Moody’s Investors Services has revised its outlook to stable from negative for the formerly beleaguered global oilfield services and drilling sector, with 2017 EBITDA anticipated to grow between 6%-8% after two years of extreme stress and declining earnings.
The revised outlook comes as oil prices and upstream spending show continued signs of recovery, buoyed by expected improvements in OFS operating margins from very depressed levels and an expansion of upstream drilling budgets, a sign of increasing optimism on the part of upstream companies.
“While OFS companies will remain stressed in regions with high production costs and excess service capacity, the broader operating environment will become less dreadful as higher energy prices keep spurring US rig activity and stabilising international markets,” says Sajjad Alam, a Moody’s vice president.
Even so, Moody’s analysts caution that not all OFS segments and markets will stabilise or recover uniformly, with certain businesses and markets expected to suffer further erosion of revenue and EBITDA. Oilfield activities are expected to accelerate in US and Canadian markets and stabilise in most onshore international markets, but will continue to decline offshore during 2017. For its part, onshore equipment utilisation is showing positive signs of recovery, and analysts expect OFS companies to regain some pricing power as soon as the second half of 2017, particularly in the US, where equipment oversupply is easing. Nevertheless, in a reflection of the OFS recovery’s unevenness, in deepwater and ultra-deepwater markets, reduced investments and project deferrals are likely to persist at least through mid-2018.
Given their scale, number of high quality assets, varied product offerings and broad geographic footprint, large and diversified companies are expected to disproportionately capture most of the incremental margins and will likely expand their market share during the industry’s recovery, Moody’s says. The five largest Moody’s-rated OFS issuers, all showed top-line growth in fourth quarter 2016, after experiencing steep revenue losses for seven consecutive quarters.
But for smaller, specialised and regionally focussed OFS companies, tough business conditions will persist in 2017, offering limited operating and financial flexibility. As of March 2017, more than half of Moody’s-rated OFS companies have very weak credit quality, with a rating of Caa1 or lower. And while many of these same companies will try to amend loan covenants, restructure debt or seek protection from bankruptcy courts to stay afloat, Moody’s says a slow or tepid recovery which makes it harder to repair the balance sheet quickly enough to avoid default may challenge these firms’ ultimate survival prospects.
Moody’s outlook for a sector reflects the rating agency’s expectations for the fundamental business conditions in the industry over the next 12 to 18 months. Moody’s would change the global OFS outlook to positive should the sector’s EBITDA growth accelerate faster than 10% annualised over the next 12-18 months, based on a quicker recovery in OFS pricing and margins than expected. Conversely, the outlook would be revised to negative on expected softer drilling and completion activity and a further lapse in OFS pricing power that would cut EBITDA by 10% or more.
