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Rating Action:

Moody's confirms ratings of 4 oilfield services firms operating in Russia

Global Credit Research - 27 Apr 2016

London, 27 April 2016 -- Moody's Investors Service (Moody's) has confirmed the ratings of four oilfield services (OFS) companies with major operations in Russia. Today's rating confirmations comprise the Ba3 corporate family rating (CFR) of C.A.T. Oil AG; the B1 CFRs and B1-PD probability of default ratings (PDRs) of Neftserviceholding LLC and Borets International Ltd, as well as the B1 senior unsecured rating of the notes issued by Borets Finance Limited, all with a stable outlook. Moody's also confirmed the B2 CFR and B2-PD PDR of IG Seismic Services Plc with a negative outlook. These actions conclude the rating reviews initiated by Moody's on 22 January 2016.

On 22 January 2016, Moody's placed the ratings of 32 integrated oil, exploration and production (E&P), and OFS companies in the EMEA region on review for downgrade. This reflected the substantial drop of oil prices and the continued oversupply in the global oil markets. Moody's also lowered its oil price estimates on 21 January 2016 and assumes Brent oil price to average $33 barrel of oil equivalent (boe) in 2016 and $38/boe in 2017, with a slow recovery for oil prices over the next several years. The drop in energy prices and corresponding capital markets concerns will also raise financing costs and increase refinancing risks for OFS companies.

The drop in oil prices and weak natural gas prices have caused a fundamental change in the energy industry and its ability to generate cash flow has fallen substantially. Moody's believes this condition will persist for several years. As a result, Moody's is recalibrating the ratings of many energy companies globally to reflect this industry shift. However, the impact of the drop in oil prices and low natural gas prices will vary substantially from issuer to issuer. Therefore, Moody's confirmed the current ratings of some companies, while downgrading others sometimes by multiple notches.

The greater resilience of the Russian OFS market to low oil prices is underpinned by (1) the taxation system, a weak rouble and relatively low production costs, which partly offset negative pressure of low oil prices on Russian oil companies; (2) the large size of the market with increasing onshore field maturity and growing complexity of oil extraction amid historical underinvestment into the OFS; (3) the high importance of the oil and gas industry for the Russian economy which translates into supportive taxation framework for the upstream sector aimed at sustainable production level; and (4) the less competitive nature of the Russian OFS market compared to the global markets, particularly that in the US. Although OFS companies experience pressure from tighter pricing as oil companies become increasingly price conscious, Moody's-rated companies still manage to preserve adequate margins by embarking on sizeable cost optimisation programmes and renegotiating better terms with their suppliers. Overall, Moody's anticipates revenues and EBITDA for the four companies in 2016 to remain at adequate levels, which should allow them to keep Moody's-adjusted debt/EBITDA ratios within the rating agency's guidelines for the ratings.

RATINGS RATIONALE

-- CONFIRMATION OF C.A.T OIL'S Ba3 CFR

Moody's confirmed the Ba3 CFR of C.A.T. Oil AG (CAToil) with a stable outlook. The rating remains supported by the company's robust business model with a well-invested modern asset base, track record of strong financial performance and sound liquidity profile. These factors provide sufficient flexibility to weather risks related to adverse market conditions and heavy exposure to rouble depreciation, due to currency mismatch between CAToil's rouble revenues and euro debt.

Moody's expects that in 2016 CAToil's operating performance and financial metrics will remain fairly strong. Although in euro terms Moody's expects further reduction in the company's revenues (following a 22% decline in 2015) as a result of ongoing rouble depreciation, its rouble revenues should remain flat based on existing contracts. The company should also be able to maintain its adjusted EBITDA margin at above 20%, supported by (1) historically strict cost control; (2) ability to renegotiate better terms with suppliers; and (3) around 90% of operating costs denominated in roubles. Despite some increase compared to historical levels, CAToil's adjusted debt/EBITDA will remain below 2.0x on a sustainable basis.

Furthermore, Moody's expects that CAToil's liquidity position will remain solid in 2016. The company's decision to postpone its expansion programme will allow it to generate positive free cash flow and cover dividend payments and debt service obligations from internal sources. Debt servicing will remain moderate with no debt due until December 2018.

The stable rating outlook reflects Moody's expectation that CAToil will continue to (1) demonstrate healthy operating and financial results during market downturn; and (2) maintain a strong liquidity profile and conservative financial policy, with adjusted debt/EBITDA below 2.0x.

Based in Austria, CAToil is an independent OFS company that services the major oil & gas companies in Russia and to a lesser extent in Kazakhstan. The company is a niche player in the overall OFS market, with a strong position in fracturing, sidetracking and high-class drilling services as a result of its high-quality modern fleet. In the 12-month period through September 2015, CAToil generated sales of EUR342 million and adjusted EBITDA of around EUR97 million.

-- CONFIRMATION OF BORETS INTERNATIONAL'S B1 CFR and B1-PD

Moody's confirmed the B1 CFR and B1-PD PDR of Borets International Ltd (Borets), as well as the B1 senior unsecured rating of the notes issued by Borets Finance Limited, a wholly owned subsidiary of Borets. The outlook on all ratings is stable.

The B1 rating is supported by the company's consistent focus on positive free cash flow generation and moderate debt service requirements until the maturity of the bond in 2018. These factors to some extent mitigate the risk of higher leverage as a result of Borets' exposure to the ongoing rouble depreciation, given the currency mismatch between its revenues (70% of which are in roubles) and mostly US-dollar-denominated debt. In addition, healthy operating performance should allow the company to reduce its adjusted debt/EBITDA back to below 4.0x in 2016 from 4.3x in 2015.

Although in 2015 Borets suffered a material contraction on international markets due to weak oil prices, the company's operating results remained strong with the record-high sales volumes supported by its resilient Russian business. Thus, while in 2015 the company's US dollar revenues dropped by 28%, in rouble terms, its revenues increased by around 16%. Moody's expects that in 2016 the negative impact of the ongoing rouble depreciation will be partly offset by continued strength in its Russian operations and some stabilisation of the international business with growing activity in the Middle East and North Africa region.

Borets should also be able to preserve a sound adjusted EBITDA margin, which exceeded 20% in 2015, as it will continue to benefit from (1) the positive impact of rouble depreciation on the profitability of its international operations, (2) the growing share of more profitable leasing business and innovative products, and (4) tight cost control and renegotiation of better terms with suppliers.

The stable outlook on the ratings reflects Moody's expectation that Borets will deliver on its operating targets, while maintaining robust cash flow generation and a strong liquidity profile. These factors should compensate for weaker leverage metrics as a result of the sharp rouble depreciation. Moody's also expects that the company will continue to adhere to its sound corporate governance standards.

Borets is a leading vertically integrated manufacturer of artificial lift products for the oil sector, specialising in the design and manufacture of electric submersible pumps (ESP) and related products and provision of related services. In 2015, Borets generated $522 million in sales and $107 million of adjusted EBITDA and reported $620 million in assets.

-- CONFIRMATION OF NEFTSERVICEHOLDING'S B1 CFR and B1-PD PDR

Moody's confirmed the B1 CFR and B1-PD PDR of Neftserviceholding LLC (NSH) with a stable outlook. The B1 rating reflects Moody's expectation that NSH's historically conservative financial profile, prudent financial policy as well as strengthened liquidity should provide a degree of flexibility to withstand adverse market conditions.

Despite the healthy results of NSH's Russian business, the company's operations in Kazakhstan and Uzbekistan contracted dramatically and led to a 30% drop in revenues in 2015. In 2016, company revenues will likely remain subdued at around the 2015 level.

Moody's, however, expects some recovery of profitability in 2016 with the company's adjusted EBITDA margin moving above 15% supported by the implementation of an extensive cost optimisation programme, growing share of the more stable Russian business, and the absence of one-off transfer costs. Profitability in 2015 was pressured by reduced activity in the Central Asian markets, limited ability to transfer rising inflation to customers, and additional costs related to transportation of the idle equipment to Russia.

Despite significant operating performance deterioration and the negative impact of rouble depreciation on the company's dollar debt, NSH's adjusted debt/EBITDA remained below 2.5x and should further improve towards 2.0x in 2016 due to stronger profitability and a reduced debt burden following the repayment of its $85 million bank facility due in Q3 2016.

Moody's also positively acknowledges the evidence of strong support from the company's shareholder, PFIG, which apart from cancelling dividend payments in 2015-16, supported the company's liquidity profile by providing a shareholder loan to guarantee timely repayment of NSH's only large bank debt maturity if the company fails to arrange the necessary refinancing.

The stable outlook on the ratings reflects Moody's expectation that the company will be able to maintain adequate operating and financial performance during the market downturn while adhering to conservative financial and liquidity management policies with adjusted debt/EBITDA remaining below 3x on sustainable basis.

NSH is a Russian independent OFS company with a presence in most of the important Russian oil and gas provinces and in the Caspian region of Kazakhstan and Uzbekistan. The company provides a range of OFS services, with a particular focus on the drilling segment. In 12-month period ended June 2015, NSH generated RUB21.3 billion ($449.0 million) of revenues and RUB2.7 billion ($55.6 million) of adjusted EBITDA.

-- CONFIRMATION OF IG SEISMIC SERVICES'S B2 CFR and B2-PD PDR

Moody's confirmed the B2 CFR and B2-PD PDR of IG Seismic Services Plc (IGSS) with a negative outlook. The B2 rating is supported by IGSS's still fairly stable operating and financial performance. At the same time, the negative outlook reflects refinancing risks related to the upcoming Put Date of the RUB3 billion bond in October 2016. Moody's understands that IGSS has already started negotiating potential refinancing and, given its strong relationship with banks, the company should be able to meet its obligations in a timely manner. Assuming this is done and depending on the terms of refinancing, Moody's continues to view IGSS as a fundamentally solid business.

Although seismic services remain the most volatile and cyclical in the OFS industry, the company's 2015 results and the existing order book for 2016 proves the continued demand for the services in Russia. Moody's expects that IGSS's revenues will remain somewhat flat in 2015-16, with existing contracts securing operations up until H1 2016 and comprising around 70% of revenues forecast for 2016. Moody's also expects that the company will retain adequate profitability despite increasing pressure from rising inflation and tight pricing under contracts. To defend its adjusted EBITDA margin at above 20%, the company is now increasingly focused on efficiency improvements and applies a selective approach towards contracting prioritising profitability over revenue growth.

Despite healthy operating results and profitability, as well as substantial capex reductions, in 2015 IGSS's adjusted debt/EBITDA remained elevated at around 4.0x largely due to an extraordinary increase in working capital as the company decided to (1) hedge against rising inflation through advance purchases of materials and (2) shift from factoring to short-term debt financing. Moody's expects that in 2016, the company's adjusted leverage will somewhat improve towards 3.5x supported by normalisation of working capital and still limited investment activity.

The negative outlook on the ratings reflects refinancing risks related to the upcoming put option on the bond, although Moody's expects that IGSS will be able to arrange the necessary refinancing in a timely manner. Moody's also expects that the company will be able to maintain adequate operating and financial performance during the market downturn while maintaining adjusted debt/EBITDA below 4x on sustainable basis. Moody's would consider stabilising the outlook on the ratings subject to IGSS successfully addressing its refinancing risk, while performing in line with Moody's expectations.

IGSS is the largest seismic services company in Russia, with minor operations in other countries including Kazakhstan and India. The company provides high-quality seismic data acquisition, and data processing and interpretation services to a diversified client base, and has a foothold in all major oil and gas provinces of Russia. For the 12-month period ended June 2015, IGSS generated sales of $404 million and adjusted EBITDA of $94 million.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Global Oilfield Services Industry Rating Methodology published in December 2014. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

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.

Ekaterina Lipatova
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
SUBSCRIBERS: 44 20 7772 5454

Victoria Maisuradze
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's confirms ratings of 4 oilfield services firms operating in Russia
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