Fitch Affirms Schahin Oil and Gas' IDRs at 'BB-'; Revises Outlook to
CHICAGO -- January 27, 2014
Fitch Ratings has affirmed Schahin Oil and Gas Ltd.'s (Schahin or Holdco)
foreign and local currency Issuer Default Ratings at 'BB-'. The Rating Outlook
has been revised to Negative from Stable.
The Negative Outlook reflects higher levels of refinancing risk as the company
has delayed obtaining permanent long-term financing at the holding company
level. Schahin has entered into two bridge loan financings to meet its
short-term refinancing needs after canceling its proposed USD685 million debt
issuance last year. The company currently has a bridge loan with Mizhuo Bank
Ltd for USD460 million, which becomes due in October 2015. This bridge loan
has an increasing interest rate, which, together with the short-term maturity,
increases the company's short to medium term refinancing risk.
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 LEVERAGE AND LOW LIQUIDITY
Schahin Oil & Gas Ltd's (HoldCo) consolidated leverage is considered high for
the rating category and is expected to decrease over time, as debt at the
operating companies' (OpCos) level amortizes to levels more consistent with
the rating category. Total debt as of September 2013 amounted to approximately
USD3.8 billion, including approximately a USD700 million capital lease for the
Victoria drilling rig. As of the last 12 months ended Sept. 30, 2013, the
company reported EBITDA of approximately USD550 million, in line with initial
expectations. Fitch expects that consolidated leverage, as measured by total
debt to EBITDA, will gradually decrease to approximately 5.0 times (x) or
below during the next three to four years from the reported 6.8x as of Sept.
30, 2013. Schahin's liquidity is supported by the dividend distributions from
its subsidiaries. As of Sept. 30, 2013, the company's unrestricted cash
position was low at approximately USD30 million of cash and cash equivalents
while consolidated short-term debt amounted to approximately USD460 million.
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 the
first 11 months of 2013, average uptime for Schahin fleet was approximately
Schahin's current contract backlog, excluding contract renewal options, of
approximately USD6 billion bodes well for the company's credit profile as it
supports cash flow predictability. Of the company's current backlog,
approximately USD5 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 construction completion.
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. The project finance debt at the
OpCos either have cash sweep provisions or 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 repaid
due to cash sweep provisions.
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.
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 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 put in
place permanent long-term financing at the holding company to refinance
intermediate subsidiaries obligations and/or failure to lower leverage to 5.0x
or below in the medium term 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'.
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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Elizabeth Fogerty, New York
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Joe Bormann, CFA
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