Fitch Affirms Nabors Industries, Inc.'s IDR at 'BBB'; Outlook Stable
Approximately \\$3.8 billion of debt is affected by today's rating action. A full list of rating actions follows at the end of this press release.
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) profile, and adequate liquidity position with subsequent ability to manage its leverage profile through the downcycle. These positive considerations are offset by the possibility of a prolonged rig recovery, particularly in the U.S. Lower 48, due to the weak oil & gas pricing environment, potential for continued realization of production efficiencies, obsolescence risk for legacy rigs, and management's commitment to manage debt and willingness to balance shareholder activity consistent with its 'BBB' rating.
FAVORABLE ASSET QUALITY MODERATES EFFECTS OF U.S. RIG COUNT COLLAPSE
U.S. rig counts (857 as of June 19, 2015) have experienced price-induced declines of over 55% since the Sept. 2014 peak with reductions towards oil-weighted rigs. However, U.S. rig activity is showing some signs of stabilization given the weekly slowdown to roughly 1% over the past seven weeks vs. around 4% in January-early May. Nabors' fleet has experienced somewhat better utilization trends than the industry (45% decline; 111 working rigs in April 2015 vs. 202 average in third quarter 2014 [3Q14]) due to its favorable power type mix and contract backlog. The company's U.S. Lower 48 rig fleet is weighted towards AC drive rigs at 171, or about 20% of total AC-drive U.S. land rigs. Further, the company's higher specification PACE-X rigs (49 planned by year-end 2015) have been exhibiting strong performance. These rigs are accretive to both drillers via premium dayrates and E&P companies via efficiency gains. Fitch notes that the deployment of six PACE-X rigs to Colombia may signal that other international market opportunities may be available. Fitch believes that Nabors' U.S.-based, non-AC-drive rigs (85 as of March 31, 2015; 31% utilization), particularly those not working, continue to be at heightened risk of obsolescence in the current market environment despite some 1Q retirements.
Trough-to-previous peak rig response in the most recent bear markets shows that the pace of a U.S. rig count recovery depends on the speed and intensity of the price recovery. The 2001 U-shaped bear market recovery required about 35 months to return to peak levels, while the 2009 V-shaped bear market needed roughly 28 months. Fitch views a longer, slower rig recovery profile as likely based on Fitch's WTI price assumption of \\$60 per barrel for 2016 and \\$70 per barrel long term. This implies that pricing support for a larger scale ramp-up in U.S. onshore activity might be several years into the future. Another consideration is drilling rig efficiency gains, as well as production per well improvements, acting as headwinds to a possible 'new normal' mid-cycle rig count remaining below pre-downturn peak levels.
Fitch expects drilling activity to begin to stabilize in 2H15, consistent with the recent moderation in decline rates, followed by an uptick in market demand thereafter assuming a supportive oil pricing environment. Rig pricing and margin pressure should be alleviated by the asset quality of the company's existing fleet, as well as 17 newbuild PACE-X rigs to be deployed during 2015 (1.75x legacy rig and roughly 40% greater than other AC drive rig margins). Further, Fitch anticipates that the company's legacy rig fleet will continue to experience pricing and utilization headwinds with additional legacy fleet rationalization activity possible.
RESILIENCE OF INTERNATIONAL ACTIVITY PROVIDES COUNTERBALANCE
Nabors' international drilling business has been exhibiting strong growth the past several years. The company has a strong presence in Saudi Arabia (33% of working international rigs as of March 31, 2015) and Argentina (nearly 20% of working international rigs), as well as other principally Middle Eastern and Latin American countries. The international drilling market has exhibited a much more resilient rig count profile - down 16% from 2014 peak levels - with the Middle East (8% reduction) experiencing the least downward pressure. Notably, Saudi Arabia has been consistently increasing its rig count since the beginning of 2014 (up nearly 40% through May 2015), which is consistent with the country's reported strategy to preserve and potentially grow its global oil market share. Argentina, meanwhile, has not reduced its drilling activity through-the-cycle and has kept its rig count flat-to-up since the beginning of 2014.
Fitch expects the company's international operations to show more resilience than North America supported by its exposure to less price sensitive markets and existing multi-year rig contracts, as well as the delivery of five newbuild/upgraded rigs. Nevertheless, some international markets will be challenged in the current oil & gas price environment. This includes, in particular, Nabors' Canadian drilling operations (45% utilization; 57 Canadian rigs as of March 31, 2015) with Fitch expecting utilization to remain at these weaker levels over the medium-term.
FORECAST BALANCED FCF PROFILE, METRICS WIDEN DUE TO WEAK, PRICE-INDUCED DRILLING ENVIRONMENT
Fitch's base case projects that Nabors will be approximately \\$100 million FCF positive, including dividends, in 2015 followed by a relatively balanced FCF profile in 2016. These FCF estimates consider corporate and field operating cost savings, maintenance of a balance capital program, and some near-term working capital improvement gains. The Fitch base case results in debt/EBITDA of about 3.2x in 2015 with a steadily improving leverage profile thereafter. Fitch recognizes, however, that net debt/EBITDA is forecast to be significantly better at approximately 2.5x in 2015 considering projected year-end cash & equivalents.
ADEQUATE LIQUIDITY POSITION
Cash and equivalents totalled \\$586 million as of March 31, 2015. The company also had a portfolio of short-term investments equal to \\$35.2 million (mainly comprised of equity securities). Supplemental sources of liquidity consist of the company's recently upsized \\$1.725 billion senior unsecured credit facility (exercised \\$225 million accordion feature in Feb. 2015) due Nov. 2017 and \\$1.5 billion commercial paper (CP) program. As of March 31, 2015, Nabors had nearly \\$1.275 billion available under its credit facility and associated CP paper program (\\$200 million of credit facility and \\$250.5 million of CP borrowings outstanding).
An additional source of liquidity is the company's 53% ownership interest in C&J Energy Services (NYSE: CJES; valued at approximately \\$860 million as of June 25, 2015), subject to a six-month lockup period (ending Sept. 24, 2015), following the merger of Nabors' completion & production (C&P) business with CJES. Fitch anticipates the company will retain its equity stake over the medium-term given its balanced FCF and adequate liquidity profiles. Further, retention of the company's CJES position provides share price upside potential from a pick-up in market activity and realization of merger synergies.
LADDERED MATURITIES PROFILE
Nabors has a laddered maturities profile with \\$350 million, \\$930 million, and \\$340 million of maturities in 2016, 2018, and 2019, respectively. These maturities represent the company's 2.35% senior unsecured notes due Sept. 2016, 6.15% senior unsecured notes due Feb. 2018, and 9.25% senior notes due Jan. 2019. Financial covenants, as defined in the credit facility agreement, require Nabors to maintain a net debt-to-total capitalization ratio below 0.6x. Other customary covenants across Nabors' debt instruments consist of lien limitations, transaction restrictions, and change of control provisions. The company was in compliance with all of its covenants, as of March 31, 2015, with ample headroom.
MANAGEABLE OTHER LIABILITIES
Nabors' defined benefit pension plan (assumed in a 1999 acquisition) was about \\$9.1 million underfunded, equal to a 72% funded status, at year-end 2014. 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 relative to funds from operations (FFO) at less than 1%. Other contingent obligations total nearly \\$1.3 billion on a multi-year, undiscounted basis as of Dec. 31, 2014. These obligations mainly consist of purchase commitments (\\$1.1 billion), pipeline minimum volume commitments (\\$84.6 million), minimum lease payments (\\$96.4 million), and minimum salary and bonus obligations (\\$19.1 million). Fitch does not consider the obligations as credit concerns, with the majority expected to be satisfied during 2015.
KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for Nabors include:
--WTI oil price that trends up from \\$50/barrel in 2015 to \\$60/barrel in 2016 and a longer-term price of \\$70/barrel;
--Henry Hub gas price that trends up from \\$3/mcf in 2015 to \\$3.25/mcf in 2016, \\$3.50/mcf in 2017, and a longer-term price of \\$3.75/mcf;
--A stabilization in North American rig counts during 2H15 followed by an uptick in market demand;
--International drilling results are projected to be more resilient given the relatively better international rig count profile, particularly in Nabors' largest international markets - Saudi Arabia and Argentina;
--C&P results are considered in 1Q15 with no cash flows/dividends assumed post-merger;
--Capital expenditures of roughly \\$900 million in 2015, consistent with company guidance, that remain generally balanced with operating cash flows over the medium-term;
--Quarterly dividend remains \\$0.06/share with no additional shareholder actions near-term;
--CJES equity stake is assumed to be retained over the near-term.
RATING SENSITIVITIES
Positive: Future developments that may, individually or collectively, lead to a positive rating action include:
--Heightened rig utilization and average day rates/margins signalling an improvement in market conditions and/or asset quality and mix;
--Demonstrated commitment by management to lower debt levels;
--Mid-cycle debt/EBITDA below 2.0x on a sustained basis.
Fitch does not anticipate a positive rating action over the medium-term given the current weak, oil & gas price induced drilling environment.
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
--Material, sustained declines in rig utilization and average day rates/margins indicating a structural deterioration in market conditions and/or asset quality and mix;
--Acquisitions and/or shareholder friendly actions that are inconsistent with the capital structure and expected cash flow profile;
--Mid-cycle debt/EBITDA between 2.5x-2.75x on a sustained basis.
FULL LIST OF RATING ACTIONS
Fitch affirms the following ratings:
Nabors Industries, Ltd. (Bermuda)
--Long-term IDR at 'BBB'.
Nabors Industries, Inc. (Delaware)
--Long-term IDR at 'BBB';
--Senior unsecured bank facility at 'BBB';
--Senior unsecured notes at 'BBB';
--Short-term IDR at 'F2';
--Commercial paper program at 'F2'.
The Rating Outlook is Stable.
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