CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BBB-' rating to Nabors Industries, Inc.'s (Nabors) senior unsecured notes due 2023. The company intends to use the net proceeds to repay outstanding borrowings under its revolving credit facility and the mandatory $162.5 million portion of the $325 million term loan maturing in 2020 with any excess proceeds used for general corporate purposes, including the repayment or repurchase of additional outstanding debt.
KEY RATING DRIVERS
Nabors' ratings consider its operational and financial flexibility, favorable asset quality characteristics and global footprint, forecasted neutral-to-modestly positive free cash flow (FCF) and flat gross debt profile, and adequate liquidity position. These factors are offset by the possibility of a prolonged onshore rig recovery, particularly in the U.S. Lower 48, resulting in lower utilization rates and continued pricing pressure. Another consideration is the potential for continued realization of production efficiencies that require additional capital spending on existing rigs and/or newbuilds, as well as continued obsolescence risk for legacy rigs. Management's willingness and ability to manage gross debt levels and curtail shareholder activity will remain a key focus through-the-cycle.
FORECAST BALANCED FCF PROFILE, NEAR-TERM METRICS REMAIN WIDE
Fitch's base case projects that Nabors will be approximately $150 million FCF positive in 2016, including dividends, benefiting from favorable one-time items and working capital cash flow movements. Debt/EBITDA is forecast to be approximately 6.0x in 2016. Leverage metrics are expected to steadily improve thereafter approaching 3.5x in 2018. This forecasted leverage profile assumes that capital spending remains within cash flow.
KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for Nabors include:
--WTI oil price that trends up from $42/barrel in 2016 to a longer-term price of $65/barrel;
--Henry Hub gas price that trends up from $2.35/mcf in 2016 to a longer-term price of $3.25/mcf;
--Uptick in U.S. rig demand during the second half of 2016 followed by continued modest demand improvements near-term;
--International drilling results are projected to remain more resilient given the relatively better international rig count profile;
--Capital expenditures of approximately $450 million in 2016, consistent with company guidance, followed by a capital spending profile that remains within cash flow;
--Quarterly dividend remains $0.06/share with no additional shareholder actions contemplated near term.
RATING SENSITIVITIES
Positive: No positive rating actions are currently contemplated in the near-term. However, future developments that may, individually or collectively, lead to a positive rating action include:
For an upgrade to 'BBB':
--Demonstrated commitment by management to lower gross debt levels;
--Mid-cycle debt/EBITDA below 2.5x on a sustained basis.
To resolve the Negative Outlook at 'BBB-':
--Demonstrated ability to manage FCF resulting in no material additions to gross debt levels;
--Retention of nearly full availability under the $2.25 billion revolver balanced by borrowings to repay the 2016 senior notes maturity and invest in near-term cash flow supportive spending;
--Heightened rig utilization and average day rates/margins signalling an improvement in market conditions;
--Mid-cycle debt/EBITDA of 3.0x - 3.25x on a sustained basis.
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
--Failure to manage FCF that significantly reduces liquidity and increases gross debt levels;
--Material, sustained declines in rig utilization and average day rates/margins indicating a structural deterioration in market conditions;
--Shareholder friendly actions that are inconsistent with the capital structure and expected cash flow profile;
--Mid-cycle debt/EBITDA 3.5x - 3.75x on a sustained basis.
ADEQUATE LIQUIDITY POSITION
Cash and short-term investments totalled approximately $201 million as of Sept. 30, 2016. Supplemental sources of liquidity consist of the company's $2.25 billion senior unsecured credit facility due July 2020 and commercial paper (CP) program. The company also has a $450 million accordion option that, subject to bank participation, can be exercised. As of Sept. 30, 2016, Nabors had approximately $1.9 billion available on its credit facility and associated CP paper program. Proceeds from the proposed unsecured notes offering are intended to repay all amounts outstanding under the unsecured credit facility.
MATURITIES PROFILE
Nabors has approximately $975 million, $340 million, and $700 million of maturities in 2018, 2019, and 2020, respectively. These maturities represent the company's 6.15% senior unsecured notes due February 2018, 9.25% senior unsecured notes due January 2019, and 5.0% senior unsecured notes due September 2020. Additionally, the company has a $325 million unsecured term loan due September 2020 with a mandatory prepayment of $162.5 million in September 2018. Proceeds from the proposed unsecured notes offering are intended to repay the mandatory portion of the term loan with any excess proceeds largely used for the repayment or repurchase of additional outstanding debt.
REDUCED COVENANT HEADROOM
Financial covenants, as defined in the credit facility agreement, require Nabors to maintain a net debt-to-total capitalization ratio below 0.6x (Fitch estimate of approximately 0.5x as of Sept. 30, 2016). The covenant, as defined in the credit agreement, does not have a non-cash asset impairment carve out. While the depressed oil & gas price environment could negatively impact stockholder's equity, the estimated covenant headroom should moderate the risk for any near-term covenant pressure. Other customary 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 $8.4 million underfunded. 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. Other contingent obligations totalled over $280 million on a multi-year, undiscounted basis as of Dec. 31, 2015. These obligations mainly consist of purchase commitments, pipeline minimum volume commitments, minimum lease payments, and minimum salary and bonus obligations. Fitch does not consider the obligations as credit concerns, with the majority satisfied during 2016.
FULL LIST OF RATING ACTIONS
Nabors Industries, Inc. (Delaware)
--Senior unsecured notes 'BBB-';
Fitch currently rates Nabors as follows:
Nabors Industries, Ltd. (Bermuda)
--Long-term IDR 'BBB-'.
Nabors Industries, Inc. (Delaware)
--Long-term IDR 'BBB-';
--Senior unsecured bank facility 'BBB-';
--Senior unsecured notes 'BBB-';
--Short-term IDR 'F3';
--Commercial paper program 'F3'.
The Rating Outlook is Negative.
Date of Relevant Committee: Feb. 3, 2016.
SUMMARY OF FINANCIAL STATEMENT ADJUSTMENTS
Fitch has made no material adjustments that are not disclosed within the company's public filings.
Additional information is available on www.fitchratings.com.
Applicable Criteria
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage - Effective from 17 August 2015 to 27 September 2016 (pub. 17 Aug 2015)
https://www.fitchratings.com/site/re/869362
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