Fitch Rates Nabors Industries Inc.'s New Senior Unsecured Issuance 'BBB'
CHICAGO -- September 17, 2013
Fitch Ratings has assigned a 'BBB' rating to Nabors Industries Inc.'s new
issuance of $350 million of 2.35% senior unsecured notes due 2016 and $350
million of 5.10% senior unsecured notes due 2023. The rating Outlook remains
KEY RATING DRIVERS
The ratings reflect Nabors's leverage, free cash flow (FCF) and capex profile,
and position as a major onshore rig operator in North America and
internationally. Adequate liquidity and an extended maturity profile support
the 'BBB' rating.
The Negative Outlook is the result of a long-term trend of declining market
share in the United States, low utilization on older equipment, industry
conditions including a lower average U.S. rig count in 2013 and the risks to
the rig count from the transition to pad drilling and other higher efficiency
Leverage and Free Cash Flow
As of June 30, 2013, Nabors had $4.6 billion in debt outstanding. The company
generated latest 12 months (LTM) EBITDA of $1.7 billion. This resulted in
leverage of 2.67x debt-to-EBITDA. Following the new issuance of $700 million,
$785.4 million in principal of the 9.25% due 2019 were tendered for a total
price of approximately $1.0 billion.
FCF was negative $41.1 million in 2012. Given expectations for capital
spending, Fitch expects Nabors to be modestly FCF positive again in 2013. This
depends upon the level of newbuild rig activity in the second half of 2013.
EBITDA Expected to Weaken Near Term
A U.S. rig count lower than 2011 and 2012 levels and continuing margin
pressure in completion and production services drive lower EBITDA expectations
for 2013 versus a 2012 high of $1.98 billion. Credit metrics could weaken in
line or the company could apply FCF to reduce revolver balances and defend its
current credit metrics.
Decreasing Market Share and Utilization in the U.S.
Compared to the first quarter of 2007 (1Q'07), the U.S. rig count has
currently been flat at approximately 1,750 rigs running. Since 1Q'07, Nabors'
Rig Years in the lower 48 states -- a measure of the average number of its
rigs running -- has fallen from 243 to 176. This implies a market share
reduction from 14% to 10%.
Nabors' AC (alternating current drive) rig fleet is highly utilized (128 out
of 141 for a utilization of 91%), but its legacy rigs in the lower 48 states
had utilization of only 40% (48 out of 122) as of 2Q'13.
Other characteristics of a premium rig besides an AC drive are moving systems
and the ability to drill on pads. The ability to move rigs from one well to
the next more efficiently improves the time required to develop a play and is
increasingly an area of focus to drive shale economics for the exploration and
production company. Fitch estimates the rig rental is typically only about 10%
to 15% of the cost of drilling a well, but the economic impact comes from
pulling production growth forward, not simply cost savings.
Impact of Premium Newbuild Rigs
Nabors newest rig model, the 'PACE-X' is designed to target the premium
high-efficiency market. The company has five rigs deployed and 16 newbuilds
under contract. This newbuild program should help Nabors defend its market
share, but it demonstrates how capital expenditures are required to build rigs
and replace legacy models, and it explains in part why the company has not
generated material positive FCF over the last four years.
There is also a risk that more efficient rigs from Nabors and its competitors
will put pressure on the total U.S. rig count, as the same number of wells can
be drilled with fewer rigs. Increases in wells drilled per year are subject to
the opportunity set; while shale economics are compelling, major plays are
beginning to mature and natural gas prices continue to limit activity in dry
basins. Further, wells drilled are limited by the capital budgets of E&P
companies. The exhaustion of many operators' capital budgets was a contributor
to the decline in activity at the end of 2012.
Nabors should be able to charge a premium for more efficient newbuild rigs,
but that premium may be limited by competition and replacement cost. Those
premiums may not be high enough to offset the effects of a scenario where the
total rig count declines.
Completion and Production Services
Separate from North America drilling, it is important to note that Completion
and Production services make up approximately 23% of adjusted LTM EBITDA.
Results have declined since peaking in 4Q'11 due to industry overcapacity in
the completion services market. First-half Completion and Production EBITDA
was $224 million lower than 2012.
Pamplona Capital Management, a British private equity firm, owns approximately
8.7% of Nabors' common stock. The chairman of Pamplona, Alexander Knaster, was
a member of Nabors' board of directors from his appointment in October 2004
until he resigned in October 2008. He is the former CEO of Alfa Bank, a
portfolio company of Alfa Group, the Russian conglomerate, and he also served
on the board of TNK-BP until its sale to Rosneft. Pamplona is also the largest
shareholder and controls a majority of the board of KCA DEUTAG, a competitor
of Nabors in international markets that owns 60 land drilling rigs operating
in Russia, the Caspian and the Middle East.
In January 2013, Pamplona filed a 13D modifying the intent of their stake in
Nabors from passive to active. In the time since, Nabors has initiated a
dividend of $0.16 per share (approximately $46 million per year), reached a
standstill agreement with Pamplona to appoint two new directors (Howard Wolf
and a second to be named in advance of the 2014 annual meeting), and hired an
advisor to 'evaluate strategies to enhance shareholder value, including
optimizing the company's capital structure, reviewing its mix of businesses
and improving operating performance.'
Corporate Governance Concerns
The results of the 2013 annual shareholder meeting demonstrate material
shareholder dissent. The issues with executive compensation are not new and
Nabors has made changes to address the problem. While the 'say on pay' votes
against were lower this year, they were still above 50%.
While 'say on pay' dissent decreased in 2013, votes against it in the
elections of directors increased this year. Two directors including John
Yearwood, lead independent director, did not receive a majority of the votes
cast. Their resignations were not accepted by the remaining board members and
they continue to serve.
Increasing uncertainty around shareholder activism and corporate governance
could increase the risk of a change in financial policy, such as: an increase
in debt levels, share repurchases, or dividends.
Liquidity remains adequate and stems from cash balances ($508.1 million),
short-term investments ($99.8 million), availability under Nabors's $1.5
billion senior unsecured credit facility (maturing in November 2017) and
operating cash flows ($1.5 billion for the LTM period ending June 30, 2013).
Nabors had $905 million available under its credit facility at June 30, 2013
with $300 million of borrowings and $295 million of commercial paper
Capital Structure and Maturities
The next note maturity will be the newly issued $350 million of 2.35% notes
due in 2016.
Nabors' RCF has one financial covenant, a net funded
indebtedness-to-capitalization limit of 0.60 to 1.0. Fitch calculates Nabors'
net debt-to-cap ratio at 0.4 to 1.0 as of June 30, 2013.
Positive: Future developments that in some combination could lead to positive
rating actions include:
--Improving operational performance combined with capex discipline that result
in material positive free cash flow and the use of those proceeds to repay
--Resolution of shareholder activism and corporate governance concerns that
reduce uncertainty and risk of a material change in financial policy;
--Increasing U.S. rig counts driven by a material upswing in commodity prices.
Negative: Future developments that in some combination could lead to negative
rating action include:
--Further declines in utilization and market share in the United States;
--A material change in financial policy driven by shareholder pressure or a
change in control;
--A major operational problem or a sustained period of low oil and natural gas
prices without offsetting adjustments in capital spending;
--Debt-to-EBITDA above 2.5x on a sustained basis and sustained negative FCF
would be more in line with a 'BBB-' rating.
Additional information is available at 'www.fitchratings.com'
Applicable Criteria and Relevant Research:
--'Corporate Rating Methodology' (Aug. 05, 2013).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Effective from 8 August 2012 - 5 August 2013
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Fitch Ratings, Inc.
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