Calfrac Well Services Ltd. Rating Raised To #B-# From #CCC+# On Improving Credit Outlook Positive

Stocks and Financial Services Press Releases Tuesday February 13, 2018 09:06
TORONTO--13 Feb--S&P Global Ratings

TORONTO (S&P Global Ratings) Feb. 12, 2018--S&P Global Ratings today said it raised its long-term corporate credit rating on Calgary, Alta.-based Calfrac Well Services Ltd. to 'B-' from 'CCC+', and its issue-level rating on Calfrac Holdings L.P.'s senior unsecured debt to 'CCC' from 'CCC-'. The outlook is positive. The recovery rating on the unsecured debt is unchanged at '6', and represents negligible (0%-10%; rounded estimate 5%) recovery in our default scenario.

The upgrade primarily reflects our expectation of improved projected revenue and cash flow following a period of stable-to-improving industry activity in North America. Based on stronger cash flow generation, we estimate the company's fully adjusted, 2018-2019 weighted-average funds from operations (FFO)-to-debt ratio will strengthen and remain well above 12% this year under our base-case scenario. We also expect Calfrac will maintain an adequate liquidity profile.

The company's financial risk profile has improved materially from a year ago, when depressed hydrocarbon prices and industry activity resulted in negative EBITDA generation at the trough of industry activity in 2016, and elevated credit measures into 2017. Our improved cash flow and leverage estimates result from higher active rig count and drilling activity in the North American producing regions where Calfrac operates. We believe the projected increased drilling activity, and the need for associated fracturing services should support incremental revenue and cash flows for 2018-2019. Despite our projected improvement in the company's cash flow and leverage metrics, we continue to view the overall financial risk profile as highly leveraged, and highly susceptible to the industry's inherent volatility. Moreover, we believe there is a relatively high fixed component in Calfrac's operating cost structure that keeps our forecast EBITDA margins in the 13%-15% range, and vulnerable to rapid deterioration during an industry downturn.

The positive outlook reflects S&P Global Ratings' view that Calfrac will generate sufficient cash flow to improve its fully adjusted, two-year (2018-2019), weighted-average FFO-to-debt ratio close to 20%, while maintaining adequate liquidity. In our opinion, cash flow ratios at this level would sufficiently improve the company's financial risk profile to support a 'B' rating. The rebound in industry activity over the past year, which we assume will continue under our hydrocarbon price assumptions, underpins our revenue and cash flow growth assumptions for Calfrac.

We could raise the rating if the company generates adjusted FFO-to-debt above 20% over the next 12 months and we expect it to be sustained at this level. In such a scenario, we would expect Calfrac to generate positive free cash flows and stable-to-improving margins while maintaining its existing business risk position.

We could revise the outlook to stable if the company's adjusted FFO-to-debt remains well below 20% with no visibility of improvement. This could occur if industry activity is weaker than we expect, which would, in turn, reduce Calfrac's equipment utilization and lead to weaker earnings and cash flows.

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