TEXT-S&P: Boart Longyear outlook revised to stable
Overview -- U.S.-based drilling services provider and drilling products manufacturer Boart Longyear Ltd. recently reduced its EBITDA guidance for the year, citing cuts in exploration spending budgets by mining companies, which we believe will lead to somewhat reduced liquidity. -- We are revising the outlook to stable from positive. At the same time, we are affirming the ratings on the company, including the 'BB-' corporate credit rating. -- The stable rating outlook is based on our view that lower exploration spending will lead to increased revolver borrowings and reduced liquidity for BLY, in light of higher capital expenditures and working capital spending, although credit metrics will likely still remain good for the 'BB-' rating. Rating Action On Oct. 1, 2012, Standard & Poor's Ratings Services revised its rating outlook on Salt Lake City, Utah-based Boart Longyear Ltd. (BLY) to stable from positive. At the same time, we affirmed all ratings on BLY, including the 'BB-' corporate credit rating. Rationale The rating affirmation and outlook revision follows BLY's recently announced lower guidance for 2012 EBITDA, which we believe will lead to negative free operating cash flow and increased borrowings on its revolving credit facility. BLY now believes that the major mining companies will pare back on their exploration drilling budgets in the second half of the year due to shareholder pressure to preserve capital. The difficulty that mid-tier, or junior, mining companies have in raising equity capital will provide further pressure on exploration spending. As a result of BLY's revised guidance, we now expect BLY to produce between $360 million and $390 million in EBITDA in 2012, compared with our prior expectation of $460 million. Absent a recovery in exploration drilling in 2013, we expect EBITDA to remain within the same range. While we expect credit metrics to remain good for the 'BB-' rating and "significant" financial risk profile, with adjusted debt-to-EBITDA of less than 2x and funds from operations (FFO)-to-debt of around 50%, we believe the company will need to increase its revolver borrowings to fund its expansion capital expenditures and for working capital, which we believe will reduce overall liquidity. We expect capital expenditures of between $250 million and $300 million in 2012, compared with $220 million in 2011, as BLY has been investing in more efficient rigs. In 2013, if markets remain weak, we would expect BLY to reduce its expansion capital expenditures budget. In addition, because we believe BLY will keep sufficient inventories of rigs and other drilling-related products on hand in the event of a rebound of exploration spending, we believe working capital spending will remain high, even though sales will likely be lower. We believe this will lead BLY to burn cash and increase revolving credit facility borrowings. BLY is one of a few global drilling services providers in a fragmented market, competing mostly against regional and local contractors. Although its size and broad service offering allows it to offer a complete range of drilling capabilities (which we believe gives the company an advantage in contracting with major mining companies), price is a determining factor for companies when they select a drilling services provider. Its customers include leading global mining companies, though no customer accounts for more than around 5% of revenues and no single contract accounts for more than 2% of revenue. The rating on BLY reflects what we consider to be the company's "weak" business risk profile, given the company's dependence on the commodity mining industry and particularly high exposure to the highly cyclical gold industry. BLY's operating performance is highly dependent on the global minerals industry's exploration, development, and production expenditures, which are largely influenced by the price of gold, copper, and other base metals. Additionally, junior miners' access to financing can affect spending in the exploration business. Still, the company maintains a leading position in the contract drilling services and equipment industry, has a flexible cost structure, good credit metrics for the rating, and "adequate" liquidity. While credit metrics are strong for the "significant" financial risk assessment at this point in the cycle, BLY's revenues are tied to the exploration and production budgets of mining companies, which are highly correlated with metals prices, so results can be volatile. Liquidity Given our operating expectations, we believe BLY has adequate liquidity to meet its needs over the next 24 months. Our view of the company's liquidity profile includes our expectations that: -- Liquidity sources (including availability under the company's $350 million revolving credit facility) will exceed uses by at least 1.2x over the next year and at least 1.0x over the next 18 to 24 months; -- Liquidity sources will continue to exceed uses, even if EBITDA were to decline by 15%; and -- Compliance with financial maintenance covenants would likely survive a 15% drop in EBITDA without the company breaching covenant test measures. BLY's primary sources of liquidity for fiscal 2012 include about $84 million in cash and about $85 million of availability on its $250 million revolving credit facility, after accounting for borrowings and letters of credit, as of June 30, 2012. In July, BLY increased its revolver commitments to $350 million. We estimate cash flow from operations to be around $200 million, the same level as in 2011. However, due to increased capital expenditures, estimated at $250 million to $300 million in 2012 as the company continues to invest in more efficient rigs, we project that free cash flow will be negative in 2012. Absent a recovery in exploration spending or a reduction in capital expenditures in 2013, we expect cash flow to be around the same level next year. We assume the company will maintain its relatively conservative financial profile, and for liquidity to remain adequate if the company decides to pursue acquisitions, dividends, or share repurchases. We expect BLY will maintain adequate headroom under the 3x minimum interest coverage covenant, as well as is 3.5x leverage ratio covenants that govern its revolving credit facility. BLY will not have debt maturities until 2016, when its revolving credit facility matures. Recovery analysis The rating on BLY's $300 million senior unsecured notes is 'BB-', the same as the corporate credit rating, and the recovery rating on the notes is '3', indicating our expectation for meaningful (50% to 70%) recovery in the event of payment default. For the complete recovery analysis, please see the recovery report on Boart Longyear published March 29, 2012 on RatingsDirect. Outlook The rating outlook is stable, reflecting our view that lower exploration spending will lead to increased revolver borrowings and reduced, albeit adequate, liquidity for BLY, in light of higher capital expenditures and working capital spending. Still, we expect credit measures to remain good for the 'BB-' rating and significant financial risk profile, with adjusted debt-to-EBITDA below 2x and FFO-to-total debt of around 50%. We could take a negative rating action if exploratory drilling remains low, suggesting to us that the company's total adjusted leverage would rise to and remain above 4x during our forecast period. We could also take such action if we were to revise our assessment of BLY's liquidity to "less-than-adequate." This could occur if EBITDA were to drop to $325 million or below and the company did not cut back on its capital expenditures or working capital spending. While a positive rating action is unlikely in the near term given the operating environment, we could raise our rating over time if a rebound in exploration spending leads BLY to reduce its revolver borrowings and the company is able to consistently generate free operating cash flow. Related Criteria And Research -- Issuer Ranking: North American Metals And Mining Companies, Strongest To Weakest, July 10, 2012 -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 -- Key Credit Factors: Methodology And Assumptions On Risks In The Mining Industry, June 23, 2009 -- Business Risk/Financial Risk Matrix Expanded, May 27, 2009 -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 Ratings List Ratings Affirmed; Outlook Action To From Boart Longyear Ltd. Corporate Credit Rating BB-/Stable/-- BB-/Positive/-- Ratings Affirmed Boart Longyear Management Pty Ltd. Senior Unsecured Local Currency BB- Recovery Rating 3 Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.
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