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Rating Action:

Moody's changes Anton's outlook to negative

 The document has been translated in other languages

20 Aug 2020

Hong Kong, August 20, 2020 -- Moody's Investors Service has changed Anton Oilfield Services Group's outlook to negative from stable. At the same time, Moody's has affirmed the company's B1 corporate family and senior unsecured ratings.

"The change in outlook to negative reflects our expectation that Anton's earnings and liquidity will weaken over 2020-21, reducing its buffer against the challenging operating environment and volatile oil prices," says Chenyi Lu, a Moody's Vice President and Senior Credit Officer.

"The rating affirmation reflects that despite this likely temporary weakening, the company's strong domestic market position places it well to benefit from increasing natural gas and shale gas production activity in China, in turn providing it with some business resilience," adds Lu.

RATINGS RATIONALE

Anton's B1 corporate family rating reflects the company's (1) integrated business model; (2) strong market position in the domestic oil field services sector in China (A1 stable); (3) growing capabilities, improved customer mix and more established track record of operating geographically diversified businesses; and (4) modest financial leverage.

At the same time, Anton's rating is constrained by the company's (1) exposure to oil price volatility and risks related to its overseas expansion; (2) small scale and high customer concentration; and (3) weak liquidity.

Moody's expects Anton's revenue will drop 10% in 2020 but grow 8% in 2021, following strong 22.3% growth in 2019. This expectation balances weak demand for Anton's products and services amid low oil prices against a gradual recovery in its domestic business, as Anton is well positioned to benefit from strong growth in China's natural gas sector over the next two years.

Anton's adjusted EBITDA margin will also weaken to 24.5%-25.0% over the next 12-18 months from 30.0% in 2019, mainly due to intense pricing pressure amid weak demand, high fixed costs and additional coronavirus-related expenses. These challenges are only partially offset by sustained cost and expense control measures.

As a result, Moody's expects Anton's debt leverage, as measured by adjusted debt/EBITDA, will increase to 3.5x-4.0x over the next 12-18 months from 2.7x in 2019, excluding the USD300 million bonds issued in December 2019 to pre-fund its December 2020 debt maturities. This level of leverage is weaker than Moody's had previously expected, but still provides some buffer against high oil price volatility and its high short-term working capital needs.

Moody's further expects the company to prudently manage its working capital cycle and remain cautious in its capital spending. As a result, Moody's expects the company's overall debt levels to decrease over the next 12-18 months.

Anton's liquidity position has weakened as a result of lower operating cash flow. As of year-end 2019, the company had cash and cash equivalents of RMB2.42 billion and restricted cash of RMB369 million. These liquidity sources and Moody's expected operating cash flow of about RMB200 million-RMB250 million over the next 12 months are insufficient to cover its RMB2.75 billion of short-term debt, RMB410 million of bills payable, and estimated maintenance capital spending of about RMB100 million over the next 12 months. Anton's short-term debt included RMB498 million short-term bank loans, USD300 million (RMB2.1 billion) senior notes due December 2020 (2020 notes), finance lease and lease liabilities.

In March 2020, the company completed a tender offer to purchase USD103 million of its 2020 notes. Moody's further expects the company to repay the remaining outstanding maturities of its 2020 notes by using the proceeds from its USD300 million bond issuance in December 2019 as a source to partially pre-fund this majority.

This weak liquidity position is mitigated by Anton's track record of rolling over its short-term bank loans, especially during the weak oil price environment in 2015 and 2016, and its track record of good access to the domestic bank and debt and equity capital markets.

The rating also takes into account the following environmental, social and governance (ESG) considerations.

Firstly, the company is exposed to increasingly stringent regulations for oil and gas operations and access to new resources. However, Anton has to date not experienced any major compliance violations related to air emissions, water discharge or waste disposal.

Secondly, on the governance front, the company's key shareholder, Luo Lin, held a sizeable 24% stake at the end of 2019. In addition, the majority of its board of directors is not independent. Meanwhile, Anton has demonstrated financial prudence as reflected in its USD300 million bond issuance in December 2019 to pre-fund its 2020 maturities.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

An upgrade of Anton's ratings is unlikely over the next 12-18 months, given the negative outlook. The outlook could return to stable if Anton (1) maintains its order backlog, revenue and earnings even amid the challenging operating environment; (2) remains prudent in its working capital management and capital investments, with adjusted debt/EBITDA remaining below 4.0x-4.5x on a sustained basis; and (3) improves in its free cash flow generation and liquidity.

The ratings could be downgraded if Anton's (1) order book declines materially; (2) financial leverage weakens, such that adjusted debt/EBITDA exceeds 5.5x on a sustained basis, because of declining profitability or higher debt arising from the pressure on its working capital needs; or (3) liquidity position weakens further.

The principal methodology used in these ratings 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.

Anton Oilfield Services Group is a major Chinese oil field services company that offers integrated oil and gas field services solutions, covering various phases of field development, including drilling technologies, well completion and oil production services.

Anton was founded by its chairman, Luo Lin, in 1999 and was listed on the Hong Kong Stock Exchange in December 2007.

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 affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, 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 ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Moody's considers a rated entity or its agent(s) to be participating when it maintains an overall relationship with Moody's. Unless noted in the Regulatory Disclosures as a Non-Participating Entity, the rated entity is participating and the rated entity or its agent(s) generally provides Moody's with information for the purposes of its ratings process. Please refer to www.moodys.com for the Regulatory Disclosures for each credit rating action under the ratings tab on the issuer/entity page and for details of Moody's Policy for Designating Non-Participating Rated Entities.

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.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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.

The first name below is the lead rating analyst for this Credit Rating and the last name below is the person primarily responsible for approving this Credit Rating.

Chenyi Lu
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Clement Cheuk Yiu Wong
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

No Related Data.
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