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Rating Action:

Moody's downgrades Pioneer Energy Services to Caa3; negative outlook

03 Mar 2016

New York, March 03, 2016 -- Moody's Investors Service (Moody's) downgraded Pioneer Energy Services Corp.'s (Pioneer Energy) Corporate Family Rating (CFR) to Caa3 from B2, Probability of Default Rating (PDR) to Caa3-PD from B2-PD, and senior unsecured notes to Ca from B3. The Speculative Grade Liquidity (SGL) Rating of SGL-4 was affirmed and the rating outlook is negative. This action concludes the rating reviews begun on January 21, 2016.

"The rating downgrades were driven by the material deterioration in Pioneer Energy's credit metrics through 2015 and our expectation of continued deterioration through 2016. The demand outlook for drilling and oilfield services is extremely weak, as witnessed by the steep and continued drop in the US rig count" said Sreedhar Kona, Moody's Vice President. "The negative outlook reflects the deteriorating fundamentals of the services sector and the likelihood of covenant breaches"

Downgrades:

..Issuer: Pioneer Energy Services Corp.

.... Corporate Family Rating, Downgraded to Caa3 from B2

.... Probability of Default Rating, Downgraded to Caa3-PD from B2-PD

....Senior Unsecured Regular Bond/Debenture, Downgraded to Ca (LGD5) from B3 (LGD5)

Affirmations:

..Issuer: Pioneer Energy Services Corp.

.... Speculative Grade Liquidity (SGL) Rating, Affirmed at SGL-4

Outlook Actions:

..Issuer: Pioneer Energy Services Corp.

....Outlook, Changed to Negative from Rating under Review

RATINGS RATIONALE

The downgrade of Pioneer Energy's Corporate Family Rating (CFR) to Caa3 from B2 is primarily driven by the continued decline in Pioneer Energy's cash flow generation through 2015 due to poor demand for drilling and services equipment and the worsened outlook for these services through 2016 and 2017. Further reduction in 2016 budgets of E&P companies as compared to 2015 will have an adverse impact on the utilization and the rates of drilling rigs and well services equipment. Based on Moody's projections, Pioneer Energy's debt to EBITDA ratio will increase towards 20x by yearend 2016 and stay near that level through 2017. Although the company secured an amendment to the credit agreement to get relief on the covenants, there is still a significant risk of covenant breach on the interest coverage covenant by the end of 2016. The company's small scale, limited range of service offerings compared to other oilfield services peers and customer concentration also impact the ratings.

The Ca rating on Pioneer Energy's $300 million of senior unsecured notes due 2022 reflects its subordination to the $200 million senior secured revolving credit facility due 2019 ($95 million outstanding and $17.3 million in committed letters of credit as of December 31, 2015).

Pioneer Energy will have weak liquidity through the next 12-18 months, as indicated by the SGL-4 Speculative Grade Liquidity Rating. At December 31, 2015, Pioneer Energy had $15 million of cash on its balance sheet and $88 million of availability under its $200 million revolving credit facility. For the full year 2016, Pioneer Energy's cash interest will be approximately $25 million and capital spending of approximately $25 million, resulting in a negative free cash flow of approximately $34 million. We expect the company to rely on the existing cash on the balance sheet and borrow from the revolving credit facility to meet its cash needs, as the EBITDA generated through 2016 will not be sufficient. The $200 million credit facility expires in September 2019. Post the December 2015 amendment to the credit facility, there are two financial maintenance covenants under the facility. The maximum senior consolidated leverage ratio covenant requires the company to maintain the ratio below 3.0x at the end of first quarter 2016, 3.50x at the end of second quarter of 2016, 4.25x at the end of third quarter 2016, and 4.75x from the end of fourth quarter 2016 to the end of second quarter 2017. Additionally the minimum interest coverage ratio covenant requires the company to maintain the ratio above 1.50x at the end of first and second quarters of 2016, and 1.25x from the end of third quarter 2016 to the end of third quarter 2017. Moody's expects the company to breach both covenants near the end of 2016, unless the company renegotiates the covenants with the bank group. The company has few alternate liquidity sources of liquidity as almost all assets are encumbered and any net proceeds from asset sales have to be used to repay revolver borrowings within 12 months.

The negative outlook reflects the deteriorating fundamentals of the services sector and the likelihood of covenant breaches.

A downgrade could occur if the company is likely to file for protection or undertakes a debt restructuring.

Ratings are not likely to be upgraded at least through 2016, given the weak commodity price environment and softness in the drilling and oilfield services sectors. Should utilization rates and dayrates start rising, contributing to EBITDA growth and interest coverage sustaining above 1.0x, combined with adequate liquidity, Pioneer Energy's ratings could be upgraded.

Pioneer Energy provides contract land drilling and various well site services to upstream oil and gas companies. The company currently operates in Texas, North Dakota and Appalachian regions and internationally in Columbia.

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.

Sreedhar Kona
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Steven Wood
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's downgrades Pioneer Energy Services to Caa3; negative outlook
No Related Data.
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