Login ID:
Password:
Partner Login
Contact Us : 7066511911

Press Release: Fitch Affirms China Oilfield Services at 'A'; Outlook Stable

12 Sep 2017 4:40 am
 
 
The following is a press release from Fitch Ratings: 
 

Fitch Ratings-Hong Kong-12 September 2017: Fitch Ratings has affirmed China Oilfield Services Limited's (COSL) Long-Term Foreign-Currency Issuer Default Rating (IDR) and its senior unsecured rating at 'A'. The Outlook is Stable. Simultaneously, Fitch has also affirmed the 'A' ratings on the senior unsecured notes issued by its wholly owned subsidiaries COSL Finance (B.V.I.) Limited and COSL Singapore Capital Ltd. The two notes are guaranteed by COSL.

The ratings reflect COSL's close linkage and importance to its parent, the wholly state-owned China National Offshore Oil Corporation (CNOOC). The close relationship translates into lower volatility of revenue and strong access to liquidity for COSL compared with its peers, which provide a buffer against the company's weaker cash flows stemming from market challenges. While the company remained unprofitable in 1H17, we expect earnings to continue to improve in 2H17 due to better utilisation, which will support COSL's standalone profile.

KEY RATING DRIVERS

Linked to CNOOC: COSL's ratings are closely aligned with the credit profile of its parent, CNOOC, in line with Fitch's Parent and Subsidiary Rating Linkage methodology. This is due to the strong strategic and operational linkages between the two companies, and the tangible support COSL has received from CNOOC, which owns 50.53% of COSL.

Importance to CNOOC: COSL has consistently accounted for around 90% of the drilling services requirements of CNOOC, specifically those of CNOOC's upstream subsidiary CNOOC Limited (A+/Stable), as well as the bulk of its well services and geophysical and marine support service requirements offshore. Fitch considers the relationship between COSL and CNOOC to be mutually beneficial as CNOOC brings stability to COSL's business profile while COSL's integrated oilfield service model provides significant efficiencies and cost flexibility to CNOOC.

Oilfield Services Industry Bottoming: In view of stabilising oil prices, most oil companies have budgeted for higher exploration and production (E&P) capex for 2017 compared with a year earlier. CNOOC Limited increased its full-year budget to CNY60 billion-70 billion in 2017 from CNY51 billion in 2016, after two consecutive years of cutting capex. This should lead to a pick-up in order flow for COSL. During 1H17, COSL's operating days increased 1% yoy while utilisation improved to 51.3% from 49.7% a year ago. COSL's average 1H17 day rates were 20% lower yoy, but were generally higher than market rates, thanks to the close relationship with CNOOC.

However, Fitch does not expect the oilfield services industry to significantly recover in the near term. This is because our oil price assumptions incorporate only a gradual recovery in global oil price in the next 18 months, which constrains upstream E&P companies' investments. In addition, while better oil prices will improve equipment utilisation, increases in day-rates usually lag oil price movements. For COSL though, the outlook may be brighter because we believe that CNOOC will have to step up its exploration and development activities due to its low developed reserve life, which should benefit COSL's domestic order book.

Diversification from Overseas Expansion: COSL plans to diversify its revenue sources by expanding overseas, but it will remain the key service provider to CNOOC. We expect CNOOC to continue to account for 60%-70% of COSL's revenue (2016: 70%) in the medium term. COSL aims to increase revenue from overseas to 50% of the total in the long term. Fitch does not expect the rise in revenue from overseas markets to change COSL's relationship with CNOOC, and CNOOC will remain the controlling shareholder of COSL.

Credit Metrics Improve Gradually: COSL's funds from operations (FFO) adjusted net leverage rose to 13.4x in 2016 from 3.8 x in 2015 and FFO-fixed charge coverage dropped to 1.1x in 2016 from 3.9x in 2015 as it was not spared the market downturn. However, Fitch expects COSL's credit metrics to improve from 2017 with FFO-adjusted net leverage likely to fall to around 4x and FFO-fixed charge coverage rise to 3x-3.5x in 2017, driven by higher utilisation rates and cost reductions. In addition, COSL's flexibility in controlling its capex, as well as benefits in order flow and access to capital markets from a close relationship with CNOOC, supports its standalone credit rating of 'BB'.

DERIVATION SUMMARY

COSL's 'A' ratings are linked to and closely aligned with its 50.52% parent, CNOOC due to their strong operational and strategic ties. On a standalone basis, COSL's peers include Nabors Industries, Inc. (BB+/Negative) and Transocean, Inc. (B+/Negative). COSL is operationally stronger than its peers, benefitting from its strong operational ties with CNOOC. For example, COSL's utilisation rate of around 55% in 2Q17 was higher than that of Transocean and Nabors of 44%-46%. COSL's fleet has also enjoyed higher utilisation in the last two years than that of the other two companies. Also, COSL's day rates were relatively higher compared with the market rates. COSL's credit metrics were weaker than its peers in 2016, but they are likely to improve from 2017 to a level comparable to Nabors' and likely to be stronger than that of Transocean. As a result, we believe COSL's standalone rating of 'BB" is appropriately positioned relative to its peers.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:

- - Drilling rigs and semi-sub utilisation rates to increase to 50%-68% in 2017 and slowly recover in 2018-2020, assuming upstream E&P activities gradually recover in line with the Fitch's oil price assumptions;

- - Drilling rigs and semi-sub day rates to increase 2%-4% in 2017, and slowly recover in 2018-2020, in line with the assumption on E&P activities above;

- - Capex of around CNY2.5 billion in 2017 and around CNY2.5 billion-3.5 billion per year thereafter

RATING SENSITIVITIES

Developments That May, Individually or Collectively, Lead to Positive Rating Action

- - Evidence of stronger of linkages between COSL and CNOOC;

- - Strengthening of CNOOC's credit profile provided the linkages remain intact.

Developments That May, Individually or Collectively, Lead to Negative Rating Action

- - Weakening of CNOOC's credit profile;

- - Evidence of weaker operating and strategic linkages between COSL and CNOOC.

COSL's standalone credit profile of 'BB' could be lowered if the company's FFO adjusted net leverage does not improve to below 5x and FFO fixed-charge coverage does not increase to over 3x by 2018.

LIQUIDITY

Debt at COSL level: All of the debt is raised at the rated entity COSL level, which either acts as the borrowing entity or provides guarantees to the debts issued by special vehicles. Management expects this funding model to continue in the future.

Strong Liquidity: COSL's short-term debt of CNY6 billion at end-2016 was fully covered by readily available cash of CNY13.1 billion. Undrawn facilities at end-2016 amounted to CNY45.3 billion. In addition, COSL also has an Euro medium-term note programme that allows COSL to issue notes in tranches up to an aggregate principal amount of USD3.5 billion. As of end-2016, the company had issued USD1 billion of notes.

Contact:

Primary Analyst

- Cecilia Chan

- Associate Director

- +852 2263 9905

- Fitch (Hong Kong) Limited

- 19/F Man Yee Building,

- 68 Des Voeux Road Central

- Hong Kong

Secondary Analyst

- Renee Lam

- Director

- +852 2263 9971

Committee Chairperson

- Ying Wang

- Senior Director

- +86 21 5097 3010

Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com.

Additional information is available on www.fitchratings.com

Applicable Criteria

- Corporate Rating Criteria (pub. 07 Aug 2017)

- https://www.fitchratings.com/site/re/901296

- Parent and Subsidiary Rating Linkage (pub. 31 Aug 2016)

- https://www.fitchratings.com/site/re/886557

Additional Disclosures

- Dodd-Frank Rating Information Disclosure Form

- https://www.fitchratings.com/site/dodd-frank-disclosure/1029030

- Solicitation Status

- https://www.fitchratings.com/site/pr/1029030#solicitation

- Endorsement Policy

- https://www.fitchratings.com/regulatory

- ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE AT HTTPS://WWW.FITCHRATINGS.COM/SITE/REGULATORY. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

(MORE TO FOLLOW) Dow Jones Newswires

September 12, 2017 00:40 ET (04:40 GMT)
Disclaimer
Top 5 Special Reports
USD/INR (Apr. ’20) – Inflection Point: Testing a Short-...
USD/INR (Apr. ’20) – Pullback Underway / Testing a Shor...
USD/MYR
USD/CNY & USD/IDR
USD/ARS & USD/BRL—