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Global Credit Research - 20 Mar 2017
New York, March 20, 2017 -- 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, according
to a newly released report, "Oilfield Services and Drilling
-- Global: EBITDA Set to Grow Mildly Following 2015-16
Period of Extreme Stress." 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 stabilizing international markets," says Sajjad
Alam, a Moody's Vice President.
Even so, Moody's analysts caution that not all OFS segments
and markets will stabilize 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 stabilize in most onshore international markets, but will continue
to decline offshore during 2017. For its part, onshore equipment
utilization 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
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
But for smaller, specialized and regionally focused 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% annualized 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.
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Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
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