London, 28 May 2020 -- Moody's Investors Service ("Moody's") has today
affirmed the Ba3 corporate family rating (CFR) of Petro Welt Technologies
AG (PWT), a Russian independent oilfield services (OFS) company.
The outlook remains stable.
RATINGS RATIONALE
The affirmation of the rating reflects Moody's expectation that
the company will have sufficient financial buffer to withstand the market
downturn in 2020-21 without a material deterioration in its credit
quality. Although PWT's operating and financial performance
will weaken over the next 12-18 months, its credit profile
should remain resilient thanks to a large cash balance and the absence
of debt except for a shareholder loan. In addition, some
improvement in the company's credit quality is possible starting
in 2022.
The spreading pandemic has depressed global oil demand and led to a sharp
decline in oil prices. Moody's as a result has lowered its average
oil price assumptions for 2020 and 2021 to $35/bbl and $45/bbl
respectively. Exceptionally weak short-term prices will
persist until production curtailments or economic recovery can ease the
strain on storage facilities already operating at or close to full capacity.
Oil production will decline in 2020-21 because of both the agreed
OPEC+ deal and a significant cut in investments. While we
expect economic activity to recover into 2021, oil demand may return
only gradually. As a result, the global oilfield services
and drilling sector will shrink dramatically in 2020 and are not likely
to fully recover in 2021 as oil and gas producers slash capital spending,
curtail drilling activity and preserve cash flow.
Substantial cuts in Russia's oil production starting in May 2020
and continuing for two years under the OPEC+ deal will lower domestic
demand for OFS services and put pressure on PWT's earnings and cash
generation. Moody's expects the company's revenue to
decline by up to 15% in 2020, remain flat or improve slightly
in 2021 and start to recover in 2022, with its EBITDA margin decreasing
to 15%-18% in 2020-22 from 19% in 2019.
As a result, EBITDA may reduce by a third in 2020 before starting
to grow gradually in 2021-22. An increase in trade receivables
is also possible because oil majors are extending payment terms,
which will weigh on the company's cash generation n 2020.
However, the affirmation of the rating is based on the company's
robust balance sheet and very good liquidity. PWT had around €120
million of cash as of 31 March 2020. At the same time, its
debt mainly consists of the €120 million shareholder loan,
including accrued interest of €20 million, which is due at
the end of 2023. Although Moody's expects negative free cash
flow of around €20 million-€30 million in 2020,
followed by positive free cash flow generation in 2021-22,
the company should sustain its large cash balance, assuming no dividends
or large acquisitions. PWT's gross leverage, measured
as adjusted debt/EBITDA, will increase to around 2.5x-2.8x
in 2020-21 from 1.8x in 2019 due to lower earnings.
At the same time, its net leverage should be below 0.5x in
2020, and below zero afterwards due to negative net debt.
Interest expense on the shareholder loan is accrued until the maturity.
PWT's credit quality also factors in (1) the company's strong market
position in its niche segments; (2) its well-invested modern
asset base; and (3) the company's continuous adherence to its
historically conservative financial policy and prudent approach to its
development strategy.
At the same time, the rating is constrained by (1) the company's
small size compared with that of its peers; (2) its highly concentrated
customer base; (3) the intensifying pricing pressure from its customers;
and (4) the company's exposure to Russia's less-developed regulatory,
political and legal framework.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG) CONSIDERATIONS
The rapid and widening spread of the coronavirus outbreak, deteriorating
global economic outlook, falling oil prices, and asset price
declines are creating a severe and extensive credit shock across many
sectors, regions and markets. The combined credit effects
of these developments are unprecedented. The OFS sector has been
one of the sectors most significantly affected by the shock given its
sensitivity to oil prices and production. We regard the coronavirus
outbreak as a social risk under our ESG framework, given the substantial
implications for public health and safety. Today's action
takes into account the impact on PWT of the coronavirus outbreak.
Governance considerations include PWT's concentrated private ownership
structure, with 87% shares in the company controlled by an
individual, which creates a risk of rapid changes in the company's
strategy, financial policies and development plans. However,
the owner's track record of a fairly conservative and supportive approach
towards the company and public listing on the Frankfurt Stock Exchange,
with relevant disclosure and governance requirements, partly mitigate
the risks related to corporate governance and potential excessive shareholder
distributions.
RATIONALE FOR THE STABLE OUTLOOK
The stable outlook on PWT's rating reflects Moody's expectation
that the company will continue to (1) demonstrate a sustainable operating
and financial performance; (2) sustain its robust balance sheet,
including the large cash cushion; and (3) maintain conservative financial
and liquidity management policies, with adjusted net debt/EBITDA
remaining below 1.0x on a sustainable basis.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING
Moody's could upgrade the rating in a scenario of sustainable market recovery,
provided the company were to (1) grow its business and improve customer
diversification, focusing on smooth organic expansion with a balanced
capital spending programme that is predominantly funded by operating cash
flow, (2) demonstrate strong operating and financial results within
our guidelines for the rating, (3) maintain robust liquidity,
and (4) demonstrate a solid track record of adhering to a conservative
financial policy. A rating upgrade would also require sustainable
improvement in operating conditions in the Russian OFS sector.
Moody's could downgrade the rating if the company's (1) Moody's-adjusted
gross debt/EBITDA were to increase above 3.0x and net debt/EBITDA
above 1.0x on a sustained basis due to weaker operating performance
or more aggressive debt-financed capital spending and shareholder
distributions, (2) operating performance were to deteriorate materially
because of a loss of a major customer or declining exploration and production
activity, and (3) liquidity were to weaken.
PRINCIPAL METHODOLOGY
The principal methodology used in this rating was Global Oilfield Services
Industry Rating Methodology published in May 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1062654.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
Registered in Austria, Petro Welt Technologies AG (PWT) is an independent
OFS company, with operations predominantly in Russia and to a lesser
extent in Kazakhstan and Romania. PWT provides fracturing,
sidetracking and high-class conventional drilling services.
In the 12 months ended 30 June 2019, PWT generated sales of €263
million.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security or pursuant
to a program for which the ratings are derived exclusively from existing
ratings in accordance with Moody's rating practices. For ratings
issued on a support provider, this announcement provides certain
regulatory disclosures in relation to the credit rating action on the
support provider and in relation to each particular credit rating action
for securities that derive their credit ratings from the support provider's
credit rating. For provisional ratings, this announcement
provides certain regulatory disclosures in relation to the provisional
rating assigned, and in relation to a definitive rating that may
be assigned subsequent to the final issuance of the debt, in each
case where the transaction structure and terms have not changed prior
to the assignment of the definitive rating in a manner that would have
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For any affected securities or rated entities receiving direct credit
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and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
The rating has been disclosed to the rated entity or its designated agent(s)
and issued with no amendment resulting from that disclosure.
This rating is solicited. Please refer to Moody's Policy
for Designating and Assigning Unsolicited Credit Ratings available on
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Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Moody's general principles for assessing environmental, social
and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
At least one ESG consideration was material to the credit rating action(s)
announced and described above.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Mikhail Shipilov
Asst Vice President - Analyst
Corporate Finance Group
Moody's Investors Service Limited, Russian Branch
7th floor, Four Winds Plaza
21 1st Tverskaya-Yamskaya St.
Moscow 125047
Russia
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Victoria Maisuradze
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
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