Fitch Rates Tuscany's Proposed USD200MM Issuance at 'B+/RR4'
BUENOS AIRES, Argentina -- November 19, 2012
Fitch Ratings has assigned a 'B+/RR4' to Tuscany International Drilling Inc.'s
(Tuscany) proposed USD200 million, seven-year senior unsecured notes,
issuance. The 'RR4' Recovery Rating on the issuance reflects an average
expected recovery in the event of default. Tuscany's foreign and local
currency Issuer Default Ratings (IDRs) are both 'B+',with a Stable Outlook.
The notes will be guaranteed by Tuscany's subsidiaries: Tuscany South America
Ltd., Tuscany Perfuracoes Brasil Ltda., Tuscany Perfuracoes Nordeste
Ltda.,Tuscany Riga Leasing S.A. and Caroil SAS. Fitch expects the company to
use the proceeds from the issuance primarily to refinance existing revolver
debt balances, and for general corporate purposes.
Tuscany's ratings reflect the company's moderate leverage, experienced
management team, and a technologically advanced asset fleet, which is either
new or has recently been 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, reflected in a consolidated total
debt to EBITDA ratio of 3.3x reported as of the last 12 months (LTM) ended
September 2012. Fitch expects the company's leverage to decline below such
levels over the medium term. Interest coverage is adequate at 3.1x as of LTM
September 2012 and is expected to be around 3.5x by 2013.
The company could choose to use its accumulated cash to expand its rig fleet,
while maintaining the same leverage and break-even to positive free cash flow.
As of September 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 USD245 million in 2012 (consisting of USD200 million in bonds and
USD 45million drawn from a new US$75 million revolver facility), with possible
paydowns of a 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 counterparty
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. 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. During the
first nine months of 2012, EBITDA increased to USD49 million, reflecting the
new business platform. 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 USD245 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. As of Sept 30, 2012, Tuscany's liquidity was low at USD 4.6 million
but was enhanced by the company's access to a new committed revolving facility
for USD45 million over the next five years. In November 2012, the company had
drawn USD 25 million from such a facility. This facility will be replaced with
a new USD 75 million revolver which will come into place once the bond is
issued, Tuscany plans to draw USD45 million that will be used to cancel the
previous facility, which will leave USD30 million of additional liquidity
available under the revolver. Fitch expects Tuscany to maintain a more robust
minimum cash position going forward.
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 lead the company's credit quality to
deteriorate. The 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's current business, or a higher level of medium-term contracts with
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 on 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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