CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed Nabors Industries, Inc.'s (Nabors; NYSE: NBR) Long-term Issuer Default Rating (IDR) at 'BBB'. The Rating Outlook is revised to Stable from Negative. Fitch has also upgraded Nabors' Short-term IDR to 'F2' from 'F3'.
The Stable Outlook reflects the positive near-term trends for U.S. land drillers and oilfield service providers due to increasing shale activity and improving liquids-focused rig counts (+92 rigs year-over-year as of May 2014; over 5% increase). Tailwinds for the U.S. onshore drilling and services industry, associated with the transition to shale, consist of fast production decline rates, service intensity (e.g., proppant/sand, frac fluid, pressure pumping, etc.), and diminishing surface efficiencies (e.g., wells drilled per rig). The Outlook is further supported by Nabors' recent favorable international drilling renewal rates and contract awards.
The short-term rating upgrade is based on the Long-term IDR Outlook revision to Stable, liquidity back-up adequacy, and the majority of current and forecasted short-term metrics being more consistent with an 'F2'.
Approximately $3.8 billion of debt is affected by today's rating action. A full list of rating actions follows at the end of this release.
KEY RATING DRIVERS
Nabors' ratings reflect its favorable rig fleet repositioning efforts, positive near-term trends for U.S. land drillers and oilfield service providers, strengthening international drilling segment, and manageable current and projected leverage profile (Fitch calculated LTM debt/EBITDA of 2.4x as of March 31, 2014; Fitch base case forecasts improvement to 2.2x - 2.3x in 2015). These considerations are offset by the potential for further increases in oil & gas production output per rig, obsolescence risk for legacy rigs, the possibility for continued overcapacity-driven U.S. onshore market weakness, stagnant Canadian, Alaskan, and offshore drilling segment results, and limited visibility for similarly favorable international drilling arrangements.
FAVORABLE RIG FLEET REPOSITIONING AND NEAR-TERM TRENDS
The company is actively repositioning its U.S. drilling fleet primarily through newbuilds to better align with E&P demand. Nabors deployed its 'ultra-high spec' PACE-X rig to meet demand for efficient, horizontal/directional drilling rigs with a total of 21 currently in the field and an additional 13 (seven contracted) to be delivered prior to year-end. Management plans to establish a foothold in the 'ultra-high spec' rig market and reverse market share losses by continuing to build PACE-X rigs prior to attaining a contract. This is contrary to historical company and industry norms, but consistent with the current newbuild strategy of peers. Fitch expects continued weakness in the company's legacy rig fleet as newbuild rigs are deployed in a modestly increasing rig count environment, but forecasts that the higher day rate, higher margin PACE-X rigs - providing over 160% of equivalent U.S. legacy rig financial results - will more than cover near-term legacy rig losses. However, while the PACE-X speculative newbuild strategy has had early success, Fitch cautions that the widely adopted shift to pursue speculative newbuilds may introduce some pricing headwinds over the medium-term that could curb expectations.
International drilling has been a bright spot for Nabors alleviating downward pressure from the rest of the company's segments. Nabors realized 24 favorable contract awards - 13 newbuild and 11 upgrade rigs - in its Middle East and Latin America regions during 2013. These contracts have an average duration of 3.3 years providing nearly 3.5x the equivalent U.S. legacy rig financial results, which boosts the company's backlog by $1.9 billion. Management indicated that it expects international rig day margins to reach the 'high teens' in 2015 with the commencement of these contracts, in conjunction with increasing international activity and improving pricing. Fitch considers the stability of these contracts and positive demand profile as supportive credit features. However, this is balanced by limited visibility for similarly favorable international drilling arrangements suggesting moderate future growth.
Completion and production services have and continue to experience weak pricing power due to considerable overcapacity in the market. However, management is optimistic that market prices in the pressure pumping market will show signs of improvement as more pads are established with deeper and longer laterals and fleets shift to more 24-hour work. Some evidence for improvement is provided by the realization of regional pressure pumping price increases (e.g., Permian and Bakken) and limited new capacity coming online. Additionally, management reported that workover rigs and trucks are seeing more bid opportunities, which could provide a tailwind. Fitch assumes modest revenue and margin improvements for both segments.
IMPROVING LEVERAGE METRICS ANTICIPATED
The company's current leverage level provides financial flexibility to pursue measured fleet initiatives. Fitch's base case forecasts Nabors will be $200 - $450 million and $100 - $300 million FCF negative in 2014 and 2015, respectively, using the Fitch oil & gas price deck. A range of outcomes is provided given the variable pace and timing of newbuild deliveries and realization of revenues, as well as continued movement in legacy U.S. Lower 48 rig utilization and day rates/margins. Fitch expects FCF shortfalls to be partially funded with cash-on-hand and the remainder credit facility financed. Despite the variances inherent in the current newbuild program and legacy Lower 48 results, leverage metrics remain consistent with the current rating level and show signs of improvement. Fitch's base case results in debt/EBITDA of 2.4x - 2.5x and 2.2x - 2.3x in 2014 and 2015, respectively. Thereafter, Fitch believes Nabors is likely to become FCF positive with debt/EBITDA approaching 2.0x. This assumes a measured approach to newbuilds, continued realization of favorable PACE-X contract terms, moderate international drilling growth, declining legacy U.S. Lower 48 operational and financial profile, modest improvements in completion and production services, and limited equity-driven restructuring and financial policy changes.
ADEQUATE LIQUIDITY POSITION
Nabors had cash and equivalents of $326.9 million and a portfolio of short-term investments equal to $97.9 million - about 80% equities and 20% debt securities - as of March 31, 2014. Supplemental sources of liquidity consist of the company's $1.5 billion senior unsecured credit facility due Nov. 2017 and $1.5 billion commercial paper program. As of March 31, 2014, Nabors had $117.5 million of credit facility and $290.3 million of commercial paper borrowings outstanding. The company's maturities profile is manageable with the $350 million 2.35% and $975 million 6.15% senior unsecured notes maturing in 2016 and 2018, respectively.
Financial covenants, as defined in the credit facility agreement, require Nabors to maintain a net debt-to-total capitalization ratio below 0.60x (0.36x as of March 31, 2014). Other covenants across Nabors' debt instruments consist of lien limitations, transaction restrictions, and change of control provisions.
MANAGEABLE OTHER LIABILITIES
Nabors' defined benefit pension plan (assumed in a 1999 acquisition) was about $4.8 million underfunded at year-end 2013, or an over 80% funded status. All benefits under the plan were frozen and participants were fully vested prior to the acquisition - limiting future obligations. Fitch believes that the expected size of service costs and contributions is manageable relative to FFO at less than 1%. Other contingent liabilities total over $1 billion on a multi-year, undiscounted basis primarily consist of purchase commitments, pipeline minimum volume commitments, and minimum lease payments. Fitch does not consider the obligations as credit concerns, which are generally accounted for in operating and capital costs.
Future rating actions will be closely linked to Nabors' ability to effectively reposition its rig fleet, while maintaining financial flexibility. Fitch does not anticipate a rating action in the near-term without a persistently weak market pricing environment and/or the occurrence of a material event.
Positive: Future developments that may, individually or collectively, lead to a positive rating action include:
--Heightened rig utilization and average day rates and margins signaling an improvement in market conditions and/or asset quality and mix;
--Improvement in completion and production services results suggesting strengthening market conditions;
--Completion of shareholder activist initiated strategic review that reduces restructuring and financial policy uncertainty;
--Mid-cycle debt/EBITDA below 2.0x on a sustained basis.
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
--Material declines in rig utilization and average day rates and margins indicating deterioration in market conditions and/or asset quality and mix;
--Prolonged period of market price softening and/or overcapacity that leads to a weaker onshore driller and oilfield services outlook;
--Restructuring and/or shareholder friendly action that is inconsistent with the capital structure and expected cash flow profile;
--Mid-cycle debt/EBITDA between 2.5x - 2.75x on a sustained basis;
--Liquidity falls below $`1.5 billion resulting in less than 100% commercial paper back-up liquidity coverage.
Fitch has affirmed the following long-term ratings as follows:
Nabors Industries, Ltd. (Bermuda)
--Long-term IDR at 'BBB'.
Nabors Industries, Inc. (Delaware)
--Long-term IDR at 'BBB';
--Senior unsecured bank facility at 'BBB';
--Senior unsecured notes at 'BBB'.
Fitch has upgraded the following short-term ratings as follows:
Nabors Industries, Inc. (Delaware)
--Short-term IDR to 'F2' from 'F3';
--Commercial paper program to 'F2' from 'F3'.
The Rating Outlook is revised to Stable from Negative.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Relevant Research:
--Corporate Rating Methodology Including Short-Term Ratings and Parent and Subsidiary Linkage (May 28, 2014);
--2014 Outlook: North American Oil & Gas (Dec. 12, 2013);
--Cash Flow Trends in the U.S. Energy Sector (Shareholder Activism Having an Impact) (Feb. 4, 2014);
--Investor FAQs--Recent Questions on E&P, Refining, and Drilling and Services Sectors (Aug 12, 2013).
Applicable Criteria and Related Research:
Cash Flow Trends in the U.S. Energy Sector (Shareholder Activism Having an Impact)
Investor FAQs: Recent Questions on the E&P, Refining, and Drilling and Services Sectors
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
2014 Outlook: North American Oil & Gas (Strong Oil Prices Continue to Support Energy Complex)