Fitch Rates Tuscany International Drilling Inc. 'B+'; Outlook Stable
BUENOS AIRES, Argentina -- November 07, 2012
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
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
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 million.
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
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