OREANDA-NEWS. Fitch Ratings has downgraded Anton Oilfield Services Group's Long-Term Issuer Default Rating and senior unsecured rating to 'BB-' from 'BB'. The Outlook on the IDR remains Negative.

The rating downgrade follows a further profit warning from the company on 18 January 2015, which shows that the challenging market conditions are impacting Anton's performance more severely than previously expected. The delays in the launches of upstream oil and gas exploration and production (E&P) projects and margin compression in the industry are not likely to reverse in the near future.

The Negative Outlook captures uncertainties in the oilfield services sector, with low oil prices leading to capex cuts by upstream companies and pressuring rates charged by oilfield service providers.

KEY RATING DRIVERS

Challenging Industry Conditions: The rapid decline of oil prices, by some 30% during 4Q14, has resulted in project cancellations and downsizing. The impact of this on Anton is a reduction in its order book to CNY1.7bn at end-December 2014 from CNY2.1bn at end-September 2014. The decline in orders was more severe in China than in its overseas operations. An increasing number of competitors added to downward pricing pressure, while more technically challenging services led to increases in costs. Fitch does not expect such competitive pressure to dissipate over the next 12 months.

Longer Working Capital Cycle, Weaker Margins: Anton's management indicated its 2H14 margins have declined from those in 1H14, and no significant improvement is expected in 2015. Fitch expects the company's EBITDA margin to remain at 15%-20% in the near term, compared with 27% in 2013. In addition, accounts receivable turnover remained at over 200 days, compared to 130 days in 2013. Historically Anton's receivable turnover has been shorter than that of its domestic peers. While collection days could moderately improve in 2015, Anton's working capital cycle is likely to remain elevated compared with prior levels.

Near-Term Liquidity Adequate: Anton has debt maturing within one year of CNY690m compared with CNY850m of cash balances as at 31 December 2014. Among the debt maturing in 2015 are bonds of CNY300m due in May 2015, and the company plans to refinance these bonds with a loan. Anton has a low maintenance capex requirement, and investment capex can be adjusted down with high flexibility. Management indicated 2015 capex would be mainly for maintenance purposes only. While the company has recently acquired interests in oilfield chemical and technology assets, Fitch does not expect Anton to conduct further sizeable acquisitions.

Medium-Term Business Prospects: The state mandates for China's large national oil companies to increase their production remain intact, and increasingly China is looking to unconventional resources to achieve these targets. This should provide business flows to oilfield service providers such as Anton, which are able to provide high-end services in the unconventional energy field. Despite difficult market conditions, Anton was able to lock in new contracts of CNY457.6m during 4Q14 and about CNY200m year-to-date in 2015, according to management. While Fitch expects oil prices to increase from current levels over the course of 2015 and 2016, margin pressures on oilfield services companies are unlikely to recover in tandem with any recovery of oil prices.

Limited Rating Headroom: Fitch estimates Anton's FFO net leverage at over 4x for 2014, compared with 1.1x in 2013. The higher leverage was due to margin compression and higher working capital requirements, leading to year-on-year deterioration of its cash position. Forecast credit metrics for 2015 are weak for the ratings; however, Fitch believes business volumes should recover over the medium term, which should ease the pressure on the company's credit profile.

RATING SENSITIVITIES

Negative: Future developments that may, individually or collectively, lead to a downgrade include:
- FFO-adjusted net leverage of over 3x or FFO fixed charge cover less than 4x on a sustained basis
- EBITDA margin sustained below 20%
- A continued decline in order backlog
- Weakening of liquidity
- A material weakening of its competitive position in China

Positive: Future developments that may, individually or collectively, lead to the Outlook being revised to Stable include:
- FFO-adjusted net leverage below 3x or fixed charge cover above 4x
- EBITDA margin at about 20% on a sustained basis
- Sustainable improvements in order backlog