Fitch Affirms Offshore Drilling Holding S.A. at 'B+'; Negative Watch Removed; Stable Outlook
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.
KEY ASSUMPTIONS
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.
RATING SENSITIVITIES
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.
LIQUIDITY
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'.
Date of Relevant Rating Committee: [11, February, 2016]
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria
Corporate Rating Methodology - Including Short-Term Ratings and Parent
and Subsidiary Linkage (pub. 17 Aug 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
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Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=999493
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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