U.S. oilfield services and drilling (OFS) companies’ current debt levels are “unsustainable” over the long term without a substantial improvement in cash flow, a leading rating agency has warned in a new report.
Sounding the alarm on Monday (October 29) in a publication for its clients, Moody’s Investor Service said most U.S. OFS companies lack the means to pay down their debt in the short term, and have only “limited options” when it comes to raising equity or pursuing other options to improve their liquidity.
Sreedhar Kona, Senior Analyst at Moody’s, said: “U.S. oilfield services and drilling companies’ high debt levels will continue to constrain their credit quality in 2019 and beyond. The largest firms are significantly better positioned to regain their credit strength next year than the smaller ones, though the threat of balance sheet restructuring will persist, particularly for the latter.”
A pickup in onshore North American production activity favors the recovery of land-focused OFS firms, in particular the majors, Kona added.
Despite their debt levels, Schlumberger (NYSE:SLB), Halliburton (NYSE:HAL) and Baker Hughes (a GE Company) are the best positioned to reap the benefits of the OFS recovery, given their diversified services and operating geographies.
The beleaguered offshore OFS segment, however, is likely still “years away” from rationalizing and fully recovering from prolonged stress, Moody’s added. Notwithstanding the recent run up in commodity prices, most new offshore projects continue to remain untenable and existing equipment oversupplied.
Despite a modest improvement in the utilization of jack-up rigs and a marginal increase in deepwater floaters, depressed day rates point to uncertain recovery prospects for offshore firms.
Absent a strong recovery in the overall sector, smaller and less diversified OFS companies remain most at risk from high debt burdens, Moody’s said. Substantial numbers of smaller firms filed for bankruptcy when oil prices slumped in 2015-16, and more are likely to restructure their balance sheets in the future if their cash flow doesn’t improve before their liquidity runs out.
OFS sector credit quality weakened significantly between 2007 and 2018, with the average debt/EBITDA ratio rising to more than 4.5 times in 2017 from less than 1.5 times in 2007.
A decade ago, earnings were growing more quickly than debt, but the reverse was true between 2008 and 2014, then in 2015-16 cash flow shrank by more than 30%, with a consequent tripling in leverage.