Fitch Expects to Rate Schahin Oil and Gas' USD685 MM Proposed Issuance 'BB-'
CHICAGO -- January 29, 2013
Fitch Ratings expects to rate Schahin Oil and Gas Ltd.'s (Schahin or Holdco)
proposed USD685 million senior unsecured notes issuance 'BB-'. Fitch has also
assigned foreign and local currency Issuer Default ratings (IDRs) of 'BB-' to
Schahin. The Rating Outlook is Stable. The company expects to use the proceeds
from the issuance to refinance subordinated debt at some of its subsidiaries
as well as debt at the holding company level.
Schahin's ratings reflect the company's high consolidated leverage and
structural subordination to its operating subsidiaries' project finance debt.
Positively, consolidated leverage is expected to decline over time as the
project finance debt at the operating companies amortizes. The OpCos assets
have long-term contracts in place that allow them to better match project debt
with the life of the assets, which results in low debt service requirements
and greater cash flow distributions to the holding company. Upstream
distributions from the four cash generating assets are not expected to be
disrupted, nevertheless they are subject to various distribution tests.
Schahin'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's aggressive
capital expenditure program as well as new exploration and production entrants
to the market.
HIGH INITIAL LEVERAGE AND AVERAGE LIQUIDITY
The company's pro forma consolidated leverage is considered high for the
rating category and is expected to decrease over time as the debt at the OpCos
amortizes to levels more consistent with the rating category. Fitch expects
pro-forma leverage as measured by total debt to EBITDA to range between 6.5x
and 7.5x for 2013. Fitch expects the company to lower its consolidated
leverage ratio to below 4.5x within the next three to five 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 USD3.6
billion by year-end 2013, while EBITDA for this year is expected to range
between USD520 million and USD570 million. As of Sept. 30, 2012, debt at the
OpCos level amounted to USD3.1 billion, out of approximately USD3.9 billion of
total consolidated financial debt.
Schahin's liquidity is supported by a twelve month debt service reserve
account and dividend distributions from its subsidiaries. As of Sept. 30,
2012, the company's unrestricted cash position was low with only USD1.4
million of cash and cash equivalent while consolidated short-term debt
amounted to USD759 million (consolidated restricted deposits amounted to
approximately USD150 million). During 2013, the company's liquidity position
is expected to improve as a result of dividend distributions from the OpCos.
The company expects to use a portion of the proceeds from the proposed debt
issuance to refinance USD356 million of short-term debt related to Vitoria
PREDICTABLE REVENUES AND STRONG BACKLOG
Schahin's consolidated revenues and cash flow from operations are stable and
predictable, reflective of its long-term contractual structure with Petrobras.
The company provides offshore oil and gas drilling services through its
different subsidiaries. The average remaining contract life for its existing
offshore drilling assets is approximately eight years. The company currently
operates six offshore drilling units under long-term contracts with Petrobras.
The bulk of the HoldCo's expected cash flow will come from dividends from its
100% owned OpCos as well as from cash flow from operations from its leased
asset, Victoria, and the potential minority investments in three new FPSOs.
Schahin has a good operating track record in the drilling sector. During 2012,
the uptime for the four assets that will distribute dividends to Holdco
Schahin's current contract backlog, excluding contract renewal options, of
approximately USD6.8 billion bodes well for the company's credit profile as it
supports cash flow predictability. Of the company's current backlog, USD5.4
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 three FPSOs for which the company has
acquired the option to purchase between 10% and 15% equity participation upon
STRUCTURAL SUBORDINATION TO OPERATING COMPANIES' DEBT
The potential retention of cash flows after debt service at the OpCos level
makes cash flow to the Holdco somewhat less stable and predictable 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 (S.S.
Panatanal and S.S. Amazonia) are not expected to distribute excess cash to the
holding company until all project finance debt and subordinated debt is
Cash distributions to Schahin are sensitive to the operating performance of
the OpCos' (the rigs') uptime performance. For example, in the case of the
Cerrado and Sertao operating assets, a decline in the uptime rate to 86% and
85% for three and six months, respectively, will likely prevent these assets
from distributing cash to the Holdco. Under Fitch's base case assumption of an
average uptime rate of 95%, these two assets are not expected to trap cash.
Also, under Fitch's base case assumptions, net cash flow distributions to
Schahin from its OpCos, after considering planned investments and holding
company operating expenses, is expected to range between approximately USD40
million and USD280 million and to average approximately USD125 million per
year over the next five years. Total debt to net dividend distributions at
Holdco is expected to average approximately 2.9x over the next five years. Net
distributions to Schahin are expected to increase starting 2017 as some
project finance debt is fully amortized and should increase if uptime rates
are higher than projected.
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 a 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 4.5x or below or an overly aggressive growth strategy that could
pressure credit metrics.
Key considerations for a positive rating action or outlook would be a faster
deleveraging process coupled with a reduction of the holding company's
structural subordination to its operating assets.
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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Chicago, IL 60602
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Daniel R. Kastholm, CFA, +1-312-368-2070
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