Fitch: Drop in Crude Oil Prices Drives Onshore Driller CDS Wider

NEW YORK--()--Five-year credit default swaps (CDS) on Nabors Industries, Inc. (Nabors) widened 95% over the past month to trade at the widest levels observed since early this year. The equity market has echoed the negative sentiment, as seen in a notable increase in Fitch Solutions' one-year and five-year probability of default for the company, up 76% and 88%, respectively, compared to month-ago levels.

The drop in crude oil prices has likely been the catalyst behind the market's growing concern for the onshore drilling company. West Texas Intermediate crude oil prices have slid over the past few months into the $80-$90 per barrel range from a recent monthly high in June of over $105. The market seems to believe the recent lows may dampen the U.S. onshore production growth outlook and, as a result, reduce onshore rig demand.

Fitch estimates that median full-cycle costs for U.S. onshore exploration and production (E&P) companies are approximately $70 per barrel, but believe some E&P companies may pull back capital spending in the $75-$80 range. However, within this price range, drillers with strong asset quality are supported by shale's fast production decline rates and diminishing rig surface efficiencies. Current prices provide some headroom to a reduction in onshore activity, but driller pricing risk is likely to heighten at sustained lower oil price levels. A secondary consideration is accelerated obsolescence of legacy rigs.

Fitch rates Nabors 'BBB' with a Stable Ratings Outlook. The rating reflects Nabors' favorable rig fleet repositioning efforts, service intensity of shale oil and gas production, size, and geographic diversification, and manageable current and projected leverage profile (Fitch calculated latest 12 months debt/EBITDA of 2.3x as of June 30, 2014; Fitch base case forecasts 2.2x-2.3x in 2015). These considerations are offset by the potential for sustained lower oil and gas prices that result in a reduction in onshore rig demand and/or pricing power, as well as further increases in oil and gas production output per rig, stagnant Canadian, Alaskan, and offshore drilling segment results, and limited visibility for similarly favorable international drilling arrangements.

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Contacts

Fitch Ratings
Diana Allmendinger
Director
Fitch Solutions
+1 212 908-0848
or
Dino Kritikos
Director
Corporate Finance, Energy
+1 312 368-3150
70 W. Madison St.
Chicago, IL
or
Kellie Geressy-Nilsen
Senior Director
Fitch Wire
+1 212 908-9123
33 Whitehall Street
New York, NY
or
Media Relations:
Brian Bertsch, New York, +1 212-908-0549
Email: brian.bertsch@fitchratings.com

Contacts

Fitch Ratings
Diana Allmendinger
Director
Fitch Solutions
+1 212 908-0848
or
Dino Kritikos
Director
Corporate Finance, Energy
+1 312 368-3150
70 W. Madison St.
Chicago, IL
or
Kellie Geressy-Nilsen
Senior Director
Fitch Wire
+1 212 908-9123
33 Whitehall Street
New York, NY
or
Media Relations:
Brian Bertsch, New York, +1 212-908-0549
Email: brian.bertsch@fitchratings.com