Nov 7 - Fitch Ratings has assigned foreign and local currency Issuer Default
Ratings (IDRs) of 'B+' to Tuscany International Drilling Inc. (Tuscany).
The Rating Outlook is Stable.
Tuscany's ratings reflect the company's moderate leverage, experienced
management team, and a technologically advanced asset fleet, which is either new
or has been recently refurbished, and gives the company a competitive advantage.
The ratings also incorporate a degree of counterparty credit risk in its
diversified customer base, a relatively small rig fleet, and exposure to the
cyclical and competitive onshore drilling industry. Tuscany faces the
operational challenge of consolidating its business following a period of
historically aggressive growth.
Leverage is low for the rating category. Fitch expects the company's
consolidated total debt to EBITDA ratio to decline to approximately 3.0 times
(x) by the end of 2012 and below thereafter from 4.2x as reported as of the last
twelve months (LTM) ended June 2012. Interest coverage is expected to be
approximately 3.0x by year-end 2012 and approximately 3.5x by 2013. The company
could choose to use its accumulated cash to expand its rig fleet, while
maintaining the same leverage and a break-even to positive free cash flow. As of
June 2012, Tuscany's consolidated nominal debt was approximately USD219 million,
of which approximately USD200 million corresponded to a term loan used to
finance acquisitions during 2011, and the balance was debt drawn down from an
existing revolving credit facility. Pro forma debt is expected to be around
USD240 million in 2012, with possible pay downs of drawn revolver.
Smaller Fleet Size and Customer Base
The company's rig fleet is relatively small with 41 onshore drilling rigs, which
limits operational diversification as well as the ability to serve larger,
financially stronger oil companies and their demand for rigs. Tuscany's small
fleet size exposes the company to weather or operational issues surrounding a
particular rig, specifically those that are more technologically advanced and
receive higher day rates. Tuscany has exposure to customers that tend to have a
lower credit quality, which adds to counter party risk. The majority of
Tuscany's revenues during 2011 were generated from small to medium sized
independent oil and gas companies, which in general are more sensitive to oil
price volatility when compared with larger, integrated oil and gas companies.
Cyclical and Competitive Industry
Tuscany's cash flow generation ability is exposed to oil price volatility as a
substantial decrease in oil prices could reduce the exploration activity of its
counterparties and lower demand for rigs. A sustained downturn in day rates and
utilization levels could affect Tuscany's ability to generate cash flow from
operations and pressure its ratings. The drilling market is highly competitive
and is characterized by short term contracts. Companies in the sector tend to
have short-term contract backlogs of one to two years, but have built long term
relationships with their client base. Tuscany's contract backlog is small given
the company's short history. The company is expected to concentrate on building
long-term commercial relationships in the short to medium term. A possible
deterioration in customer credit quality remains a concern, although this risk
is somewhat mitigated by reasonable customer diversification.
Growing Cash Flow Generation in 2012
The company's cash flow generation is expected to increase in 2012 due to the
consolidation of recently incorporated assets in Brazil, Colombia and Africa.
Fitch expects Tuscany's EBITDA to be approximately USD70 million in 2012,
significantly higher than the USD32 million reported in 2011 as a result of the
incorporation of the newly acquired assets. During the first half of 2012,
EBITDA increased to USD35 million, reflecting the new business platform. The
company's EBITDA would likely remain at this level over the next four years with
only modest increases due to improving efficiencies and modest fee increases.
Over the same period, Fitch expects annual interest for Tuscany to range between
USD20 million and USD23 million and its annual maintenance capital expenditures
to average approximately USD20 million. The company expects total debt to remain
stable at USD240 million and to marginally decrease if it pays down a portion of
its revolver debt overtime.
Improved Liquidity Position
Tuscany was able to improve its tight liquidity as it extended its loan due
during September 2012 to September 2013 and modestly improving its debt profile.
The company's liquidity is bolstered by access to a new committed revolving
facility for USD45 million over the next five years, if needed. Fitch expects
Tuscany to maintain a more robust minimum cash position going forward. Before
the company extended its loan, its liquidity profile was weak with approximately
USD16 million of cash on hand compared to short term debt of USD37 million.
Catalysts for a negative rating action include a significant deterioration of
the company's rig fleet utilization levels, coupled with lower than expected day
rates, which could lower EBITDA and deteriorate the company's credit quality.
The company's ratings could also be downgraded if the company's debt and
coverage ratios do not improve in line with Fitch expectations. A positive
rating action could result from the satisfactory consolidation of the company
current business, higher level of medium term contracts with solid counterparts.
Tuscany is an oil and gas service company incorporated in Canada that operates,
for the most part, in Latin America. The company offers drilling services and to
a lesser extent work-over services. Approximately 80% of the company's rigs are
less than five years old or have been recently refurbished. As a result of this,
day rates for approximately 60% of rigs are at or above USD25,000. Tuscany
operates predominantly in Latin America and approximately 60% of the fleet is
concentrated in Colombia and Brazil, reflecting a modest geographic
diversification. The company was created in 2008 and was initially focused in
the construction of 19 state of the art onshore drilling rigs. In 2011,
following the acquisitions of companies in Brazil, Colombia and Africa,
Tuscany's rig fleet increased to 41. In May 2011, the company acquired Drillfor
Perfuracoes do Brazil Ltd, which added 7 rigs. In September 2011, the company
added 15 rigs to its fleet when it acquired Caroil for an all in cost of USD204
Additional information is available at 'www.fitchratings.com'. The ratings above
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012).
--'Recovery Ratings and Notching Criteria for Nonfinancial Corporate Issuers'
(May 4, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers