Fitch Ratings has downgraded Nabors Industries, Inc.'s ratings as follows:
--Issuer Default Rating (IDR) to 'BBB' from 'BBB+';
--Senior unsecured notes to 'BBB' from 'BBB+';
--Senior unsecured credit facilities to 'BBB' from 'BBB+'.
Fitch has also downgraded the following rating of Nabors Industries, Ltd. (the parent company of Nabors Industries, Inc.):
--IDR to 'BBB' from 'BBB+'.
The Rating Outlook has been revised to Stable from Negative. Approximately $4.6 billion in total debt is affected.
The downgrade reflects leverage levels that have remained above 2.0x (Fitch's targeted maximum for a return to 'BBB+', Stable Outlook last year), continued high levels of capital expenditures, lower overall levels of liquidity, and recent weakness in the pressure pumping market and North American onshore rig count. Recent EBITDA growth has resulted in modest deleveraging to 2.25x (total debt to last 12 months EBITDA) at June 30, 2012 and the company has highlighted enhancing balance sheet flexibility as a priority both through asset sales and capex reductions, but the amount, execution and timing of these improvements is still uncertain.
Total liquidity at June 30, 2012 was $945 million, which included $490 million in availability under revolving credit facilities ($1.4 billion in total commitments, due in 2014), $320 million in cash and cash equivalents and $135 million in short-term investments, and will be lower following the retirement of the $275 million unsecured notes maturing Aug. 15, 2012. Following the 2012 maturity, Nabors has no note maturities until $975 million comes due in 2018. While Fitch does not expect Nabors to have to issue additional debt, as cash flow from operations should fund cash needs if the company can reduce capex in line with 2012 guidance ($967 million first six months, $1.6 billion guidance), the overall level of liquidity available to cushion a downturn or unexpected funding requirement is reduced.
The company's track record of high capital expenditures and low or negative free cash flow is also more consistent with a 'BBB' through the rating cycle. Since January 2007 Nabors has spent $8.5 billion in capex (compared to $7.7 billion in cash from operations), yet funds from operations (cash flow from operations before working capital changes) have not grown at all relative to 2008 peak levels.
This is before adjusting for the contribution from the Superior Well Services (SWSI) acquisition in 2010 to build out Nabors pressure pumping business. While the company did generate positive free cash flow through the last downturn in 2009 and 2010, debt actually increased as a result of the SWSI acquisition.
Given this track record, Fitch believes the industry fundamentals may not provide for consistent positive free cash flow as upstream providers continuously demand the newest and best rigs and equipment. Management's targeted asset sales and capex reductions may not necessarily result in Nabors being able to consistently maintain lower total debt levels going forward if reinvestment in new equipment will be required again in a future upswing to defend market share.
Nabors' ratings continue to be supported by the size, diversity and quality of the company's fleet of drilling and workover rigs as well as the forward earnings and cash flow protections of previously signed contracts.
A note on corporate governance: long time CEO and Chairman Gene Isenberg was replaced as CEO in October 2011 and retired as a director and Chairman at the 2012 annual meeting, and has been replaced in both roles by long time COO and President Tony Petrello. John Yearwood was elected to the board in 2010 and appointed Lead Director in 2011, and two new board members were appointed in 2012 to replace retiring directors. Nabors also has responded to shareholder requests to declassify its Board of Directors and adopt a director-resignation policy for directors failing to obtain a majority of votes cast in an uncontested election. While governance changes potentially reduce credit risk from changes in management policy regarding the balance sheet, acquisitions, dividends and share buybacks, Fitch finds the impact hard to judge until a fuller track record can be established.
WHAT COULD TRIGGER A RATING ACTION?
Positive: Future developments that may, individually or collectively, lead to positive rating action ('BBB' with a Positive Outlook or better) include:
--Execution of material asset sales and meaningful capex reductions over the next 18 months;
--Use of asset sales proceeds and resulting positive free cash flow to reduce and maintain lower total debt levels and improve liquidity;
--Strong operating performance over the next 18 months in the face of weakening industry conditions in North America;
--Combination of the above factors driving Total Debt to LTM EBITDA below 2x through the cycle.
Negative: Future developments that may, individually or collectively, lead to negative rating action ('BBB' with a Negative Outlook or worse) include:
--Inability to execute on asset sales or reduce capex resulting in negative free cash flow and the need to issue new debt;
--Collapse in operational performance due to weakening industry conditions or a material (and extended) decline in oil prices that reduces the total rig count in North America.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' dated Aug. 8, 2012.
Applicable Criteria and Related Research:
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460
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