter.
The Negative Outlook considers the potential that an extended oilfield
services downcycle could further heighten liquidity and refinancing
risks. The one-year credit facility extension received in the second
quarter of 2015 (Q2'15) and cancelled common equity and mandatorily
convertible subordinated notes offering in Q3'15 suggests management may
have to accept accommodative bank and capital market terms to preserve
financial flexibility. The Outlook also reflects the effect that
persistently low oil & gas prices could have on U.S. and international
exploration and production (E&P) company capital budgets. Lower E&P
activity levels will likely challenge the company's ability to
consistently generate free cash flow (FCF) to meaningfully pay down debt.
Approximately $7.5 billion of debt, excluding certain short-term
borrowings, is affected by today's rating action. A full list of ratings
actions follows at the end of this release.
KEY RATING DRIVERS
Weatherford's ratings consider its position as the fourth largest
international oil & gas services company, geographic diversification
(North America [N.A.] has historically contributed 45%-50% of
consolidated revenues), business lines and regional exposure with
favorable through-the-cycle revenue characteristics, returns focused
strategic initiatives, and projected neutral-to-positive FCF profile
leading to moderate further debt reduction. These considerations are
offset by the company's mixed asset quality and weaker forecasted
through-the-cycle leverage metrics (Fitch-calculated latest 12 month
[LTM] debt/EBITDA of 5.5x as of Sept. 30, 2015).
SECOND YEAR OF E&P CAPEX CUTBACKS WEAKENS NEAR-TERM OUTLOOK
Fitch continues to see a longer, slower recovery profile as likely
implying that oil & gas market pricing support for a larger scale
ramp-up in N.A. onshore activity might be several years into the future.
Fitch expects N.A. E&P capital spending to be down 20%-30% and, as a
consequence, anticipates Weatherford's N.A. revenue profile will be
subject to lower activity and some additional pricing pressure. Fitch
believes, however, that N.A. pricing concessions have generally been
realized with limited additional headroom for service providers to cut
further, since prices for certain products and services are at or below
breakeven with many smaller providers in financial duress. This should
support market tightening and pricing improvements as oil & gas prices
recover over the medium-term.
Fitch expects international markets to remain more resilient but show
some moderation with international oil company (IOC) capital spending
estimated to be down 10%-15% on average. National oil company (NOC)
capital profiles are anticipated to be mixed with the majority of
cutbacks to be realized outside of the Middle East and North Africa
(MENA). Weatherford expects incremental business in Abu Dhabi and Saudi
Arabia and new contract activity in Algeria, Oman, Qatar, and Egypt.
Contraction/stagnation in Latin America, Europe, and Asia is anticipated
to broadly continue over the near term.
MODESTLY POSITIVE FCF PROFILE & SOME DEBT REDUCTION FORECASTED
Fitch forecasts Weatherford will be approximately $150 million FCF
positive for 2015. Debt/EBITDA is estimated to increase to 5.6x in 2015
from 3.0x in 2014. The key driver of the increase in leverage metrics is
nearly a 50% drop in EBITDA due to lower activity levels and pricing
Fitch's rating case forecasts Weatherford will be approximately $325
million FCF positive in 2016. These FCF estimates consider a full year
of operating cost savings, maintenance capex levels, additional
activity-linked working capital improvements, and further reductions in
oilfield services demand. Fitch expects the company to allocate all
forecasted surplus FCF towards debt repayment. Thereafter, Fitch's base
case forecasts that the leverage profile will exhibit moderate levels of
Fitch's key assumptions within the rating case for Weatherford include:
--WTI oil price that trends up from $45/barrel in 2016 to a long-term
price of $65/barrel;
--Henry Hub gas that trends up from $2.50/mcf in 2016 to a long-term
price of $3.25/mcf;
--Consolidated revenue decline of approximately 13% with greater
declines in the U.S. relative to international regions on average due to
further global E&P capital spending reductions with a moderate recovery
--Margins that exhibit a full year of cost improvements in 2016 with
some moderate additional cost reductions assumed thereafter;
--Capital expenditures of $400 million in 2016 followed by similarly low
levels of capex until operating cash flows exhibit meaningful growth;
--Year-over-year cash flow improvements related to Zubair contractual
and severance costs;
--Application of surplus cash to debt repayment;
--Retention of international rig fleet.
Positive: No positive rating actions are currently contemplated over the
near-term given the weak oilfield services outlook and Fitch's
forecasted leverage profile that exceeds through-the-cycle levels.
However, future developments that may, individually or collectively,
lead to a positive rating action include:
For an upgrade to 'BB+':
--Track record of achieving operational and financial targets with
material reductions in gross debt outstanding;
--Progress in achieving greater geographical diversification that
reduces North America's proportional share of consolidated
--Mid-cycle debt/EBITDA of approximately 3.5x on a sustained basis.
To resolve the Negative Outlook at 'BB':
--Improved oilfield services outlook supported by market pricing and/or
activity level improvements;
--Mid-cycle debt/EBITDA of around 4.0x on a sustained basis.
Negative: Future developments that may, individually or collectively,
lead to a negative rating action include:
--Failure to realize positive FCF and achieve management's debt
reduction targets signalling execution issues;
--Continued depressed activity levels that further prolong a recovery in
oilfield services demand;
--Bank and/or capital market funding issues that further heighten
liquidity and refinancing risks;
--Mid-cycle debt/EBITDA of 4.5x-5.0x on a sustained basis.
Fitch would anticipate downgrading Weatherford to 'BB-' absent evidence
of a meaningful improvement in the company's forecasted leverage
profile, as well as an alleviation of liquidity and refinancing risks.
FORECASTED FCF AND MATURITIES PROFILE INCREASING LIQUIDITY RISK
Weatherford had cash and equivalents of $519 million, as of Sept. 30,
2015, with most held by foreign subsidiaries. Supplemental liquidity is
principally provided by the company's $2.25 billion senior unsecured
credit facility due July 2017 and commercial paper program. There are
currently no rating triggers with regard to capacity, collateral, or
covenants. Approximately $530 million and $509 million in credit
facility and commercial paper borrowings, respectively, were outstanding
as of Sept. 30, 2015. Facility availability was nearly $1.2 billion,
including $16 million in letters of credit. The commercial paper program
is sized to the revolving credit facility. Additional short-term
borrowings have been provided by the company's uncommitted short-term
facilities with $241 million outstanding as of Sept. 30, 2015. The
majority of these borrowings ($180 million) mature during the first half
Over the next five years, Weatherford has $350 million in 5.5% senior
notes due February 2016, $600 million in 6.35% senior notes due June
2017, $500 million in 6% senior notes due in March 2018, $1 billion in
9.625% senior notes due March 2019, and $800 million in 5.125% senior
notes due September 2020. The company also pursued open market debt
repurchases throughout 2015 and purchased approximately $396 million of
long-dated debt as of Sept. 30, 2015. These repurchases were funded with
a combination of cash on hand, FCF, and credit facility/CP borrowings.
Management has indicated that they expect to repay the 2016 and 2017
maturities with cash on hand and FCF. However, Fitch's rating case
forecasts that the company may need to draw on the credit facility to at
least partially refinance the 2016 and 2017 maturities. Forecasted FCF
and the scheduled maturities profiles suggest the company will require
access to its credit facility, particularly in the current challenged
capital market environment. Fitch expects the company to renegotiate the
existing credit facility during the first half of 2016 with some
accommodation of terms likely. Fitch recognizes, however, that a one
year extension consistent with the Q2'15 process and, in a worst case, a
delayed renewal/extension process remain possibilities that could
further heighten liquidity risk.
COVENANTS AND GUARANTEES
The company's main financial covenant is a maximum
debt-to-capitalization ratio of 60% (51.9% as of Sept. 30, 2015)
contained in the revolver. The covenant, as defined in the credit
agreement, does not have a non-cash asset impairment carve out with the
exception of foreign currency translations. This may introduce covenant
pressure given the potential impact that depressed oil & gas prices
could have on stockholder's equity. Other customary covenants contained
in the indentures governing the senior notes restrict the ability to
incur additional liens, engage in sale and leaseback transactions, and
merge, consolidate, or sell assets, as well as change in control
Guarantees have been provided by and between the Bermuda and Delaware
affiliates for all senior unsecured debt effectively establishing
cross-guarantees. Additionally, Weatherford has guaranteed all
obligations of its affiliates. All unsecured debt is pari passu.
MANAGEABLE OTHER CONTINGENT LIABILITIES
Weatherford's pension obligations were underfunded by $164 million for
the year-ended 2014. Fitch believes that pension funding requirements
are manageable relative to funds from operations and pension
contributions. The company had over $1.8 billion in other contingent
obligations on a multi-year, undiscounted basis as of Dec. 31, 2014.
These obligations consisted of non-cancellable operating lease payments
($1.1 billion) and purchase obligations ($708 million). Fitch does not
consider the obligations as material credit concerns, which are
generally accounted for in operating and capital costs.
FULL LIST OF RATING ACTIONS
Fitch has downgraded the following ratings and assigned Recovery Ratings
Weatherford International plc.
--Long-term IDR to 'BB' from 'BBB-'.
Weatherford International Ltd. (Bermuda)
--Long-term IDR to 'BB' from 'BBB-';
--Senior unsecured notes to 'BB'/RR4 from 'BBB-';
--Senior unsecured bank facility to 'BB'/RR4 from 'BBB-';
--Short-term IDR to 'B' from 'F3';
--Commercial paper program to 'B' from 'F3'.
Weatherford International, LLC (Delaware)
--Long-term IDR to 'BB' from 'BBB-';
--Senior unsecured notes to 'BB'/RR4 from 'BBB-'.
The Rating Outlook remains Negative.
Additional information is available at 'www.fitchratings.com'.
Corporate Rating Methodology - Including Short-Term Ratings and Parent
and Subsidiary Linkage (pub. 17 Aug 2015)
Recovery Ratings and Notching Criteria for Non-Financial Corporate
Issuers (pub. 07 Dec 2015)
Dodd-Frank Rating Information Disclosure Form
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