-- Switzerland-headquartered oil and natural gas services company
Weatherford's credit protection measures are weak relative to our expectations
for the current rating.
-- The company has increased reliance on debt to finance growth over the
past several quarters which has slowed improvement in the company's key credit
-- We are revising our rating outlook on the company to negative from
stable, reflecting a greater likelihood that the ratings could be lowered if
the company is not able to restore credit metrics to appropriate levels for
the rating over the intermediate term.
On Aug. 21, 2012, Standard & Poor's Ratings Services revised its outlook on
Switzerland-headquartered Weatherford International Ltd. to negative from
stable. At the same time, we affirmed the 'BBB' long-term corporate credit
rating and the A-2 short-term rating.
The rating action reflects our view that anticipated improvement in the
company's credit protection measures will likely be delayed relative to our
prior expectations. Weatherford's reliance on debt to finance growth over the
past several quarters has slowed the pace of improvement in the company's
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 a top-three market position
within several of its segments, we view its 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.
Weatherford's consolidated operating performance has improved meaningfully
over the past year. In the second quarter, revenues were up 24% and EBITDA
margins were roughly flat compared with the same quarter in 2011. Revenue
improvement has benefited from increased activity and demand across all four
of its geographic segments; however, North America and (to a lesser extent)
Latin America accounted for the vast majority of the improvement in
consolidated results. From a product perspective, the company saw notably
stronger year-over-year demand in its well construction, artificial lift,
completions, and drilling services product lines which benefitted from strong
liquids pricing and associated higher levels of E&P drilling activity.
In our view, improving trends in the company's financial performance are
likely to continue through 2013. Higher levels of anticipated E&P spending,
continued recovery in international operations, and a greater realization of
earnings from recent and continuing capital investments should spur revenue
growth of about 20% in 2012 and 10% in 2013. A greater proportion of growth
will likely come from international operations, given the earlier stage of
recovery in activity levels and the abatement of various project delays that
hurt 2011 performance. We anticipate that consolidated EBITDA margins will
improve to about 22% in 2013 as the company experiences a stronger backlog of
international projects, the expiration of certain lower-margin contracts, and
political and weather-related disruptions subside. The company has less
exposure to the softening North American pressure-pumping market than its
peers, accounting for about 9% of consolidated segment operating profit in
Weatherford has reported a material weakness in its internal controls over
financial reporting related to income tax reporting and indicated that it has
identified adjustments that are material to prior years. As a result, the
company is in the process of remediating associated deficiencies and restating
its historical financial reports. The company has obtained waivers for the
filing of interim financial statements through March of 2013.
We view the company's financial profile as significant. Funds from operations
(FFO) to debt has improved from the high-teens percentage area to the mid-20%
area over the past year. Credit metric improvement during this timeframe has
largely been framed by growth in earnings slightly outpacing growth in the
company's debt balances. Current credit protection measures are weak relative
to the 35% to 40% FFO to debt level that is considered appropriate for the
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 $3.2 billion and $3.8 billion in 2012 and
2013, respectively, given our expectations for about 20% revenue growth in
2012 followed by 10% growth in 2013 and gradual expansion of margins to
slightly more than 22% in 2013. Corresponding levels of funds from operations
are $2.3 billion and $2.8 billion. We estimate that debt balances will likely
peak at or about $8.8 billion at the end of 2012 and remain near that level in
2013. As a result, we estimate that the ratio of funds from operations to debt
is likely to remain in the mid-20% area in 2012 and strengthen to the low-30%
area in 2013.
We assess Weatherford's overall liquidity as "adequate." Our assessment
incorporates the following expectations and assumptions:
-- The company had cash and equivalent balances of $381 million as of
June 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 slightly
more than $1 billion of availability as of June 2012.
-- The company has $544 million of long-term debt that matures through
the end of 2013.
-- We forecast that the company's capital expenditures and working
capital investment will likely outpace funds from operations by about $200
million over the next 18 months.
-- We expect the company's sources of liquidity cover uses by more than
1.25x over the next 18 months.
The negative outlook reflects our view that the company's credit protection
could remain weak relative to expectations for the rating. We would consider a
negative rating action if Weatherford's debt balances increase materially from
current levels, such that FFO drops below 25% 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 40% to 45%.
Related Criteria And Research
-- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Business Risk/Financial Risk Matrix Expanded, May 27, 2009
Rating Affirmed; Outlook Negative
Weatherford International Ltd.
Corporate Credit Rating BBB/Negative/A-2 BBB/Stable/A-2