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Corporate FinanceMoody’s GlobalRating
Methodology
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Table of Contents:
Summary 1 About the Rated Universe 2 About this Rating Methodology 4 The Key Rating Factors 6 Assumptions and Limitations and Rating Considerations that are not Covered in the Grid 11 Conclusion: Summary of the Grid-Indicated Rating Outcomes 2 Appendix A: Global Oilfield Services Industry Methodology Factor Grid 3 Appendix B: Methodology Grid-Indicated Ratings 13 Appendix C: Observations and Outliers for Grid Mapping 5 Appendix D: Oilfield Services Industry Overview 18 Appendix E: Key Rating Issues over the Intermediate Term 0 Moody’s Related Research 1
Analyst Contacts:
New York 1.212.553.1653
Peter Speer Vice President – Senior Credit Officer
Steven Wood
Team Managing Director
Thomas Coleman Senior Vice President
Kenneth Austin Vice President – Senior Credit Officer
Andrew Oram Vice President – Senior Credit Officer
Francis J. Messina Vice President – Senior Analyst
Gretchen French Assistant Vice President
Winton Congdon Associate Analyst
(continued on last page)
December 2009
Global Oilfield Services Rating Methodology
Summary
This rating methodology explains Moody’s approach to assessing credit risk for
companies in the oilfield services industry. It replaces the Global Oilfield Services
Rating Methodology that was published in December 2006. With very similar core
principles as the previous methodology, this updated framework incorporates slight
changes to the grid and refinements in the text to provide a clearer explanation for
the way ratings are currently derived in this sector.
This publication is intended to provide a reference tool that can be used when
evaluating credit profiles within the oilfield services industry, helping issuers,
investors, and other interested market participants understand how key qualitative
and quantitative risk characteristics are likely to affect rating outcomes. This
methodology does not include an exhaustive treatment of all factors that are
reflected in Moody’s ratings but should enable the reader to understand the
qualitative considerations and financial ratios that are most important for ratings in
this sector.
This report includes a detailed rating grid and illustrative mapping of a
representative sample of 15 rated companies against the factors in the grid. The
purpose of the rating grid is to provide a reference tool that can be used to
approximate credit profiles within the oilfield services sector. The grid provides
summarized guidance for the factors that are generally most important in assigning
ratings to oilfield services companies. The grid is a summary that does not include
every rating consideration, and our illustrative mapping uses historical results while
our ratings also consider forward-looking expectations. As a result, the grid-
indicated rating is not expected to match the actual rating of each company.
2 December 2009 Rating Methodology Moody’s Global Corporate Finance - Global Oilfield Services Rating Methodology
Rating Methodology Moody’s Global Corporate Finance
Global Oilfield Services Rating Methodology
The grid contains three key factors that are important in our assessments for ratings in the oilfield services sector:
1. Scale and Business Profile
2. Profitability and Returns
3. Financial Strength
Each of these factors also encompasses a number of sub-factors or metrics, which we explain in detail. Since an issuer’s scoring on a particular grid factor often will not match its overall rating, in the Appendix we include a discussion of "outliers" – companies whose grid-indicated rating for a specific factor differs significantly from the actual rating.
This rating methodology is not intended to be an exhaustive discussion of all factors that Moody’s analysts consider in ratings in this sector. We note that our analysis for ratings in this sector covers factors that are common across all industries (such as ownership, management, liquidity, legal structure in the corporate organization, corporate governance) as well as factors that can be meaningful on a company specific basis. Our ratings consider qualitative considerations and factors that do not lend themselves to a transparent presentation in a grid format. The grid represents a compromise between greater complexity, which would result in grid-indicated ratings that map more closely to actual ratings, and simplicity, which enhances a transparent presentation of the factors that are most important for ratings in this sector most of the time.
Highlights of this report include:
An overview of the rated universe
A description of the key factors that drive rating quality
Comments on the rating methodology’s assumptions and limitations, including a discussion of rating considerations that are not included in the grid.
The Appendices show the rating grid criteria on one page (Appendix A), tables that illustrate the application of the methodology grid to 15 representative rated oilfield services companies (Appendix B) with explanatory comments on some of the more significant differences between the grid-implied rating and our actual rating (Appendix C), a brief industry overview (Appendix D), and a discussion of key rating issues for the oilfield services sector over the intermediate term (Appendix E).
About the Rated Universe
Moody’s rates 52 companies in the oilfield services industry. In the aggregate, these issuers have approximately $67 billion of rated debt. Oilfield services companies are a diverse group that provides products and services used in the exploration and production of oil and natural gas, including companies involved in the manufacturing of equipment used by oilfield services companies. We divide companies in the industry into three groups: services companies, contract drilling companies and offshore support companies.
Rated oilfield services issuers are primarily based in the U.S., although many derive a significant portion of their revenues outside the U.S. Ten of the companies are headquartered in Europe, while three are based in Canada, and three in the Caribbean and Latin America.
The corporate family rating (CFR) or senior unsecured ratings of the covered issuers range from A1 to Ca with a concentration in the Ba and B rating categories. The median rating for oilfield services companies is a Ba3. As of the date of publication, approximately 75% of the issuers had stable outlooks, while 15% had negative outlooks and 4% had positive outlooks. The remaining three issuers had a developing outlook, ratings under review for possible upgrade and ratings under review for possible downgrade.
3 December 2009 Rating Methodology Moody’s Global Corporate Finance - Global Oilfield Services Rating Methodology
Rating Methodology Moody’s Global Corporate Finance
Global Oilfield Services Rating Methodology
Exhibit 1: Global Oilfield Services Rating Methodology Universe
Oilfield Services Rated Universe
Company Type Rating* Outlook Country Rated Debt**
Schlumberger Ltd. Services A1 Stable Netherlands $4,542
Baker Hughes Incorporated Services A2 Stable USA $2,650
Halliburton Company Services A2 Stable USA $4,573
Schlumberger Technology Corp. Services A2 Stable Netherlands $649
National Oilwell Varco Inc. Services A3 Stable USA $850
BJ Services Company Services Baa1 RUR - Up USA $899
Cameron International Corporation Services Baa1 Stable USA $1,250
Diamond Offshore Drilling, Inc. Contract Drilling Baa1 Stable USA $1,500
ENSCO International Incorporated Contract Drilling Baa1 Stable USA $150
Nabors Industries, Inc. Contract Drilling Baa1 Stable Bermuda $4,082
Noble Corporation Contract Drilling Baa1 Stable Switzerland $299
Smith International, Inc. Services Baa1 Stable USA $3,182
Weatherford International, Ltd. Services Baa1 Stable Switzerland $7,300
FMC Technologies Services Baa2 Stable USA $1,178
Transocean Inc. Contract Drilling Baa2 Stable Switzerland $10,961
Rowan Companies, Inc. Contract Drilling Baa3 Stable USA $500
Pride International, Inc. Contract Drilling Ba1 Positive USA $1,000
SEACOR Holdings Inc. Offshore Support Ba1 Stable USA $700
Bristow Group Inc. Offshore Support Ba2 Stable USA $674
Compagnie Generale de Geophysique - Veritas Services Ba2 Stable France $1,980
Exterran Holdings, Inc. Services Ba2 Stable USA $1,640
J. Ray McDermott, S.A. Services Ba2 Developing Panama $800
Petroleum Geo-Services ASA Services Ba2 Stable Norway $1,400
Precision Drilling Corporation Contract Drilling Ba2 Stable Canada $899
Complete Production Services, Inc. Services Ba3 Stable USA $650
Dresser-Rand Group, Inc. Services Ba3 Stable USA $870
Gulfmark Offshore, Inc. Offshore Support Ba3 Stable USA $500
Hornbeck Offshore Services, Inc. Offshore Support Ba3 Stable USA $744
Key Energy Services, Inc. Services Ba3 Stable USA $425
SESI, L.L.C. Services Ba3 Stable USA $300
CAToil A.G. Services B1 Stable Austria $0
Calfrac Well Services, Ltd. Services B1 Stable Canada $235
Lupatech S.A. Services B1 RUR - Down Brazil $275
Parker Drilling Company Contract Drilling B1 Stable USA $225
PHI, Inc. Offshore Support B1 Stable USA $200
Basic Energy Services, LP Services B2 Stable USA $675
Dresser, Inc. Services B2 Stable USA $2,011
Geokinetics Holdings, Inc. Services B2 Stable USA $275
Hercules Offshore, Inc. Contract Drilling B2 Negative USA $659
North American Energy Partners, Inc. Services B2 Stable Canada $200
Stewart & Stevenson LLC Services B2 Stable USA $150
Allis-Chalmers Energy, Inc. Services B3 Stable USA $430
4 December 2009 Rating Methodology Moody’s Global Corporate Finance - Global Oilfield Services Rating Methodology
Rating Methodology Moody’s Global Corporate Finance
Global Oilfield Services Rating Methodology
Oilfield Services Rated Universe
Rated Company Type Rating* Outlook Country Debt**
Global Geophysical Services Services B3 Stable USA $235
Turbo Beta Ltd. Contract Drilling B3 Negative UK $1,625
Frontier Drilling ASA Contract Drilling Caa1 Positive Norway $450
Trico Shipping AS Offshore Support Caa1 Stable USA $400
TSI Acquisition, LLC Services Caa1 Negative USA $167
Continental Alloys & Services, Inc. Services Caa2 Negative USA $180
Forbes Energy Services LLC Services Caa2 Negative USA $196
Funding Co. (Varel) Services Caa2 Negative USA $160
Seitel, Inc. Services Caa3 Negative USA $402
Express Energy Services Operating, LP Services Ca Negative USA $300
* For investment grade companies, the senior unsecured rating is listed; for speculative grade companies, the corporate family rating is listed
** As of September 30, 2009 or the latest reported fiscal period prior to that date, in millions of US dollars.
Exhibit 2: Global Oilfield Services Rating Distribution
0
2
4
6
8
10
Aaa-Aa3
A1 A2 A3 Baa1 Baa2 Baa3 Ba1 Ba2 Ba3 B1 B2 B3 Caa-Ca
Num
ber
of Is
suer
s
About this Rating Methodology
This report explains the rating methodology for oilfield services companies in six sections, which are summarized as follows:
1. Identification of Key Rating Factors
The grid in this rating methodology focuses on three key rating factors. The three broad factors are further broken down into 6 sub-factors.
Rating Factor Factor Weighting Relevant Sub-factor
Sub-Factor Weighting
Scale and Business Profile 45% Assets
Business Profile
25%
20%
Profitability and Returns 15% EBIT / Assets (5-year average) 15%
Financial Strength 40% EBIT / Interest (5-year average)
Debt / EBITDA (5-year average)
Debt / Book Capitalization
20%
10%
10%
5 December 2009 Rating Methodology Moody’s Global Corporate Finance - Global Oilfield Services Rating Methodology
Rating Methodology Moody’s Global Corporate Finance
Global Oilfield Services Rating Methodology
2. Measurement of the Key Rating Factors
We explain below how the sub-factors for each factor are calculated and the weighting for each individual sub-factor. We also explain the rationale for using specific rating metrics, and the ways in which we apply them during the rating process. Much of the information used in assessing performance for the sub-factors is found in or calculated using the company’s financial statements; others are derived from observations or estimates by Moody’s analysts.
Moody’s ratings are forward-looking and incorporate our expectations of future financial and operating performance. We use both historical and projected financial results in the rating process. Historical results help us to understand patterns and trends for a company’s performance as well as for peer comparison. While the rating process includes both historical and anticipated results, this document makes use of historical data only to illustrate the application of the rating methodology. Specifically, unless otherwise stated, the mapping examples use reported financials for the five-years ended June 30, 2009. All of the quantitative credit metrics incorporate Moody’s standard adjustments to income statement, cash flow statement and balance sheet amounts for (among others) off-balance sheet accounts, receivable securitization programs, under-funded pension obligations, and recurring operating leases.
3. Mapping Factors to the Rating Categories
After identifying the measurements for each factor, the potential outcomes for each of the 6 sub-factors are mapped to a broad Moody’s rating category. (Aaa, Aa, A, Baa, Ba, B, Caa).
4. Mapping Issuers to the Grid and Discussion of Grid Outliers
In this section (Appendix B) we provide tables showing how 15 representative companies map to grid-indicated ratings for each rating sub-factor and factor. The weighted average of the sub-factor ratings produces a grid-indicated rating for each factor. We highlight companies whose grid-indicated performance on a specific sub-factor is two or more broad rating categories higher or lower than its actual rating and discuss general reasons for such positive outliers and negative outliers for a particular factor or sub-factor.
5. Assumptions and Limitations and Rating Considerations That are not Included in the Grid
This section discusses limitations in the use of the grid to map against actual ratings, additional factors that are not included in the grid that can be important in determining ratings, and limitations and key assumptions that pertain to the overall rating methodology.
6. Determining the Overall Grid-Indicated Rating
To determine the overall rating, we convert each of the 6 sub-factor ratings into a numeric value based upon the scale below.
Aaa Aa A Baa Ba B Caa
1 3 6 9 12 15 18
6 December 2009 Rating Methodology Moody’s Global Corporate Finance - Global Oilfield Services Rating Methodology
Rating Methodology Moody’s Global Corporate Finance
Global Oilfield Services Rating Methodology
The numerical score for each sub-factor is multiplied by the weight for that sub-factor with the results then summed to produce a composite weighted factor score. The composite weighted factor score is then mapped back to an alphanumeric rating based on the ranges in the table below.
Grid-Indicated Rating
Aggregate Weighted Total Factor Score
Aaa X < 1.5
Aa1
Aa2
Aa3
1.5 ≤ x < 2.5
2.5 ≤ x < 3.5
3.5 ≤ x < 4.5
A1
A2
A3
4.5 ≤ x < 5.5
5.5 ≤ x < 6.5
6.5 ≤ x < 7.5
Baa1
Baa2
Baa3
7.5 ≤ x < 8.5
8.5 ≤ x < 9.5
9.5 ≤ x < 10.5
Ba1
Ba2
Ba3
10.5 ≤ x < 11.5
11.5 ≤ x < 12.5
12.5 ≤ x < 13.5
B1
B2
B3
13.5 ≤ x < 14.5
14.5 ≤ x < 15.5
15.5 ≤ x < 16.5
Caa1
Caa2
16.5 ≤ x < 17.5
17.5 ≤ x ≤ 18.0
For example, an issuer with a composite weighted factor score of 11.7 would have a Ba2 grid-indicated rating. We used a similar procedure to derive the grid-indicating ratings in the tables embedded in the discussion of each of the three broad rating factors.
The Key Rating Factors
Moody’s analysis of oilfield services companies focuses on three broad factors:
Scale and business profile
Profitability and returns
Financial strength
Factor 1: Scale and Business Profile (45% weight)
Why It Matters
Scale of Asset Base:
The scale of an oilfield services company's asset base is correlated with the scale of its revenue base, but asset size is the more stable measure. A larger asset base implies a platform for sustainable earnings and cash flows. It also correlates to the diversity of product line/fleet as well as geographic diversity, as discussed below. Finally, a large asset base can have a positive effect on a company's relative market position, its ability to compete in terms of cost structure, and its ability to obtain financing to undertake capital projects.
Business Profile:
The markets for different segments of the industry are not perfectly correlated with one another. In this industry, a more stable business profile is one that can meet multiple needs and is less vulnerable to
7 December 2009 Rating Methodology Moody’s Global Corporate Finance - Global Oilfield Services Rating Methodology
Rating Methodology Moody’s Global Corporate Finance
Global Oilfield Services Rating Methodology
fluctuating industry conditions. This implies a high degree of product line diversity or a well diversified fleet of quality equipment, broad geographic diversity, and a strong market position. We assess an oilfield services company's business profile by looking at the following sub-factors:
Product Line Diversity/Fleet Composition
Product line diversity (applies to services companies) Product line diversity balances and offsets exposure to the volatility of demand and price competition in different industry segments. However, the effectiveness of this strategy has to be analyzed with regard to the correlation of the individual segments. To the extent that a company's offerings are exposed to the same stage in the lifecycle of an oil or natural gas well, the benefits of diversification are less pronounced. Service companies that are diversified effectively will typically exhibit greater revenue consistency and higher operating efficiencies that are normally reflected in higher profit margins.
Fleet composition (applies to contract drillers and offshore support companies) Diversity in fleet composition and the maintenance of a high quality fleet are important because they enable operators to mitigate exposure to industry downturns. High quality drilling rigs and offshore support units (vessels or helicopters) generally continue to operate -- albeit at lower dayrates -- during industry downturns, whereas lower quality commodity units might be taken out of service. For companies operating offshore, a fleet diversified by type also is important because there tends to be variation in the demand trends for deepwater, mid-water, and shallow water equipment.
Geographic Diversity
Geographic diversity reduces vulnerability to changes in drilling activity across regions. Activity can vary based on the nature of evolving plays and the economic viability of those plays. Geographic diversity also reduces the potential impact of regional regulatory and environmental concerns. Outside of the North American markets, diversity can also reduce volatility due to a more stable demand from producers in those markets.
Market Position
A strong competitive position is important relative to the measures of diversity above. For example, if a company is diversified geographically but has a tiny market position in each of its core markets, its business profile may not be particularly strong. Similarly, offering too many products and services with a small market position in each may be an indication of a lack of focus (the "mile wide, inch deep" issue). This is particularly the case for smaller oilfield services companies. A larger market share typically indicates technological leadership, which is important in emerging plays and commands premium pricing.
How We Measure it for the Grid
Scale of Asset Base:
The unit of measurement is the most recent figure for total assets. Total assets is used as a broad measure of size and scale, and one that is relatively stable over time absent major expansions, acquisitions or an impairment writedown. For companies with significant working capital assets relative to total assets, we may adjust total assets to take into account expected changes in working capital due to fluctuating industry conditions. Also, for companies with significant intangible assets such as goodwill, we consider the relative subjectivity of those values and their susceptibility to impairment and may adjust total assets accordingly.
Business Profile:
Our assessment of business profile takes into account three qualitative sub-factors (see tables below). The three sub-factors are given equal weight and are combined into a single score which corresponds to our ratings scale as was illustrated on page 6. This approach simplifies the presentation of the ratings grid and combines the criteria in a meaningful way. We use different criteria for services companies than we do for contract drillers and offshore support companies. This reflects the nature of operations and asset intensity for services companies which are significantly different than from the latter two types.
8 December 2009 Rating Methodology Moody’s Global Corporate Finance - Global Oilfield Services Rating Methodology
Rating Methodology Moody’s Global Corporate Finance
Global Oilfield Services Rating Methodology
Business Profile - Services Companies
1 - 4 5 - 10 11 - 16 17 - 18
Product Line Diversity (33%) More than five product lines, well balanced across at least two major industry segments
More than three product lines, well balanced across at least two major industry segments
More than one product line, but heavily reliant on one major industry segment
Has only a single product line
Geographic Diversity (33%) Activities correspond to the distribution of worldwide drilling activity with a presence in all major producing regions
Positioned in at least three major markets internationally with presence in those markets well proportioned relative to the distribution of worldwide drilling activity
Positioned in at least two major producing regions or, if all business is in North America, at least three significant producing areas
Focused in a single major market internationally or, if all business is in North America, positioned in less than three significant producing areas
Market Position (33%) Among the top three players in at least three of its product lines
Among the top five players in at least three of its product lines
Among the top five players in two of its product lines
Regional or niche player
Business Profile - Contract Drillers and Offshore Support Companies
1 - 4 5 - 10 11 - 16 17 - 18
Fleet Composition (33%) Sizable fleet comprised entirely of high specification rigs or offshore support units
Industry leading, high quality fleet of rigs or offshore support units, well diversified by type
High quality fleet of rigs or offshore support units, but concentrated in one or two major types
Lower quality fleet of rigs or offshore support units, concentrated in one or two major types
Geographic Diversity (33%)*
Activities correspond to the distribution of worldwide drilling activity with a presence in all major offshore markets
Positioned in at least three major offshore markets with presence in those markets well proportioned relative to the distribution of worldwide drilling activity
Positioned in at least two major offshore markets
Focused in a single offshore market
Market Position (33%) Among the top three players in the industry globally
Among the top five players in the industry globally
Among the top five players in at least two major offshore markets
Regional or niche player
* Geographic Diversity for land drillers is evaluated using the criteria for services companies
To illustrate, assume that a services company is scored as a 9 on product line diversity, an 18 on geographic diversity, and a 12 on market position. This would result in a weighted average score of 13 ([9+18+12]/3=13), which maps to an indicated rating of "Ba3" for business profile.
In the application of the rating methodology, the numbers above the sub-factor descriptions represent points along a continuous range, with a lower number corresponding to higher credit quality, consistent with our ratings scale on page 6. Therefore more product line and geographic diversity, stronger market position or higher fleet quality corresponds to lower scores. We assign a specific score based on our assessment of the individual issuers. For example, if two offshore drillers have rig fleets that fall broadly within the description under “5 - 10”, but we believe that one company’s fleet quality is superior to the other company; we could use a 7 for fleet composition for the company with the higher quality fleet and a 10 for the other.
9 December 2009 Rating Methodology Moody’s Global Corporate Finance - Global Oilfield Services Rating Methodology
Rating Methodology Moody’s Global Corporate Finance
Global Oilfield Services Rating Methodology
Factor 1 Mapping: Scale and Business Profile Aaa Aa A Baa Ba B Caa
Assets >$25 Billion $12 - $25 billion $8 - $12 billion $4 - $8 billion $2 - $4 billion $0.5 - $2 billion <$0.5 billion
Business Profile <1.5 1.5 - 4.5 4.5 - 7.5 7.5 - 10.5 10.5 - 13.5 13.5 - 16.5 >16.5
A chart that illustrates grid mapping results for Factor 1 and a discussion of outliers is included in Appendix C.
Notes on Measurement Criteria for Business Profile
Product Line Diversity or Fleet Composition
For services companies, we evaluate the company's portfolio of products and services. Higher credit quality results from the company having different product lines across at least two major industry segments (see table below). These major industry segments correspond roughly to the stages in the life of an oil or natural gas well. In order to provide a meaningful level of diversification and thus be considered for purposes of our evaluation, participation in a major industry segment needs to be material to a company's operations (e.g., it should comprise at least 20% of operating income). Companies disclose segment information in the notes to the financial statements, which serves as a starting point for our evaluation. To the extent that a company combines two or more operating segments into a single reporting segment because they determine that the operating segments have similar economic characteristics, we will likely view them in a similar manner for purposes of evaluating diversification. Product line information is available from company disclosures or industry sources. Similar to our approach for evaluating a company's participation in a major industry segment, a product line needs to be material to a company's operations in order to be considered in our evaluation.
Product Lines By Major Industry Segment - Services Companies
Exploration (Seismic)* Drilling & Completion Production Capital Equipment & Other
Marine Acquisition Drill Bits Artificial Lift Rig Equipment Manufacturing
Land & Transition Zone Acquisition Drilling Fluids Well Servicing Unit Manufacturing
Multi-Client Seismic Library Pressure Pumping Production Chemicals Subsea Equipment
Data Processing & Equipment Sales Solids Control Contract Gas Compression Offshore Construction
FEWD / Directional Drilling Casing / Tubing Services Upstream Oilfield Supply
Wireline & Testing Other
Oil Country Tubular Goods
Drilling & Completion Products
Fishing / Rental Tools
* The different product lines for the seismic industry segment are considered a single product line for purposes of evaluating product line diversity.
For contract drillers and offshore support companies, we look at fleet composition and capability. A lower quality fleet would be one comprised of older equipment and capable of operating only in shallower water depths (e.g., less than 300'). Some mid-water semisubmersibles that are second or third generation also might be considered lower quality for purposes of evaluating fleet composition. On the other end of the spectrum, a fleet comprised of high-end equipment that commands premium pricing will generate a more favorable score. High-end equipment includes offshore equipment capable of operating in deep water and/or harsh environments with the latest technology.
Several companies in the industry undertake both services and contract drilling or offshore support activities. Still other companies participate in other, non-oilfield services businesses, such as E&P. In these cases, we assess the degree of diversification using the same concepts as articulated herein depending on how well the portfolio of businesses can be expected to perform under changing industry conditions. For companies with
10 December 2009 Rating Methodology Moody’s Global Corporate Finance - Global Oilfield Services Rating Methodology
Rating Methodology Moody’s Global Corporate Finance
Global Oilfield Services Rating Methodology
significant E&P operations, that portion of the business may be evaluated separately using our E&P rating methodology.
Geographic Diversity
To measure geographic diversity, we identify the major markets to which a company delivers products or provides services. For services companies, this can refer either to a physical presence or to the actual destination of its products. For contract drillers and offshore support companies, geographic diversity addresses the location of its fleet.
Rig counts provide a point of reference for assessing geographic diversity. To the extent that a company's activities correspond proportionally to the rig count, it is deemed to be highly diversified geographically. Services companies are evaluated relative to the rig counts for both land and offshore markets whereas offshore contract drillers and offshore support companies are evaluated relative to the rig counts for offshore markets. For a services company doing business only in North America, it would need to deliver its products or provide services to at least three significant producing areas within North America in order to score in the "11 - 16" category for geographic diversity. Significant producing areas in North America include the Gulf Coast, Gulf of Mexico, Ft. Worth Basin/East Texas, Permian Basin, Mid-continent, Rocky Mountains, California, Appalachian Basin, and Western Canada.
The assessment of geographic diversity assumes that a company's customer base is well diversified within each applicable area. If a company's customer base is concentrated, particularly in higher risk locations, we may assign a less favorable score.
Market Position
Our determination of overall competitive position is based on an assessment of a company's market position as measured by market share. If a company is only a niche player, we assign a score of "17 - 18" for this factor. A top player in multiple product lines and industry segments might score in the "1 - 4" category. If a company has few product lines, but is the dominant provider in a particular product line, a better score might be warranted.
Factor 2: Profitability and Returns (15% weight)
Why It Matters
The returns a company generates on its investments, including acquired businesses, are critical to credit strength. Inherent in this definition is how profitably and efficiently a company is utilizing its assets. For example, if a company overpays for acquired assets, its returns will suffer unless offset by unexpected acquisition synergies. An oilfield services company's ability to generate returns across periods of cyclically strong and weak industry conditions is also critical to its credit strength.
How We Measure it for the Grid
A multiyear average of EBIT/Assets provides a meaningful measure against which to assess profitability and returns. For contract drillers and offshore support companies, EBIT is particularly meaningful to the extent that depreciation reflects the costs associated with maintaining a fleet. Given the high cyclicality of oilfield services demand and profitability, we use five-year averages for illustrative mapping purposes.
Factor 2 Mapping: Profitability and Returns Aaa Aa A Baa Ba B Caa
EBIT / Assets (5-year average) >22% 15% - 22% 11% - 15% 8% - 11% 5% - 8% 2% - 5% <2%
A chart that illustrates grid mapping results for Factor 2 and a discussion of outliers is included in Appendix C.
11 December 2009 Rating Methodology Moody’s Global Corporate Finance - Global Oilfield Services Rating Methodology
Rating Methodology Moody’s Global Corporate Finance
Global Oilfield Services Rating Methodology
Factor 3: Financial Strength (40% weight)
Why It Matters
Financial strength is important in that it provides an indication as to how well a company might cope with an industry downturn and its ability to maintain or strengthen its competitive position during such times. A company's financial strength is a function of both its financial performance and its financial policies, including its philosophy about capital structure and the degree of financial risk under which it is willing to operate.
How We Measure it for the Grid
To assess financial strength, we look at interest coverage (EBIT/Interest) and two leverage ratios (Debt/EBITDA and Debt/Book Capitalization). Given the high cyclicality of oilfield services demand and profitability, a multiyear average of interest coverage and Debt/EBITDA is a more meaningful measure of a company’s strength. Oilfield services companies with long operating histories tend to strengthen their interest coverage and lower their leverage ratios during sector upcycles in order to have the flexibility to weather downturns and pursue opportunistic acquisitions when asset and corporate valuations are depressed.
Interest coverage can be particularly meaningful for speculative grade companies. This is especially true if the interest rate environment is in a period of change -- such as the migration from lower interest rates to higher interest rates -- and an issuer is facing the need to refinance debt that is nearing maturity.
Leverage ratios demonstrate the overall level of debt employed in the capital structure as well as the level by which debt corresponds to the cash flow generation capability of the company.
Debt/Book Capitalization is not a dynamic measure, but it is a simple way to compare the capital structures of companies operating within an industry and is less volatile than most other credit metrics because it is tied to the balance sheet. It also provides some insight into a company's financial policies, including its tolerance for debt levels and how it has historically funded organic growth and acquisitions.
Debt/EBITDA is a measure of a company's ability to cover debt with a proxy level of cash flow, as indicated by EBITDA. For seismic companies that have a multi-client seismic data library, we use EBITDA less multi-client capex for purposes of computing this ratio.
Factor 3 Mapping: Financial Strength Aaa Aa A Baa Ba B Caa
EBIT / Interest (5-year average) >16x 10x - 16x 7.5x - 10x 5x - 7.5x 2.5x - 5x 1.5x - 2.5x <1.5x
Debt / EBITDA (5-year average) <0.25x 0.25x - 1x 1x - 2x 2x - 3x 3x - 4x 4x - 6x >6x
Debt / Book Capitalization <5% 5% - 15% 15% - 25% 25% - 35% 35% - 55% 55% - 70% >70%
A chart that illustrates grid mapping results for Factor 2 and a discussion of outliers is included in Appendix C.
Assumptions and Limitations and Rating Considerations that are not Covered in the Grid
The rating methodology grid incorporates a trade-off between simplicity that enhances transparency and greater complexity that would enable the grid to map more closely to actual ratings. The three rating factors in the grid do not constitute an exhaustive treatment of all of the considerations that are important for ratings of global oilfield services companies.
In choosing metrics for this rating methodology grid, we did not include certain important factors that are common to all companies in any industry, such as the quality and experience of management, assessments of corporate governance and the quality of financial reporting and information disclosure. The assessment of these factors can be highly subjective and ranking them by rating category in a grid would, in some cases,
12 December 2009 Rating Methodology Moody’s Global Corporate Finance - Global Oilfield Services Rating Methodology
Rating Methodology Moody’s Global Corporate Finance
Global Oilfield Services Rating Methodology
suggest too much precision in the relative ranking of particular issuers against all other issuers that are rated in various industry sectors.
Ratings may include additional factors that are difficult to quantify or that only have a meaningful effect in differentiating credit quality in some cases. Such factors include regulatory and litigation risk as well as management’s propensity to grow through acquisition or engage in shareholder friendly activities such as stock repurchases and special dividends. While these are important considerations, it is not possible to precisely express these in the rating methodology grid without making the grid excessively complex and less transparent.
Ratings may also reflect circumstances in which the weighting of a particular factor will be different from the weighting suggested by the grid. For example, a company may have reported assets that map to a higher rating level but if a high proportion of that asset base is goodwill from recent acquisitions we may place a lower weighting on that factor due to the inherent uncertainty that acquisitions will perform as expected and realize their initial valuations. This variation in weighting as a rating consideration can also apply to factors that we chose not to attempt to represent in the grid. For example, liquidity is a rating consideration that can sometimes be critical to ratings and under other circumstances may not have a substantial impact in discriminating between two issuers with a similar credit profile. Ratings can be heavily affected by extremely weak liquidity that magnifies default risk. However, two identical companies might be rated the same if their only differentiating feature is that one has a good liquidity position while the other has an extremely good liquidity position. This illustrates some of the limitations for using grid-indicated ratings to predict rating outcomes.
In addition, our ratings incorporate expectations for future performance, while the financial information that is used to illustrate the mapping in the grid is historical. In some cases, our expectations for future performance may be informed by confidential information that we cannot publish. In other cases, we estimate future results based upon past performance, industry trends, demand and price outlook, competitor actions and other factors. In either case, predicting the future is subject to the risk of substantial inaccuracy. Assumptions that can cause our forward looking expectations to be incorrect include unanticipated changes in any of the following: the macroeconomic environment and general financial market conditions, industry competition, new technology, regulatory actions, global and regional trends in supply and demand for oil and natural gas and ensuing volatility in commodity prices.
Conclusion: Summary of the Grid-Indicated Rating Outcomes
The methodology grid-indicated ratings based on last twelve month financial data as of the quarter end closest to June 30, 2009 map to current assigned ratings for a representative group of 15 services, contract drillers and offshore support companies as follows (see Appendix B for the details):
1 company maps to their assigned rating
10 companies have a grid-indicated rating that is two alpha-numeric notches from their assigned rating
4 companies have a grid-indicated rating that is three or four notches from their assigned rating
Overall, the framework indicates that most companies’ grid-indicated rating is above their actual rating (14). This can be primarily attributed to a variety of factors including: (a) our expectations of much weaker earnings and cash flows in 2009 and 2010 due to the rapid decline in demand for oilfield services, which will lower the returns and financial strength metrics to levels more in line with current ratings; (b) grid metrics do not capture Moody’s expectation of higher leverage associated with opportunistic corporate and acquisition activity during this current cyclical downturn; and (c) liquidity concerns that are not fully captured by the grid.
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Appendix A: Global Oilfield Services Industry Methodology Factor Grid
Weights Aaa Aa A Baa Ba B Caa
Factor 1: Scale and Business Profile
Assets 25.0% >$25 Billion $12 - $25 billion $8 - $12 billion $4 - $8 billion $2 - $4 billion $0.5 - $2 billion <$0.5 billion
Business Profile 20.0% <1.5 1.5 - 4.5 4.5 - 7.5 7.5 - 10.5 10.5 - 13.5 13.5 - 16.5 >16.5
Factor 2: Profitability and Returns
EBIT / Assets (5-year average) 15.0% >22% 15% - 22% 11% - 15% 8% - 11% 5% - 8% 2% - 5% <2%
Factor 3: Financial Strength
EBIT / Interest (5-year average) 20.0% >16x 10x - 16x 7.5x - 10x 5x - 7.5x 2.5x - 5x 1.5x - 2.5x <1.5x
Debt / EBITDA (5-year average) 10.0% <0.25x 0.25x - 1x 1x - 2x 2x - 3x 3x - 4x 4x - 6x >6x
Debt / Book Capitalization 10.0% <5% 5% - 15% 15% - 25% 25% - 35% 35% - 55% 55% - 70% >70%
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Appendix B: Methodology Grid-Indicated Ratings
Factor 1 - Scale and Business Profile
Factor 2 - Profitability and Returns Factor 3 - Financial Strength
Senior Unsecured or Corporate Family Rating
Grid-Indicated Rating
Assets Business Profile
EBIT / Assets (5-yr average)
EBIT / Interest (5-yr average)
Debt / EBITDA (5-yr average)
Debt / Book Capitalization
Issuer (Factors 1 to 3) 25% 20% 15% 20% 10% 10%
Schlumberger Ltd. A1 Aa3 Aaa Aa Aa A A Ba
Baker Hughes Inc. A2 Aa3 Aa Aa Aa Aa Aa Baa
Halliburton Company A2 A1 Aa Aa Aa A A Ba
National Oilwell Varco Inc. A3 Aa2 Aa Aa A Aaa Aa Aa
Nabors Industries, Inc. Baa1 A3 A Baa A Aa Baa Ba
Noble Corporation Baa1 A1 Baa A Aa Aaa Aa Aa
Weatherford International, Ltd. Baa1 A3 Aa A Baa Baa Baa Ba
Transocean, Inc. Baa2 A1 Aaa Aa A A Baa Ba
Compagnie Generale de Geophysique – Veritas Ba2 Baa3 Baa Baa Baa Ba Baa Ba
Exterran Holdings, Inc. Ba2 Ba2 Baa Baa Ba B Ba B
Dresser-Rand Group, Inc. Ba3 Ba1 Ba Ba Baa Ba Baa Ba
Hornbeck Offshore Services, Inc. Ba3 Ba2 B Ba Baa Ba Ba Ba
Parker Drilling Company B1 Ba2 B B A Ba Baa Ba
Basic Energy Services, Inc. B2 Ba2 B Ba A Ba Baa Ba
Dresser Inc. B2 Ba3 Ba Baa Baa B Caa Caa
Data as of June 30, 2009
Ratings at December 2009
Positive Outliers – grid-indicated outcome on a specific sub-factor is at least two broad rating categories higher than the actual rating assigned.
Negative Outliers – grid indicated outcome on a specific sub-factor is at least two bread rating categories lower than the actual rating assigned.
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Appendix C: Observations and Outliers for Grid Mapping
Factor 1: Scale and Business Profile (45%)
Issuer
Senior Unsecured or Corporate Family Rating
Assets 25%
Business Profile
20%
Schlumberger Ltd. A1 Aaa Aa
Baker Hughes Inc. A2 Aa Aa
Halliburton Company A2 Aa Aa
National Oilwell Varco Inc. A3 Aa Aa
Nabors Industries, Inc. Baa1 A Baa
Noble Corporation Baa1 Baa A
Weatherford International, Ltd. Baa1 Aa A
Transocean, Inc. Baa2 Aaa Aa
Compagnie Generale de Geophysique - Veritas Ba2 Baa Baa
Exterran Holdings, Inc. Ba2 Baa Baa
Dresser-Rand Group, Inc. Ba3 Ba Ba
Hornbeck Offshore Services, Inc. Ba3 B Ba
Parker Drilling Company B1 B B
Basic Energy Services, Inc. B2 B Ba
Dresser Inc. B2 Ba Baa
Data as of June 30, 2009 Ratings at December 2009
Green: Positive Outliers - grid-indicated outcome on a specific sub-factor is at least two broad rating categories higher than the actual rating assigned.
Factor 1 – Observations and Outliers
The mapped ratings for the size and business profile correlate well with the credit ratings of the oilfield services peer group. Schlumberger and Transocean are the largest services and contract drilling companies in the world, with much larger asset bases than their nearest competitors. Weatherford has grown rapidly both organically and through acquisitions in recent years achieving asset scale significantly greater than its assigned rating. Transocean’s ratings are restrained by its more aggressive financial policies relative to peers while Weatherford’s rating reflects the risks inherent to its aggressive growth strategy and higher leverage metrics than most similarly rated peers entering the current downcycle.
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Factor 2: Profitability and Returns (15%)
Issuer
Senior Unsecured or Corporate Family
Rating
EBIT / Assets (5-yr average)
15%
Schlumberger Ltd. A1 Aa
Baker Hughes Inc. A2 Aa
Halliburton Company A2 Aa
National Oilwell Varco Inc. A3 A
Nabors Industries, Ltd. Baa1 A
Noble Corporation Baa1 Aa
Weatherford International, Ltd. Baa1 Baa
Transocean, Inc. Baa2 A
Compagnie Generale de Geophysique - Veritas Ba2 Baa
Exterran Holdings, Inc. Ba2 Ba
Dresser-Rand Group, Inc. Ba3 Baa
Hornbeck Offshore Services, Inc. Ba3 Baa
Parker Drilling Company B1 A
Basic Energy Services, Inc. B2 A
Dresser Inc. B2 Baa
Data as of June 30, 2009 Ratings at December 2009
Green: Positive Outliers - grid-indicated outcome on a specific sub-factor is at least two broad rating categories higher than the actual rating assigned.
Factor 2 – Observations and Outliers
Nearly all of the representative companies have returns that map above their ratings, with three lower-rated companies generating very high returns on assets during the period. Most of the five-year historical period through June 30, 2009 was a period of increasing demand for oilfield services that outpaced the industry’s supply of equipment and personnel. This was the longest and strongest upcycle for the sector since the early 1980’s, resulting in strong pricing power and profitability from 2005 through 2008, even for the smaller competitors in the industry. Our ratings are forward looking and incorporated the expectation of periods of weaker demand and profitability. We expect the current cyclical downturn in oilfield services demand to extend for all of 2009 and 2010, generating much lower returns that offset some of the outsized returns of 2005 through 2008.
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Factor 3: Financial Strength (40%)
Issuer
Senior Unsecured or Corporate Family
Rating
EBIT / Interest
(5-yr average)
20%
Debt / EBITDA (5-yr
average)
10%
Debt / Book Capitalization
10%
Schlumberger Ltd. A1 A A Ba
Baker Hughes Inc. A2 Aa Aa Baa
Halliburton Company A2 A A Ba
National Oilwell Varco Inc. A3 Aaa Aa Aa
Nabors Industries, Ltd. Baa1 Aa Baa Ba
Noble Corporation Baa1 Aaa Aa Aa
Weatherford International, Ltd. Baa1 Baa Baa Ba
Transocean, Inc. Baa2 A Baa Ba
Compagnie Generale de Geophysique - Veritas Ba2 Ba Baa Ba
Exterran Holdings, Inc. Ba2 B Ba B
Dresser-Rand Group, Inc. Ba3 Ba Baa Ba
Hornbeck Offshore Services, Inc. Ba3 Ba Ba Ba
Parker Drilling Company B1 Ba Baa Ba
Basic Energy Services, Inc. B2 Ba Baa Ba
Dresser Inc. B2 B Caa Caa
Data as of June 30, 2009
Ratings at December 2009
Green: Positive Outliers - grid-indicated outcome on a specific sub-factor is at least two broad rating categories higher than the actual rating assigned.
Red: Negative Outliers - grid indicated outcome on a specific sub-factor is at least two bread rating categories lower than the actual rating assigned.
Factor 3 – Observations and Outliers
As discussed in factor 2 above, the strong earnings and cash flows during the five-year period ended June 30, 2009 allowed most peer companies to report EBIT/Interest and Debt/EBITDA metrics that were stronger than their assigned ratings. Debt/Book Capitalization is a more stable metric that measures how companies have funded their asset base over time and reflects their financial policies through that date. This metric has fewer outliers compared to the assigned ratings. Noble continues to follow very conservative financial policies and used the current upcycle to invest in its fleet while reducing leverage. Schlumberger and Halliburton’s relatively high Debt/Book Capitalization metric for their ratings reflects to an extent the impact of past charges related to various asset writedowns and the asbestos settlement (the latter for Halliburton), as well as active share repurchase programs during recent flush cash flow periods. The metric is offset by their industry leading scale and business profiles, illustrating the counterbalancing effects of size and leverage on ratings, and by large cash balances that are not offset against their debt or incorporated into this leverage metric. In addition, their interest coverage and leverage ratios are more consistent with their ratings and peer group.
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Appendix D: Oilfield Services Industry Overview
The key issues for the Oilfield Services industry can be summarized as follows:
The Oilfield Services sector is highly cyclical
Revenues and earnings are extremely volatile for oilfield services companies. As witnessed in the downturn that began during the fourth quarter of 2008, demand for drilling rigs and other services can decline abruptly. Total EBITDA for all rated oilfield services companies declined by approximately 30% from the fourth quarter 2008 to the second quarter 2009. For companies focused onshore North America, the declines were much steeper, with some in the 50 to 70% range over the same period. This downturn followed a historically long and strong period of increasing demand for oilfield services from 2004 through 2008.
Demand for oilfield services is driven by the capital spending patterns of oil and natural gas producers. This, in turn, is based on producers' expectations of future oil and natural gas prices, price volatility, and the availability and risks associated with exploring for and developing oil and natural gas reserves. The prices of oil and natural gas are inherently cyclical and susceptible to periods of heightened volatility. Over the last three years oil prices (West Texas Intermediate) have fluctuated from a low of $50.48 per barrel (January 2007) to a high of $145.18 (July 2008), followed by a decline to $31.41 (December 2008) before beginning a fairly steady upward climb to the $70 to $80 range. In the same period, natural gas prices (Henry Hub) started 2007 at $5.40 per MMBtu, reached a high of $13.31 (July 2008) and then bottomed at $1.88 (September 2009) before returning to the $4 to $5 range.
While producers do not alter their capital expenditures in response to short-term fluctuations in commodity prices, they do react to what they perceive to be as medium to long-term changes in prices based on their own view of fundamental supply and demand trends for oil and natural gas. Global demand for oil and natural gas is correlated with economic growth. The global supply of oil is dependent on a number of factors, primarily the availability, economic viability, and quality of prospect areas. The supply of natural gas is affected by similar factors but natural gas markets are regional in nature. Over the longer term natural gas markets are expected to become less regional as LNG increases in significance.
The supply and demand dynamics of natural gas currently have a greater impact on rated oilfield services companies because North America remains, by far, the largest oilfield services market in the world and the substantial majority of wells drilled in North America are for natural gas. In addition, an increasing share of natural gas produced in North America comes from unconventional sources (shale and tight gas sands) which are more services-intensive than conventional sources due to the complex nature of these plays. Because natural gas from unconventional sources is more costly to develop, spending to find and develop natural gas is more sensitive to commodity prices than is the case for oil.
The sector is prone to periods of surplus capacity, which can prolong earnings weakness
Industry capacity in oilfield services is not a limited resource like oil or natural gas. Companies can add drilling rigs, other equipment and employees to respond to demand from producers. While adding capacity takes years, most of the added equipment has very long lives and leads to prolonged declines in pricing when demand weakens. After finally working through the huge build-up in capacity during the early 1980’s, the oilfield services sector experienced strong pricing power and profitability from 2005 through 2008. This period of high returns attracted capital investment to the sector that resulted in increased capacity. The recent downturn in demand has returned pricing power to the producers and it will take an extended period of increased activity and/or industry consolidation to enable price increases over the next few years.
Diversification across different types of products and services helps mitigate cyclicality
The demand for products and services related to exploration, drilling and completion, production, and oilfield services equipment are correlated with one another roughly, but not perfectly. As a result, companies that offer a diversified mix of products and services can be expected to generate more stable results than companies
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concentrated in just one or two products or services. A similar concept applies to contract drillers and offshore support companies in that maintaining a high quality and diversified fleet reduces exposure to changes in demand for certain types of equipment.
International exposure also mitigates cyclicality but increases political risk
Markets outside of North America tend to be more oil focused and often are led by the major international oil companies (IOC) or the national oil companies (NOC). The IOCs make their capital investment decisions based on their long-term view of commodity prices and their need to sequence large multi-year projects to maintain or modestly grow their production. NOCs have similar considerations but are even more production volume focused due to the significant role these companies play in their home country economies, including the funding of economic development and social programs. Consequently, both IOCs and NOCs capital spending is less sensitive to short-term fluctuations in oil and natural gas prices.
In recent years, NOCs have increasingly utilized the large oilfield services companies to provide the technology and project management expertise that they used to rely on the IOCs to provide. While this has provided increased revenue opportunities for oilfield services companies, it has come with increased political risk that accompanies developing nations. This risk was manifested in Venezuela’s decision to expropriate drilling rigs and other oilfield services equipment in early 2009.
The industry is competitive and subject to rapid technological change
The leading oilfield services companies must innovate constantly due to the risk that their products and services will become obsolete or commoditized. This is increasingly the case as oil and natural gas reservoirs around the world mature, creating a need for advanced drilling and completion solutions and production enhancement. The shift to unconventional plays, particularly in North America, also creates demand for a higher degree of technological expertise. As a result, many oilfield services companies, especially those that compete in markets for premium products and services, have become technology focused companies. In order to guard against falling behind technologically, these companies have to make substantial research and development expenditures through the industry cycles. At the other end of the spectrum, oilfield services companies that provide commoditized products and services also are exposed to competitive pressures because of low barriers to entry and the arrival of low-cost equipment from manufacturers in developing countries, particularly China.
Most companies are capital intensive
Contract drillers and offshore support companies are capital intensive. The cost of drilling rigs (particularly offshore drilling rigs) and offshore support vessels is substantial. The capital requirements for maintaining a fleet also can be high. As a result, contract drilling and offshore support companies often show negative free cash flow during periods of new construction or major fleet enhancement. Apart from periods of new construction or major enhancements, these companies do have some flexibility to defer capital spending (to the extent not required by commitments) in the event of a prolonged industry downturn. Services companies generally require less capital spending, but often have significant working capital requirements. As a result, services companies often show reduced or negative free cash flow during periods of growth, attributable to increased working capital requirements. During industry downturns, working capital for these companies decreases, temporarily supporting cash flow.
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Appendix E: Key Rating Issues over the Intermediate Term
Duration of Excess Capacity in Onshore North America
The high returns of 2005 to 2008 attracted capital investments in the oilfield services industry resulting in increased capacity of drilling rigs, pressure pumping equipment, well servicing rigs and other assets utilized in the drilling and completion of wells. After the significant downturn in demand for this equipment, E&P company activity has started increasing but we expect the growth to be restrained by weak natural gas prices. While we do not believe the current oversupply situation is comparable to the mid 1980’s, there is inherent uncertainty as to the pace of recovery and ultimate return of pricing power to the oilfield services industry. There is also the potential that the present oversupply of natural gas in North America is structural, which could result in another decline in drilling activity if the E&P industry must reduce production to rebalance the market and achieve prices that result in adequate cash margins and return on capital investment.
Deepwater Markets Provide Strong Backlogs for Offshore Drillers
Deepwater exploration and development activity has been remarkably resilient through this industry downturn. Oil prices recovered fairly rapidly during 2009 and currently are at levels supportive of continued investment by producers. Deepwater basins provide some of the few remaining opportunities for significant oil reserve and production replacement outside of the control of NOCs. While deepwater rates have softened somewhat, they remain at historically high levels and do not appear to be at risk for significant declines with oil prices in the $70 to $80 range.
This has allowed the offshore drillers with deepwater fleets to use their backlogs to maintain strong earnings while being more disciplined in taking surplus mid-water and shallow water rigs out of the market. This has allowed the sector to avoid the precipitous declines in dayrates for older generation floating and jackup rigs in international markets. The jackup segment may continue to be under pressure due to the significant number of newbuild jackup rigs scheduled for delivery in coming years.
With deepwater rigs requiring such large capital investments and construction lead time, it has become increasingly difficult for this asset class to move into an oversupply situation. Therefore offshore drillers may be able to maintain the ability to contract their deepwater fleet under multi-year contracts and continue to reduce their earnings and cash flow volatility. Despite somewhat softer market conditions, the sector’s backlog has held up well and provides more visibility and durability through the cycle than in past downturns.
Ongoing Focus on Technology Development
Advances in technology are critical to producers who are continually challenged by the need to be more efficient in finding, developing, and producing reserves in mature basins. The continuing challenge to replace production requires more complex drilling technologies and techniques to efficiently access unconventional resources. Steep decline curves, lower reserves per well, and increased costs place a premium on efficiency.
This continuing need to improve efficiency increases producers' dependence on the technology provided by oilfield services companies. Historically, the development of new oilfield technologies was spearheaded by producers (traditionally the majors). However, this has shifted to services companies over the course of the past decade. Services companies are in an ideal position to develop most new oilfield technologies, because of their expertise and their ability to leverage new technology by marketing it to a large number of customers.
Industry Consolidation and Related Event Risk
Excess capacity of rigs and equipment, particularly in North America, and more accessible capital markets will drive further consolidation in the industry. The industry’s largest players will seize opportunities to increase their service line diversification (Baker Hughes’ proposed acquisition of BJ Services), obtain additional exposure to international markets (Weatherford’s acquisition of TNK-BP’s oilfield services business in Russia), and expand product offerings and manufacturing capacity (Cameron International’s acquisition of NATCO). Smaller consolidators focused on North America, such as Complete Production Services, Key Energy
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Services and Basic Energy Services, may also pursue opportunities to increase their scale and reduce excess capacity through M&A. Both the strategic rationale for the acquisitions and how they are funded will drive whether these enhance or diminish the credit profiles of the participants.
Potential Regulatory Changes Bring Uncertainty
Various government legislative and regulatory initiatives related to carbon emissions, taxation, onshore and offshore permitting, and industry practices like hydraulic fracturing raise significant uncertainties for oil and gas producers. To the extent that producer costs are increased, access to prospective acreage is limited, or certain drilling and completion techniques are limited, this could adversely affect demand and profitability of oilfield services companies.
Moody’s Related Research
Industry Outlook
Oilfield Services and Drilling, June 2009 (117751)
To access any of these reports, click on the entry above. Note that these references are current as of the date of publication of this report and that more recent reports may be available. All research may not be available to all clients.
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Analyst contacts (continued from front page):
London 44.20.7772.5454 Moscow 7.495.228.60.60
Paul Marty Victoria Maisuradze
Vice President - Senior Analyst Vice President - Senior Analyst
Toronto 1.416.214.1635 Sao Paulo 55.11.3043.7300
Terry Marshall Richard Sippli
Vice President - Senior Credit Officer Vice President - Senior Analyst
Darren Kirk
Vice President - Senior Analyst
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Report Number: 121846
Author Production Specialist
Peter Speer Cassina Brooks