OREANDA-NEWS.  Fitch Ratings has affirmed Nabors Industries, Inc.'s (Nabors; NYSE: NBR) long-term Issuer Default Rating (IDR) at 'BBB'. The Rating Outlook has been revised to Negative from Stable.

The Negative Outlook reflects the effect that persistently low oil & gas prices have had on U.S. and international exploration & production (E&P) company cash flows and balance sheets leading to a weakened outlook for rig utilization and day rates. Fitch expects this will result in Nabors' cash flow and leverage profiles weakening more than previously forecast. Fitch's base case currently forecasts 2016 debt/EBITDA of over 4.1x compared to our previous base case estimate of approximately 3.2x. The leverage profile thereafter is also higher due to our lower and longer rig recovery profile assumption.

E&P companies have either provided early guidance or are signalling for a second consecutive year of capital spending cutbacks to preserve liquidity and financial strength. Capital budgets for U.S. independents could be reduced an additional 20%-30% following an average reduction of approximately 35% in 2015. The limited permitting activity improvements in key producing U.S. states also supports the maintenance of depressed U.S. rig counts at least over the near-term. Fitch expects international capital budgets, on average, to be reduced less than U.S. independents.

Approximately $3.7 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, and obsolescence risk for legacy rigs. Management's willingness to manage debt and balance shareholder activity consistent with its 'BBB' rating will remain a key focus through-the-cycle.

MACRO WEAKNESS OUTWEIGHS U.S. LOWER 48 ASSET QUALITY BENEFITS
U.S. Lower 48 rig counts (729 as of Oct. 30, 2015) have experienced price-induced declines of approximately 61% since the November 2014 peak with reductions towards oil-weighted rigs. The U.S. Lower 48 rig count showed some signs of stabilization during the second and most of the third quarters, but has fallen by nearly 13% since late August. Nabors' U.S. Lower 48 fleet has experienced somewhat better utilization trends than the industry (56% decline; 89 working rigs as of Sept. 30, 2015 versus 202 average in third quarter 2014) due to its favorable power type mix and contract backlog. However, the company's U.S. fleet will be increasingly exposed to lower spot pricing as term contracts (roughly two-thirds contracted as of Sept. 30, 2015) roll-off. Management indicated that, under its current contract mix, 40 rigs will be under contract to begin 2016 with 20 of those rig contracts expiring during the year.

The company's U.S. Lower 48 rig fleet is weighted towards AC drive rigs at 172, 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 day rates and E&P companies via efficiency gains. Fitch continues to believe that Nabors' U.S.-based, non-AC-drive rigs (85 as of Sept. 30, 2015; 12% utilization), particularly those not working, continue to be at heightened risk of obsolescence in the current market environment despite some year-to-date retirements.

Fitch currently expects U.S. Lower 48 drilling activity to begin to show signs of stabilization during the first half of 2016. E&P companies are anticipated to continue to reduce activity in 2015 with a clearer picture of next year's drilling plans as 2016 budgets are finalized. Rig pricing and margin pressure should be somewhat alleviated by the asset quality of the company's existing fleet, as well as the 17 newbuild PACE-X rigs that have been and will 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 exhibited strong growth the past several years. The company has a strong presence in Saudi Arabia and Argentina, as well as other principally Middle Eastern and Latin American countries. The international land drilling market has exhibited a much more resilient rig count profile - down 17% from 2014 peak levels - with the Middle East (8% reduction) experiencing the least downward pressure. Notably, Saudi Arabia has been generally increasing its rig count since the beginning of 2014 (up over 50% through September 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. However, management recently noted that it has seen market stress in Argentina and in Latin America more broadly. Nabors' Canadian drilling operations is also experiencing considerable weakness (27% utilization; 63 Canadian rigs as of Sept. 30, 2015) with Fitch anticipating utilization to remain at these weaker levels over the medium term.

Fitch expects the company's international operations to show more resilience than the U.S. supported by its exposure to less price sensitive markets and existing multi-year rig contracts, as well as the recent and pending delivery of five newbuild/upgraded rigs. Nevertheless, some international markets will be challenged in the current oil & gas price environment.

FORECAST BALANCED FCF PROFILE, METRICS WIDEN DUE TO WEAK, PRICE-INDUCED DRILLING ENVIRONMENT
Fitch's base case projects that Nabors will be approximately $50 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 approximately 3.4x and over 4.1x in 2015 and 2016, respectively, followed by a steadily improving leverage profile thereafter.

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 a longer-term price of $70/barrel;
--Henry Hub gas price that trends up from $3/mcf in 2015 to a longer-term price of $3.75/mcf;
--Continued weakness in U.S. rig counts with signs of stabilization during the first half of 2016 followed by a modest 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;
--Completion & Production Services 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, followed by a relatively balanced capital spending profile over the medium term;
--Quarterly dividend remains $0.06/share with limited 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.

Future negative rating actions are possible and will be closely linked to the U.S. Lower 48 and international drilling activity outlook and the company's ability to secure rig terms that result in through-the-cycle leverage metrics consistent with its current 'BBB' rating.

ADEQUATE LIQUIDITY POSITION
Cash, cash equivalents, and short-term investments (mainly comprised of equity securities) totalled $277 million as of Sept. 30, 2015. Supplemental sources of liquidity consist of the company's $2.2 billion senior unsecured credit facility due July 2020 and commercial paper (CP) program. As of June 30, 2015, Nabors had, on a pro forma basis, full availability under its credit facility and associated CP paper program considering the use of the recently issued $325 million five-year unsecured term loan to pay down CP borrowings.

An additional source of liquidity is the company's 53% ownership interest in C&J Energy Services (NYSE: CJES; valued at over $300 million as of Oct. 30, 2015). Fitch notes that the company's six-month lockup period ended Sept. 24, 2015. 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 September 2016, 6.15% senior unsecured notes due February 2018, and 9.25% senior notes due January 2019. Additionally, the recently issued $325 million five-year term loan has a mandatory prepayment of $162.5 million in three years.

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 June 30, 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. 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.

FULL LIST OF RATING ACTIONS

Fitch has affirmed 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 has been revised to Negative from Stable.