NEW YORK--(BUSINESS WIRE)--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.
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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.