-- 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
-- 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.
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.
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
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.
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.
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,
-- 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
Downgraded; Outlook Action
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