NEW YORK--(BUSINESS WIRE)--Nabors Industries Ltd. (Nabors) has the operational and financial flexibility to manage its balance sheet through the downcycle, according to Fitch Ratings. However, this is offset by the company's ability to manage capital expenditures, commitment to reduce debt, and willingness to balance shareholder-friendly activity consistent with its current 'BBB' rating. Another consideration is the successful execution of Nabors' completion and production services merger with C&J Energy Services Inc. (C&J) and allocation of cash proceeds towards debt repayment.
Fitch believes that U.S. rig counts could fall below 1,000 during the current downcycle based on a review of previous cycles, guidance from North American (N.A.) exploration and production (E&P) companies, and Fitch's 2015 West Texas Intermediate (WTI) price assumption of $50 per barrel. Further, Fitch views a longer, slower rig recovery profile as likely based on rig responsiveness in previous cycles and Fitch's WTI price assumption of $60 per barrel for 2016. This implies that oil pricing support for a larger scale ramp-up in U.S. onshore activity might be several years into the future.
Nabors' rig fleet has favorable asset quality characteristics and global footprint which should moderate the operational and financial impact of the downcycle. The land drilling fleet consists of 501 land rigs with about 75% of those (366 total rigs) located in N.A. As of Sept. 30, 2014, N.A. and international rig years totaled 250.3 (68% utilization) and 130.1 (96%), respectively. Further, the N.A. power-type mix is favorably weighted towards AC drive rigs at roughly 160, or about 20% of total active AC drive U.S. land rigs. Fitch believes that Nabors' U.S.-based, non-AC drive rigs, particularly those not working during the second half of 2014, are at heightened risk of obsolescence in the current market environment.
Fitch expects U.S. drilling cash flows to come under considerable pressure throughout 2015 as N.A. E&P companies rationalize drilling programs. A preference reversion towards asset quality should begin to materialize as capital allocation flexibility improves and 2015 progresses. Contracted, 'ultra-high-spec' Pace-X rigs (43 awards with 33 deployed as of Nov. 2014) will provide some support to 2015 results given their daily margin advantage (about 1.75x legacy rig margins and roughly 40% greater than other AC drive rigs as of Sept. 30, 2014). International operations are anticipated to show more resilience, but will also be challenged.
Nabors has demonstrated, in previous downcycles, that it possesses a considerable amount of capex flexibility, with spending being cutback to be generally consistent with or below cash flows from operations. Fitch believes that Nabors has the ability to manage its capital spending to minimize the need for debt funding in the current downcycle. Free cash flow (FCF), including dividends, is forecast to be negative $125 million in 2015, considering completion of the C&J merger, followed by a positive FCF profile in 2016 due to a reduction in capital spending. During the most recent downcycle, the company demonstrated an ability to generate FCF of approximately $525 million and $175 million in 2009 and 2010, respectively.
The market environment has introduced some uncertainty as to Nabors completion & production services merger with C&J. Fitch believes, however, that the $250 million reduction in cash consideration ($688 million vs. $938 million) should help alleviate shareholder concerns. Nevertheless, execution risk remains. Transaction funding risk is mitigated by C&J financing commitments for up to $1.875 million through the extended merger termination date of March 31, 2015.
Fitch currently forecasts 2015 debt/EBITDA of 3x with and 3.4x without the completion of the C&J merger. These scenarios consider a contraction in U.S. drilling results, resiliency in international operations, a pullback in capital spending to be generally consistent with cash flows from operations, no additional equity-friendly actions, and a reduction in short-term debt with C&J merger proceeds. Fitch believes that 2016 could remain challenged based on rig responsiveness in previous cycles and Fitch's WTI price assumption of $60 per barrel. However, capex elasticity provides financial flexibility to manage cash flows and the balance sheet.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--U.S. Rig Counts Under Pressure (Downcycle to Fewer than 1,000 Rigs Followed by Longer, Slower Recovery) (Feb. 5, 2014);
--U.S. Rig Count Falling; Longer, Slower Recovery Expected (Feb. 5, 2014);
--Capex Cuts in North American E&Ps Continue Amid Oil Drop (Feb. 9, 2014);
--Full Cycle Costs for North America E&P (Production Costs Moderate in 2013) (July 30, 2014);
--North American Exploration and Production Handbook (July 16, 2014);
--Global Impact on U.S. Shale Oil (Rising Production Tempers World Prices) (Feb. 10, 2013).
Applicable Criteria and Related Research:
U.S. Rig Counts Under Pressure (Downcycle to Fewer than 1,000 Rigs Followed by Longer, Slower Recovery)
North American Exploration and Production Handbook
Full Cycle Costs for North America E&P (Production Costs Moderate in 2013)
Global Impact of U.S. Shale Oil (Rising Production Tempers World Prices)