China Oilfield Services Outlook Revised To Positive On Improving Financial P #BBB# Ratings Affirmed

Stocks and Financial Services Press Releases Thursday May 17, 2018 12:30
HONG KONG--17 May--S&P Global Ratings

HONG KONG (S&P Global Ratings) May 17, 2018--S&P Global Ratings revised its outlook on China Oilfield Services Ltd. (COSL) to positive from stable. At the same time, we affirmed our 'BBB' long-term issuer credit rating on the China-based oilfield services provider and contract driller. We also affirmed our 'BBB' long-term issue rating on COSL's U.S. dollar senior unsecured notes.

We revised the outlook to positive to reflect COSL's improving financial performance owing to the company's steadily growing workload as exploration and production (E&P) companies are increasing spending amid a recovery in oil prices. COSL's performance in 2017 signals a turnaround from a trough in 2016.

We expect COSL's operating performance to steadily improve in 2018. The company's workload has risen in the first quarter of 2018, and we anticipate drilling utilization to further increase from the second quarter as more drilling rigs start operations.

COSL reported bigger losses in the first quarter of 2018 on a year-over-year basis. We attribute this to higher expenses during the period to prepare for work starting from the second quarter of the year, in addition to foreign exchange losses on overseas operations as the Chinese renminbi appreciated.

We continue to see COSL as a strategically important subsidiary of the CNOOC group. As the drilling and oilfield services arm of the group, COSL is likely to benefit from a substantial increase in capital expenditure (capex) by CNOOC Ltd. We expect COSL to get more than 60% of its revenue in 2018 from CNOOC Ltd. and its related parties. CNOOC Ltd.'s 2018 capex guidance is 40%-60% higher than its actual capex in 2017.

While COSL's drilling utilization rate is likely to moderately increase over the next two years, we expect the day rate to remain flat because of the continuing oversupply of drilling rigs, albeit this is reducing. Although oil prices are recovering, the oilfield services market is gradually rebalancing and E&P companies remain cautious in price negotiations.

We anticipate a more noticeable growth in utilization rates for semi-submersible rigs compared to jack-up rigs due to a lower base. We also expect growth in non-drilling segments such as well services and marine support services, but slower than in the drilling segment.

We expect COSL's ratio of funds from operations (FFO) to debt to stay above 20% and ratio of debt to EBITDA to be around 4.0x over the next two years if the industry recovery sustains.

COSL's debt is likely to remain stable because operating cash flows should cover most of its capex and other cash needs. Moderate revenue growth and stable margins should yield EBITDA of Chinese renminbi (RMB) 6 billion per year. This could sufficiently fund COSL's declining capex, which we estimate at around RMB2.5 billion in 2018 because the company is unlikely to have extensive plans to build new rigs.

COSL has shown a willingness to reduce debt as it has paid down more than RMB5 billion of bank loans in 2017. As a result, its adjusted debt fell to RMB21.3 billion as of the end of 2017, from RMB25.1 billion in 2016; resulting in the FFO-to-debt ratio improving to 25.8% in 2017, from 5.2% in 2016.

S&P Global Ratings has revised its assessment of industry risk for the contract drilling and oilfield services segments to moderately high from intermediate to reflect the effect of the oil price downturn in recent years on both service providers and drillers. The revision in industry risk does not affect the issuer credit rating on COSL.

The positive outlook on COSL reflects our expectation that the company's performance will steadily improve over the next 12-24 months from the trough in 2016. We forecast utilization rates of COSL's drilling rigs will improve following the increase in capex by E&P companies amid rising oil prices.

We could upgrade COSL if the company's operating cash flow improves while the debt level remains largely flat on a sustainable basis. This could happen if the recovery in the offshore drilling and oilfield services industry is sustainable, resulting in higher utilization and day rates for COSL's drilling rigs and greater revenue from other segments than we forecast. The recovery would be sustainable if oil prices stay around current levels and E&P companies continue to increase capex. COSL's FFO-to-debt ratio staying above 20% on a sustainable basis over the next 12-24 months could trigger an upgrade.

We would revise the outlook on COSL to stable if oil prices fall again and the offshore drilling and oilfield services industry does not recover as we expect, such that COSL's revenue and profitability decline. The company's FFO-to-debt ratio falling to well below 20% in 2018 would indicate such deterioration. We could also revise the outlook to stable if the company substantially increases its debt owing to more aggressive capex or unfavorable working capital movements.


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