Fitch Ratings has affirmed Halliburton Company's (Halliburton; NYSE: HAL) Issuer Default Rating (IDR) at 'A-' despite continued weak market conditions.
Fitch has affirmed the following ratings for Halliburton:
--Issuer Default Rating (IDR) at 'A-';
--Senior unsecured notes/debentures at 'A-';
--Senior unsecured bank facility at 'A-';
--Short-term IDR at 'F2';
--Commercial paper at 'F2'.
The Rating Outlook is Stable. Approximately $4.6 billion in total debt is affected.
Halliburton's ratings are supported by the company's leading position in the energy services sector, its geographic and operational diversity, and its strong credit profile. Offsetting factors include continued weak market conditions for drilling and service companies, the potential for a 'double-dip' recession and the resulting impact to commodity prices and drilling activity, the potential for increased leverage to fund acquisitions or capital expenditures, and significant off-balance-sheet obligations resulting in more modest adjusted credit metrics.
Today's rating action incorporates the current weak market conditions for drilling and service companies as well as the expectation that international market conditions are expected to continue weakening into 2010. Expectations of weaker international market conditions primarily reflect delays in slowing industry activity levels due to long-term contracts and moderation in overall pricing/margin conditions for the industry. While domestic onshore market conditions are showing signs of stabilizing and even very modest improvements, Fitch notes that this market remains highly dependent on natural gas prices. The Stable Outlook on Halliburton's ratings reflects expectations that the company should be able to manage through the difficult market conditions of 2009 and 2010.
It is important to note that a key risk for the sector remains falling oil prices. Oil prices have rallied from the early 2009 lows and currently trade above Fitch's long-term expectations for the commodity ($60/barrel). Based on the current global economic environment and the resulting supply/demand fundamentals, we believe prices have room to pull back from current levels which could result in reduced oil drilling activity and further pressure the outlook for the drilling and service sector. Additionally, natural gas remains susceptible to lower prices in 2010 as a result of further weakening in economic conditions, mild winter weather or upon signs of additional supply strength. Fitch will continue to monitor both individual company performance and industry conditions for rating implications should either oil or natural gas prices fall significantly below our long-term price expectations.
For the quarter ending Sept. 30, 2009, Halliburton generated latest 12 months' (LTM) EBITDA of approximately $3.61 billion and finished the period with debt of
$4.57 billion. As a result, debt-to-EBITDA was 1.3 times (x) (2.2x using adjusted debt, which primarily includes 8x rental expense), with an interest coverage ratio of 13.7x.
While credit metrics remain consistent with the current rating levels, Fitch expects metrics to weaken as Halliburton faces less robust market conditions throughout the remainder of 2009 and into 2010.
During the third quarter of 2009, revenues stabilized relative to prior-quarter's levels; however, they remained down approximately 26% on a year-over-year basis. EBITDA margins stabilized at second quarter levels, but EBITDA during the third quarter remained down approximately 43% from third-quarter 2008 levels. Third-quarter 2009 EBITDA margins were estimated at 19.8%, versus 25.6% during the third quarter of 2008 and 20% for the previous quarter.
Capital expenditures for 2009 of approximately $1.8 billion continue to be expected while 2010 capex levels are not expected to differ materially from these levels as the company remains committed to replacing equipment that was worked heavily in the last industry cycle as well as expanding market share in the domestic and international markets. Fitch expects the company to be generally FCF neutral during 2009 (which includes the company making $369 million of cash payments to settle the FCPA investigations). In 2010, FCF levels could turn negative due to the remaining $190 million of FCPA settlement payments, the potential for a Barracuda-Caratinga settlement with Petrobras, the potential for high levels of un-collectibles, and due to continued weakness in the company's end markets reflecting a full-year of depressed North American margins and the further declines in international margins.
Beyond capital expenditures, the biggest other uses of cash will likely be M&A opportunities, the maturity of the company's $750 million of 5.5% senior notes due in October 2010, and annual dividend payouts of approximately $320 million. Halliburton remains focused on growing its global footprint via acquisitions targeted at niche technologies and/or acquisitions that increase the company's geographical footprint. Management has previously indicated that larger, consolidation-focused M&A could be considered.
Liquidity remains strong at Halliburton following the $2 billion debt issuances the company made earlier in the year. Halliburton maintains liquidity from cash and equivalents ($3.19 billion on Sept. 30, 2009); its $1.2 billion credit facility (undrawn on Sept. 30, 2009); and generation of operating cash flows ($2.66 billion for the LTM ending Sept. 30, 2009). Current maturities include $750 million in 2010 (the 5.5% senior notes due in October 2010). The company's senior unsecured credit facility is currently undrawn and does not mature until July 2012. The company has no financial covenants in either the credit facility or any of its capital markets debt outstanding.
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or
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