Fitch Affirms QGOG Constellation's FC and LC IDRs at 'BB-'; Outlook Stable
CHICAGO -- October 22, 2013
Fitch Ratings has affirmed QGOG Constellation S.A.'s foreign and local
currency Issuer Default Ratings (IDRs) and USD700 million senior unsecured
notes due 2019 at 'BB-'. The Rating Outlook is Stable.
Key Rating Drivers
Constellation's 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 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. As of the
last 12 months (LTM) ended June 30, 2013, leverage as measured by total debt
to EBITDA was approximately 6.0x. 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 as of June 30, 2013 reached
approximately USD3.2 billion, while EBITDA was USD535 million. As of June 30,
2013, debt at the OpCo level amounted to USD2.4 billion, out of approximately
USD3.2 billion of total consolidated debt.
Constellation's liquidity is supported by a 12 months debt service reserve
account 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, 2013, cash and cash equivalent amounted to USD421
million, of which approximately USD229 million were at the holding company
level and the balance was at the operating companies. Also a positive factor
for the company's liquidity was the equity injection of approximately USD300
million from its shareholders during September 2013, which the company expects
to use to partially fund its approximately USD200 million equity contribution
for a new ultra deep water (UDW) drilling rig it ordered in November of 2012.
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%, net cash flow
distributions to Constellation from its OpCos is expected to average between
USD50 million and USD70 million over the next four years. Net distributions to
Constellation are expected to notably increase beyond 2017 as some project
finance debt is fully amortized and should increase if uptime rates are higher
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 three and a half years. The company currently operates
eight offshore drilling units under long-term contracts with Petrobras and has
placed an order to build a new 100% owned UDW drillship yet to be contracted,
which adds to risk. The company also operates nine onshore rigs, which are,
for the most part, contracted with Petrobras. The bulk of the holding
company's cash flow comes from its offshore services.
Constellation's current contract backlog, excluding contract renewal options,
of approximately USD10 billion bodes well for the company's credit profile as
it supports cash flow predictability. Of the company's current backlog,
approximately half relates to the offshore drilling assets where the company
has majority participation. The balance of the backlog relates to other assets
without majority participation as well as its onshore assets.
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.
Considerations that could lead to a negative rating action (Rating or Outlook)
--Failure to lower leverage to 4.0x or below; or
--An overly aggressive growth strategy that could pressure credit metrics
(somewhat mitigated by the issuance's covenants).
Considerations that could lead to a positive rating action (Rating or Outlook)
--Injection of new capital into the company, depending on how it invests the
new funds and the lead time required for the new investments to generate cash
flow from operations.
Additional information is available at 'www.fitchratings.com'.
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: Including Short-Term Ratings and Parent and
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Fitch Ratings, Inc.
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