Fitch Ratings has affirmed Nabors Industries, Inc.'s (Nabors; NYSE: NBR)
Long-term Issuer Default Rating (IDR) at 'BBB'. The Rating Outlook is
revised to Stable from Negative. Fitch has also upgraded Nabors'
Short-term IDR to 'F2' from 'F3'.
The Stable Outlook reflects the positive near-term trends for U.S. land
drillers and oilfield service providers due to increasing shale activity
and improving liquids-focused rig counts (+92 rigs year-over-year as of
May 2014; over 5% increase). Tailwinds for the U.S. onshore drilling and
services industry, associated with the transition to shale, consist of
fast production decline rates, service intensity (e.g., proppant/sand,
frac fluid, pressure pumping, etc.), and diminishing surface
efficiencies (e.g., wells drilled per rig). The Outlook is further
supported by Nabors' recent favorable international drilling renewal
rates and contract awards.
The short-term rating upgrade is based on the Long-term IDR Outlook
revision to Stable, liquidity back-up adequacy, and the majority of
current and forecasted short-term metrics being more consistent with an
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 release.
KEY RATING DRIVERS
Nabors' ratings reflect its favorable rig fleet repositioning efforts,
positive near-term trends for U.S. land drillers and oilfield service
providers, strengthening international drilling segment, and manageable
current and projected leverage profile (Fitch calculated LTM debt/EBITDA
of 2.4x as of March 31, 2014; Fitch base case forecasts improvement to
2.2x - 2.3x in 2015). These considerations are offset by the potential
for further increases in oil & gas production output per rig,
obsolescence risk for legacy rigs, the possibility for continued
overcapacity-driven U.S. onshore market weakness, stagnant Canadian,
Alaskan, and offshore drilling segment results, and limited visibility
for similarly favorable international drilling arrangements.
FAVORABLE RIG FLEET REPOSITIONING AND NEAR-TERM TRENDS
The company is actively repositioning its U.S. drilling fleet primarily
through newbuilds to better align with E&P demand. Nabors deployed its
'ultra-high spec' PACE-X rig to meet demand for efficient,
horizontal/directional drilling rigs with a total of 21 currently in the
field and an additional 13 (seven contracted) to be delivered prior to
year-end. Management plans to establish a foothold in the 'ultra-high
spec' rig market and reverse market share losses by continuing to build
PACE-X rigs prior to attaining a contract. This is contrary to
historical company and industry norms, but consistent with the current
newbuild strategy of peers. Fitch expects continued weakness in the
company's legacy rig fleet as newbuild rigs are deployed in a modestly
increasing rig count environment, but forecasts that the higher day
rate, higher margin PACE-X rigs - providing over 160% of equivalent U.S.
legacy rig financial results - will more than cover near-term legacy rig
losses. However, while the PACE-X speculative newbuild strategy has had
early success, Fitch cautions that the widely adopted shift to pursue
speculative newbuilds may introduce some pricing headwinds over the
medium-term that could curb expectations.
International drilling has been a bright spot for Nabors alleviating
downward pressure from the rest of the company's segments. Nabors
realized 24 favorable contract awards - 13 newbuild and 11 upgrade rigs
- in its Middle East and Latin America regions during 2013. These
contracts have an average duration of 3.3 years providing nearly 3.5x
the equivalent U.S. legacy rig financial results, which boosts the
company's backlog by $1.9 billion. Management indicated that it expects
international rig day margins to reach the 'high teens' in 2015 with the
commencement of these contracts, in conjunction with increasing
international activity and improving pricing. Fitch considers the
stability of these contracts and positive demand profile as supportive
credit features. However, this is balanced by limited visibility for
similarly favorable international drilling arrangements suggesting
moderate future growth.
Completion and production services have and continue to experience weak
pricing power due to considerable overcapacity in the market. However,
management is optimistic that market prices in the pressure pumping
market will show signs of improvement as more pads are established with
deeper and longer laterals and fleets shift to more 24-hour work. Some
evidence for improvement is provided by the realization of regional
pressure pumping price increases (e.g., Permian and Bakken) and limited
new capacity coming online. Additionally, management reported that
workover rigs and trucks are seeing more bid opportunities, which could
provide a tailwind. Fitch assumes modest revenue and margin improvements
for both segments.
IMPROVING LEVERAGE METRICS ANTICIPATED
The company's current leverage level provides financial flexibility to
pursue measured fleet initiatives. Fitch's base case forecasts Nabors
will be $200 - $450 million and $100 - $300 million FCF negative in 2014
and 2015, respectively, using the Fitch oil & gas price deck. A range of
outcomes is provided given the variable pace and timing of newbuild
deliveries and realization of revenues, as well as continued movement in
legacy U.S. Lower 48 rig utilization and day rates/margins. Fitch
expects FCF shortfalls to be partially funded with cash-on-hand and the
remainder credit facility financed. Despite the variances inherent in
the current newbuild program and legacy Lower 48 results, leverage
metrics remain consistent with the current rating level and show signs
of improvement. Fitch's base case results in debt/EBITDA of 2.4x - 2.5x
and 2.2x - 2.3x in 2014 and 2015, respectively. Thereafter, Fitch
believes Nabors is likely to become FCF positive with debt/EBITDA
approaching 2.0x. This assumes a measured approach to newbuilds,
continued realization of favorable PACE-X contract terms, moderate
international drilling growth, declining legacy U.S. Lower 48
operational and financial profile, modest improvements in completion and
production services, and limited equity-driven restructuring and
financial policy changes.
ADEQUATE LIQUIDITY POSITION
Nabors had cash and equivalents of $326.9 million and a portfolio of
short-term investments equal to $97.9 million - about 80% equities and
20% debt securities - as of March 31, 2014. Supplemental sources of
liquidity consist of the company's $1.5 billion senior unsecured credit
facility due Nov. 2017 and $1.5 billion commercial paper program. As of
March 31, 2014, Nabors had $117.5 million of credit facility and $290.3
million of commercial paper borrowings outstanding. The company's
maturities profile is manageable with the $350 million 2.35% and $975
million 6.15% senior unsecured notes maturing in 2016 and 2018,
Financial covenants, as defined in the credit facility agreement,
require Nabors to maintain a net debt-to-total capitalization ratio
below 0.60x (0.36x as of March 31, 2014). Other covenants across Nabors'
debt instruments consist of lien limitations, transaction restrictions,
and change of control provisions.
MANAGEABLE OTHER LIABILITIES
Nabors' defined benefit pension plan (assumed in a 1999 acquisition) was
about $4.8 million underfunded at year-end 2013, or an over 80% funded
status. 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 FFO at less than 1%. Other contingent
liabilities total over $1 billion on a multi-year, undiscounted basis
primarily consist of purchase commitments, pipeline minimum volume
commitments, and minimum lease payments. Fitch does not consider the
obligations as credit concerns, which are generally accounted for in
operating and capital costs.
Future rating actions will be closely linked to Nabors' ability to
effectively reposition its rig fleet, while maintaining financial
flexibility. Fitch does not anticipate a rating action in the near-term
without a persistently weak market pricing environment and/or the
occurrence of a material event.
Positive: Future developments that may, individually or collectively,
lead to a positive rating action include:
--Heightened rig utilization and average day rates and margins signaling
an improvement in market conditions and/or asset quality and mix;
--Improvement in completion and production services results suggesting
strengthening market conditions;
--Completion of shareholder activist initiated strategic review that
reduces restructuring and financial policy uncertainty;
--Mid-cycle debt/EBITDA below 2.0x on a sustained basis.
Negative: Future developments that may, individually or collectively,
lead to a negative rating action include:
--Material declines in rig utilization and average day rates and margins
indicating deterioration in market conditions and/or asset quality and
--Prolonged period of market price softening and/or overcapacity that
leads to a weaker onshore driller and oilfield services outlook;
--Restructuring and/or shareholder friendly action that is inconsistent
with the capital structure and expected cash flow profile;
--Mid-cycle debt/EBITDA between 2.5x - 2.75x on a sustained basis;
--Liquidity falls below $`1.5 billion resulting in less than 100%
commercial paper back-up liquidity coverage.
Fitch has affirmed the following long-term ratings as follows:
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'.
Fitch has upgraded the following short-term ratings as follows:
Nabors Industries, Inc. (Delaware)
--Short-term IDR to 'F2' from 'F3';
--Commercial paper program to 'F2' from 'F3'.
The Rating Outlook is revised to Stable from Negative.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Relevant Research:
--Corporate Rating Methodology Including Short-Term Ratings and Parent
and Subsidiary Linkage (May 28, 2014);
--2014 Outlook: North American Oil & Gas (Dec. 12, 2013);
--Cash Flow Trends in the U.S. Energy Sector (Shareholder Activism
Having an Impact) (Feb. 4, 2014);
--Investor FAQs--Recent Questions on E&P, Refining, and Drilling and
Services Sectors (Aug 12, 2013).
Applicable Criteria and Related Research:
Cash Flow Trends in the U.S. Energy Sector (Shareholder Activism Having
Investor FAQs: Recent Questions on the E&P, Refining, and Drilling and
Corporate Rating Methodology - Including Short-Term Ratings and Parent
and Subsidiary Linkage
2014 Outlook: North American Oil & Gas (Strong Oil Prices Continue to
Support Energy Complex)
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Source: Fitch Ratings