Ratings house Moody's issued a damning report on the health of some of the industry's top offshore drillers following a review.
Out of six US offshore drilling companies, it has downgraded two by three notches, three companies' ratings were dropped four notches and one was dropped five notches.
Further, the ratings agency says the challenging environment will continue through 2018 and the oil price recovery will be slow and over several years.
"Oil prices have dropped substantially reflecting continued oversupply in the global oil markets, very high inventory levels and additional Iranian oil exports coming on line," said Moody's "Moody's lowered its oil price estimates on January 21 and expects a slow recovery for oil prices over the next several years."
"Significantly reduced upstream capital spending and the declining creditworthiness of upstream customers coupled with a steady supply of newbuild rigs entering an already over-supplied rig market will keep dayrates under heavy pressure through 2018. Leverage and cash flow metrics are expected to deteriorate sharply beyond 2017 as current drilling contracts roll off or are replaced by contracts with lower dayrates."
Moody's adds: "The drop in oil prices and weak natural gas prices has caused a fundamental change in the energy industry, and its ability to generate cash flow has fallen substantially. Moody's believes this condition will persist for several years. As a result, Moody's is recalibrating the ratings of many energy companies to reflect this industry shift. For contract drillers specifically, weakening cash flow and liquidity, limited capital market access, and reduced rig values will hinder the ability of companies to meaningfully reduce debt creating significant stress in the industry."
Ratings kicks
Atwood Oceanics was to Caa1 from Ba3, with a negative outlook, on concerns over rapidly rising financial leverage and weak re-contracting prospects. Additionally, Atwood faces a potential covenant breach in 2017 and an increasing risk of debt restructuring. All of Atwood's active rigs except for two drillships (Atwood Achiever and Advantage) will roll out of contracts in 2016. Additionally, the company owes $400 million USin remaining payments on two seventh generation drillships that are scheduled for delivery in 2017 and 2018.
The company is currently having discussions with its banks to modify covenants. Despite owning one of the highest quality rig fleets and having $1.3 billion in revenue backlog as of December 31, 2015, Atwood will face the same bleak offshore drilling market fundamentals as its peers and may have to stack a number of its rigs upon completion of existing contracts. Atwood should have adequate liquidity through mid-2017.
Diamond Offshore Drilling was dropped to Ba2 from Baa2, with a stable outlook. Moody's expects Diamond's leverage and cash flow based credit metrics will deteriorate through 2018 driven by the weak outlook for offshore drilling demand, rig dayrates and fleet utilization. However, Diamond's credit metrics will likely remain meaningfully stronger than its peer group given its higher contract coverage through 2018 and lower debt levels, Moody's says.
Ensco was downgraded to B1 from Baa2, with a stable outlook. The downgrade reflects Moody's view that Ensco's leverage will increase to very high levels as more of its rigs roll off contracts in an extremely challenging offshore contract drilling market. By the end of 2018, 14 of Ensco's 15 active floaters and 23 of 25 active jackups will be off contract, assuming no new contracts. The company will also have to cover $850 million in remaining newbuild capex through 2018. While Ensco has very good liquidity today supported by its $1.3 billion cash balance, an undrawn $2.25 billion revolver as well as $5.8 billion of revenue backlog contributing to positive free cash flow in 2016, both earnings and liquidity will decline over time as the company is compelled to rationalize its fleet to adjust to reduced demand conditions.
Noble Holding International (primary rated subsidiary of Noble Corporation) was dropped to B1 from Baa3, with a stable outlook. The downgrade to B1 reflects Moody's expectations that Noble's leverage, margins and cash flow metrics will deteriorate significantly in 2017 and 2018 as its contracted revenue backlog rolls off and rigs are re-contracted at lower dayrates and overall fleet utilization declines. The B1 rating is supported by the company's relatively new rig fleet that is predominantly high specification, placing Noble in a good competitive position to operate in all major global offshore markets without requiring significant further capital investments. The rating is also supported by the company's contracted revenue backlog that will support earnings and cash flows in 2016 to fund its last remaining new rig under construction, its good liquidity and relatively small debt maturities through 2019.
Rowan Companies was dropped to B1 from Baa3, with a stable outlook. The downgrade reflects the high likelihood that Rowan's cash flow based leverage metrics will significantly deteriorate as existing contracts roll-off, combined with the muted outlook for utilization rates and dayrates at least through 2018, says Moody's. The rating is supported by Rowan's business profile, which is underpinned by its leading market position as a provider of premium jackup drilling rigs to the offshore market. The company has a relatively young rig fleet that is geographically well-diversified. The company's decision to enter the ultra-deepwater drillship market gave rise to a certain level of operational and execution risks but has long term benefits in a more stable offshore drilling rig demand environment. Rowan's anticipated very good liquidity profile, bolstered by cash flow from the company's drillships, all of which are contracted at strong dayrates, could be somewhat dented by potential "blend and extend" type contract renegotiations that could result in reducing the expected cash flow in 2016 and 2017, while benefitting Rowan from extending its contract coverage.
Transocean was downgraded to B2 from Ba2, with a stable outlook. Moody's expected the company's financial leverage will rise through 2017 and then will likely increase substantially in 2018 based on Moody's outlook for weak dayrates and rig utilization. The company also has larger debt maturities through 2018 and more new rig construction commitments than many of its peers, albeit Transocean has been very successful in deferring many of those capital spending commitments into 2019 and beyond. The B2 rating is supported by the company's proactive measures to reduce operating costs and enhance operational utilization for its active rigs, its strong liquidity and its large and diverse offshore drilling rig fleet.
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