Fitch Expects to Rate QGOG Constellation's Proposed Sr. Unsecured Notes
CHICAGO -- October 22, 2012
Fitch Ratings expects to rate QGOG Constellation S.A.'s (Constellation or
Holdco) proposed senior unsecured notes issuance 'BB-'. Fitch has also
assigned foreign and local currency Issuer Default ratings (IDRs) of 'BB-' to
Constellation. The Rating Outlook is Stable. The company expects to use the
proceeds from the issuance to refinance debt at the holding company level and
for general corporate purposes.
Constellation ratings reflect the company's high consolidated leverage and
structural subordination to its operating subsidiaries' project finance debt,
which at times may limit cash flow disbursements from the operating
subsidiaries (Opcos) to the Holdco depending on various financial covenants.
Positively, consolidated leverage is expected to rapidly decline as the
project finance debt at the operating companies amortizes.
Constellation's ratings also reflect the stable and predictable cash flow
generation of the company's OpCos' offshore drilling assets, which are
supported by long-term contracts with investment grade rated Petroleo
Brasileiro S.A. (Petrobras; IDR 'BBB'). The ratings also incorporate the
favorable demand prospects for oil and gas services in Brazil driven by
Petrobras' aggressive capital expenditure program as well as new exploration
and production entrants to the market.
High Initial Leverage and Adequate Liquidity
The company's pro forma consolidated leverage is considered high for the
rating category and is expected to decrease over the near term as the debt at
the OpCos rapidly amortize to levels more consistent with the rating category.
Pro forma leverage as measured by total debt to EBITDA is approximately 6.2x
for 2012. Fitch expects the company to lower its consolidated leverage ratio
to below 4.0x within the next few years, which is more in line with the
assigned ratings. Total debt on a pro forma basis and considering the proposed
issuance is expected to reach approximately USD3.2 billion by year-end 2012,
while EBITDA for this year is expected to range between USD450 million and
USD500 million. As of June 30, 2012, debt at the OpCo level amounted to USD2.4
billion, out of approximately USD3 billion of total consolidated debt.
Constellation's liquidity is supported by a 12 months debt service reserve
account to be funded upon completion of the proposed debt issuance, and the
company's cash on hand, which somewhat mitigates possible disruptions of cash
flow to the Holdco from the OpCos due to debt restrictions at the OpCos. As of
June 30, 2012, cash and cash equivalent amounted to USD437 million after
subtracting a July payment of USD428 million related to the completion of
Amaralina Star, which began operations during September 2012. Of the USD437
million of cash on hand, USD360 million were at the holding company level and
the balance was at the operating companies.
Structural Subordination to Operating Companies' Debt
The potential retention of cash flows after debt service at the OpCo level
makes cash flow to the Holdco somewhat less stable and unpredictable than the
cash flow from operation of its subsidiaries. Most of the project finance debt
at the OpCos have cash sweep provisions and minimum debt service coverage
ratios (DSCR) (e.g. 1.2 or above) that must be met before cash flow
distributions are allowed to be made to the Holdco. Specific assets (Lone and
Gold Star) are not permitted to distribute excess cash to the holding company
until all project finance debt is repaid.
Cash distributions to Constellation are sensitive to the operating performance
of the OpCos' (the rigs') uptime performance. For example, in the case of the
Alaskan-Atlantic operating assets, a decline in the uptime rate to 95% or
below from the combined 15 years historical average of 96.3% will likely
prevent these assets from distributing cash to the Holdco. Gold and Lone Star
financing are not expected to distribute any cash to the holding company until
Gold Star is released from the associated financing and Lone Star until all
debt is paid off, which is expected to fully amortize by 2017. Under Fitch's
base case assumption of an average uptime rate of 95%, cash flow to be
distributed to Constellation from its OpCos is expected to average between
USD50 million and USD55 million over the next five years. Net distributions to
Constellation are expected to increase beyond 2017 as some project finance
debt is fully amortized and should increase if uptime rates are higher than
Predictable Revenues and Strong Backlog
Constellation's consolidated revenues and cash flow from operations are stable
and predictable, reflective of its long-term contractual structure, for the
most part with Petrobras. The company provides onshore and offshore oil and
gas drilling services through its different subsidiaries. The average
remaining contract life for its existing majority owned offshore drilling
assets is approximately five years. The company currently operates seven
offshore drilling units under long-term contracts with Petrobras and an
additional unit is expected to be operational before year end. The company
also operates nine onshore rigs, which are, for the most part, contracted with
Petrobras. The bulk of the holding company's expected cash flow will come from
the offshore services, although cash flow from its onshore operations will
provide important support during 2012 and 2013, when cash flow from offshore
assets will be weak due to covenant rich financing at the Opco level.
Constellation's current contract backlog, excluding contract renewal options,
of approximately USD11.1 billion bodes well for the company's credit profile
as it supports cash flow predictability. Of the company's current backlog,
USD5.1 billion relate to the existing offshore drilling assets, where the
company has majority participation, all of which are contracted with
Petrobras. The balance of the backlog relates to other assets without majority
participation as well as its onshore assets, two thirds of which are
contracted with Petrobras with an average remaining contract life of
approximately two years.
Strong Demand for Drilling Rigs in Brazil
Long term demand prospects for oil and gas services in Brazil, including
demand for offshore drilling rigs and production equipment, are strong. Driven
by a government initiative to increase the country's oil and gas production,
Petrobras has embarked on an aggressive capital investment program of up to
USD236 billion over the next four years. Further, the government has
implemented requirement that a high percentage of the work and materials
provided for these expenditures be from 'local' sources in order to boost
economic activity. The combination of higher demand and the local content
mandate for oil and gas related services support long-term demand prospects
for the company as well as its ability to renew contracts at favorable rates.
Factors that could lead to a negative rating action are: Failure to lower
leverage to 4.0x or below or an overly aggressive growth strategy that could
pressure credit metrics. Nevertheless, the latter is somewhat mitigated by the
proposed issuance's covenants.
Key considerations for a positive rating action or outlook would be the
injection of new capital into the company, depending on how it invests the new
funds and the lead time for the new investments to generate cash flow from
operations and distributions to Constellation.
Constellation is 80.5% owned by the Queiroz Galvao family, which in turn owns
a Brazilian industrial conglomerate, and 19.5% by Capital International
Private Equity Funds (CIPEF). The company currently has nine land drilling
rigs, four conventional and five helicopter-transportable rigs and eight
offshore rigs - three semisubmersible moored to operate in water depth up to
1,100 meters and three dynamic positioning for operation in water depth up to
2,700 meters. The company also has a 55% participation in two additional
drillships built in the Samsung shipyard in Korea, in partnership with
Alperton Capital. The first drillships began operating in September 2012 and
the second one is expected to begin operating before year-end 2012. These
drillships will be capable of operating in ultra-deep-waters (UDW), that is,
water depths of up to 3,000 meters. Constellation also has 15% equity
participate in three UDW semi-submersibles drill-ships in partnership with
Sete Brasil Participacoes S.A., which are to be built in Brazil and operated
by Constellation. The company also has 20% to 25% participation on three
Floating Production, Storage and Offloading (FPSO) vessels, two of which are
under construction and one currently operating in Brazil.
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);
--'Parent and Subsidiary Rating Linkage' (Aug.8, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology
Parent and Subsidiary Rating Linkage
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