TEXT - S&P cuts Weatherford International to 'BBB-'
Overview -- Switzerland-based oilfield services company Weatherford International's credit protection measures are not improving at the faster pace we previously forecasted. -- We are lowering our rating on Weatherford International Ltd. to 'BBB-' from 'BBB'. We are lowering our short-term rating on the company to 'A-3' from 'A-2'. -- The stable outlook reflects our view that the company is likely to restore credit protection measures to levels consistent with the revised rating over the next 12 to 18 months. Rating Action On Dec. 21, 2012, Standard & Poor's Ratings Services lowered its corporate credit rating on Switzerland-headquartered Weatherford International Ltd. to 'BBB-' from 'BBB'. At the same time we lowered the short-term ratings on the company to 'A-3' from 'A-2'. The outlook is stable. Rationale The rating action reflects our view that the company's credit protection measures are likely to improve at a slower pace than that which we had previously expected. Weatherford's capital spending and working capital investment over the last several quarters have slowed the company's de-levering trajectory, leaving credit ratios at levels that are considered weak for the prior rating category. The ratings on Weatherford International Ltd. reflect our assessment of the company's "satisfactory" business risk and "significant" financial risk. The ratings incorporate the company's position as the fourth-largest oilfield services provider, breadth of its product and service line offerings, and favorable geographic diversity. The ratings also reflect the company's high level of continued business investment (capital expenditures, working capital, and acquisitions) in excess of funds from operations that have resulted in debt increasing by an average of $300 million per quarter since mid-2011. This has significantly slowed the pace of the company's credit ratio improvement. Our assessment of Weatherford's satisfactory business profile stems from its diversification in major oilfield product and service categories that include: artificial lift, well construction, drilling services, drilling tools, completion systems, wireline and evaluation services, reentry and fishing services, stimulation and chemicals, integrated drilling, and pipeline and specialty services. Although the company maintains leading market positions within several of its segments, we view its overall competitive position as somewhat weaker than that of peers Schlumberger, Baker Hughes, and Halliburton, which we generally view as having stronger holistic product and service offerings and which have generally demonstrated more muted cyclical margin volatility. Our management and governance assessment of the company is fair. Weatherford has been subject to several restatements of historical financial statements due to weaknesses in the company's internal controls over financial reporting. Reporting errors have largely related to accounting for income taxes and percentage of completion contracts. The company recently filed a restated 2011 10-K and its interim financial statements for 2012. In our view, the company's financial performance is likely to show improvement in 2013. Higher levels of anticipated exploration and production spending, continued recovery in international operations, and a greater realization of earnings from recent and continuing capital investments should support revenue growth of about 6% in 2013. We anticipate that international operations will account for the vast majority of growth, given the earlier stage of recovery in activity levels and a flattish performance in North America. Further, we anticipate that consolidated EBITDA margins will improve to about 21% in 2013 as the company experiences a stronger backlog of international projects. It is worth noting that the company has less exposure to the softening North American pressure-pumping market than its peers, accounting for less than 10% of consolidated segment operating profit in North America. We view the company's financial profile as significant. Funds from operations (FFO) to debt has generally been in the 20% area over the last several years--a level considered weak for the rating category. Despite a strengthening operating performance, an increasing debt burden due to high levels of continued business reinvestment has hampered improvement in credit metrics. . At the revised rating level, we expect FFO to debt to strengthen to a more appropriate level of 30% to 35%. We believe that Weatherford's credit protection measures are likely to approach levels more consistent with the rating category in 2013. Our forecast assumes that EBITDA will expand to $3.3 billion in 2013, given our expectations for about 6% revenue growth and expansion of margins to about 21%. Corresponding levels of funds from operations are $2.2 billion. We estimate that debt balances will likely fall closer to $8.6 billion at the end of 2013. As a result, we estimate that the ratio of funds from operations to debt is likely to strengthen to the mid- to high-20% area in 2013. Liquidity We assess Weatherford's overall liquidity as "adequate." Our assessment incorporates the following expectations and assumptions: -- The company had cash and equivalent balances of $365 million as of Sept. 30, 2012. -- The company has a $2.25 billion senior unsecured revolving credit facility that matures in July 2016. We estimate that the company had approximately $900 million of availability as of September 2012. -- The company has $545 million of long-term debt maturing in 2013. -- We forecast that the company will generate slightly more than $400 million of discretionary cash flow (cash from operations less capital expenditures) through the end of 2013. -- We expect the company's sources of liquidity cover uses by more than 1.25x over the next 18 months. Outlook The stable outlook reflects our view that the company's credit protection measures will strengthen to levels considered appropriate for the current rating over the next 12 to 18 months. We would consider a negative rating action if Weatherford's debt balances increase materially from current levels, such that FFO drops below 20% or we deem it likely that improvement in the company's credit protection will be delayed beyond our current expectations. Similar ratings pressure could occur if EBITDA margins decline to below 18%. Alternatively, we would consider a positive rating action in the event that the company is able to reduce debt and maintain FFO to debt of 35% to 40%. Related Criteria And Research -- Management And Governance Credit Factors For Corporate Entities And Insurers, Nov. 13, 2012 -- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012 -- Key Credit Factors: Global Criteria For Rating Oilfield Services And Equipment Companies, July 30, 2012 -- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 -- Corporate Ratings Criteria 2008, published April 15, 2008. Temporary contact numbers: Carin Dehne-Kiley, 917-496-8208; Lawrence Wilkinson, 212-991-8514 Ratings List Downgraded; Outlook Action To From Weatherford International Ltd. Corporate Credit Rating BBB-/Stable/A-3 BBB/Negative/A-2 Senior Unsecured BBB- BBB Commercial Paper A-3 A-2 Weatherford International Inc. Senior Unsecured BBB- BBB
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