RPT-Fitch affirms Russia's Eurasia Drilling Company at 'BB', outlook stable
May 24 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has affirmed Eurasia Drilling Company Limited's (EDC) Long-term foreign currency Issuer Default Ratings (IDR) at 'BB' with a Stable Outlook. Fitch also affirmed the 'BB' senior unsecured ratings of the RUB5bn domestic bonds due in 2018 issued by EDC's fully owned subsidiary OOO Burovaya Kompaniya Eurasia and USD600m Eurobond due in 2020 issued by its fully owned subsidiary EDC Finance Limited. A full list of ratings actions on EDC is at the end of this release.
EDC is the largest oilfield drilling company in Russia with a strong operational and financial profile. Fitch believes that EDC will continue to benefit from a favourable business environment as high oil prices enable Russian oil companies to finance their upstream capex including exploration and production drilling. We expect that EDC will maintain strong credit metrics in 2013-2016, i.e., funds from operations (FFO) gross leverage of below 1.75x and FFO interest coverage of above 10x. The company's ratings are currently constrained by high customer concentration and limited geographical diversification beyond Russia.
KEY RATING DRIVERS
Russia's Largest Drilling Company:
EDC is the largest oilfield drilling company in Russia with a market share of 29% in 2012 (by metres drilled, excluding offshore drilling). It operates mostly in Russia's Western Siberia, Volga-Urals, Timan Pechora and Eastern Siberia regions and is predominantly involved in onshore drilling, although it has begun to diversify geographically and stepped up offshore drilling operations. Nonetheless, the company's operational scale remains limited compared to that of larger, global oilfield services companies, such as Halliburton Company ('A-'/Stable) and Nabors Industries Inc. (Nabors, 'BBB'/Stable).
Positive Output Dynamics:
In 2012 EDC's drilling volumes increased to 6.1 million metres, up 27% year-on-year, following consolidation in 2011 of Russia-based assets of Schlumberger Ltd. and due to continued organic growth. In 2012, EDC's consolidated revenue increased to USD3,237m, up 17% yoy. A positive trend continued in Q113, as EDC's both total drilling volume and revenue increased by 6% compared to those in Q112. We expect that the company will report single-digit growth rates in the medium term as the industry outlook remains favourable.
Solid Asset Base:
The company's average fleet age of 12 years compares well with the Russian industry average of 16 years (as estimated by Douglas-Westwood). At end-2012, EDC operated 257 land drilling and sidetracking rigs, 413 workover rigs, and two jack-up rigs intended for offshore drilling. The company's relatively modern asset base allows it to provide complex services, including horizontal drilling. This has a positive impact on EDC's margins.
Caspian Offshore Drilling Intensifies:
EDC's aims to diversify its operations through developing offshore drilling on the Caspian Sea shelf. At end-2012, EDC operated two jack-up rigs there for offshore drilling, and two more rigs are under construction. We expect that their commissioning in 2013 and 2014 will strengthen EDC's position in this region, the importance of which in terms of oil and gas exploration is growing. In 2012, offshore drilling accounted for 5% and 15% of the company's consolidated revenue and net income, respectively.
Stable Industry Outlook:
Fitch believes that the business environment will remain favourable for EDC, as Russian oil majors will maintain high upstream capex aimed at arresting production decline at Western Siberian brownfields and developing greenfield sites. Based on Fitch's price deck for Brent of USD100/bbl in 2013, USD92/bbl in 2014 and USD85/bbl in 2015, we forecast that Russian oil companies will carry on with their ambitious upstream capex budgets. Conversely, prolonged period of low oil prices may have a lasting negative impact on the EDC's drilling volumes and profit margins.
High Dependence on LUKOIL:
OAO LUKOIL ('BBB-'/Stable), Russia's largest private oil company, remains EDC's top customer accounting for 57% of onshore drilling volumes and 63% of total revenues in 2012. Fitch acknowledges the long-term relations between EDC and LUKOIL as beneficial but notes that the high customer concentration remains a key rating constraint. Fitch expects that EDC's dependence on LUKOIL may decrease over time as EDC attempts to diversify its customer base, but this is unlikely to happen in the short to medium term.
Leverage to Remain Moderate:
In 2012 EDC's funds from operations (FFO) lease-adjusted gross leverage was 1.2x and coverage was 14x. The company has some additional leverage headroom at the current rating level before its credit metrics go beyond Fitch's negative rating action guidance of above 2x for leverage and below 8x for coverage. In our base case we expect EDC to maintain a conservative financial policy and forecast its FFO leverage at below 1.75x in 2013-2016 and coverage above 10x.
Positive: Stable revenue growth, improved geographical diversification, and lower share of revenues coming from LUKOIL would be positive for EDC's ratings. An upgrade of LUKOIL's ratings could also be positive for EDC.
Negative: Fitch would consider a negative rating action if the company's FFO adjusted gross leverage rises above 2x and FFO interest coverage falls below 8x on a sustained basis, due to lower operating profits, higher dividends or capex.
DEBT AND LIQUIDITY
Comfortable Debt; Sufficient Liquidity:
At end-2012 EDC had total balance-sheet debt of USD700m. Its short-term debt of USD258m was well covered by cash and cash equivalents of USD305m. We believe that EDC will be able to refinance or repay its obligations from its cash flows from operations when they are due.
Manageable FX Risks: Following the April 2013 Eurobond issue, around half of EDC's debt portfolio is USD-denominated. The company expects that its USD-denominated operating cash inflows from offshore drilling are sufficient to cover its USD-denominated debt servicing, including interest and principal. Hence, Fitch assesses the company's currency risk as manageable.
Limited Exposure to Cyprus: EDC has intermediate holding companies domiciled in Cyprus but no significant operations there. The company has informed Fitch that these entities typically do not have significant cash balances in Cyprus, and that the company has no unavailable amounts held with Cypriot banks. The company's oil drilling in Russia is unaffected by events in Cyprus.
The rating actions are as follows:
Eurasia Drilling Company Limited
Long-Term IDR: affirmed at 'BB', Outlook Stable
Short-Term IDR: affirmed at 'B'
Long-Term local currency IDR: affirmed at 'BB', Outlook Stable
Short-Term local currency IDR: affirmed at 'B'
National Long-Term Rating: affirmed at 'AA-(rus)', Outlook Stable
OOO Burovaya Kompaniya Eurasia
Senior unsecured rating: affirmed at 'BB'
National senior unsecured rating: affirmed at 'AA-(rus)'
EDC Finance Limited
Senior unsecured rating: affirmed at 'BB'
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