Tuesday June 8, 10:59 am Eastern Time
Oil services industry ratings still
pressured-Mdys
( PRESS RELEASE PROVIDED BY MOODY'S
INVESTORS SERVICE )
NEW YORK, June 08 - Credit ratings in the oil services
industry remain under pressure and the outlook is
negative for a number of players, even if the recent upturn
in oil prices is sustained, says Moody's Investors Service in a new report.
Moody's believes oil and gas producers will spend about $70-75 billion this year for
global oil field services related to exploration, drilling, and well servicing -- down 20%
from $90 billion in 1998.
This decline reflects financial stress at many producing companies because of low oil
prices, and continuing price uncertainty, which has led producers to be cautious in
reacting to the recovery of oil prices.
''Demand for oil field services will also be negatively affected by the dramatic surge in
upstream consolidation, and by the upstream sector's efforts to improve earnings by
reducing operating costs,'' according to Moody's Vice President/Senior Analyst Daniel
Gates.
In early 1999, oil prices reached their lowest level in real dollar terms in over 50 years,
with West Texas Intermediate crude trading at under $11 a barrel. As a result, the
number of land drilling rigs working in the U.S. reached an all time low this spring.
Oil prices have firmed significantly following the OPEC accord to reduce production
beginning April 1st, but Moody's analysts say that there is normally a lag of two or three
quarters before a rise in prices is substantially reflected in increased revenue for oil and
gas service firms.
''The current downturn will be much less severe than the late 1980s collapse because
consolidation has already substantially reduced the number of competitors,and
companies in the industry have taken a conservative approach to financing growth,''
Gates adds.
The 37 oil service and drilling companies rated by Moody's operate in all segments of
the business, with credit ratings ranging from Halliburton's A1 rating to Dailey
International's Ca rating.
Niche Companies More Vulnerable Than Others The particular portion of the services
sector that a services company specializes in also has an impact on its credit ratings.
''The highest rated oil service companies have diversified operations across the
spectrum of the energy sectors,'' Gates says, adding,'' Qualitative factors are far more
important than current financial performance in the ratings of oil service companies.''
These factors include degree of exposure to the more cyclical components of the
exploration and production cycle, company size, capital intensity, diversity of
operations, market share, quality and breath of products and services. The leading
companies, Halliburton, Schlumberger, and Baker Hughes, which make up about
one-third of the industry's revenues, offer services across the oil and gas spectrum, and
have broad geographic reach that reduces risk, the rating agency says.
"On the other hand, niche oil industry service players that provide services which are
primarily related to exploration and development activity, such as Key Energy Services
and Dailey, will exhibit more volatile cash flow over the course of the industry cycle.
Gates went on to say that the drilling business has commodity characteristics and these
''companies combine high capital intensity with a volatile cash flow because of wide
swings in day rates and utilization over the course of the industry cycle.''
Companies such as R&B Falcon and Grey Wolf Inc. fall into this category," Gates adds.
Other factors that mitigate credit risk are long-term drilling contracts and having
financially stronger companies as customers, Gates says. The report also discusses
pricing and utilization rates for drilling rigs, how increasing North American gas
production will reduce the industry's cyclical swings, how integrated oil companies have
become more dependent on the technology of the oil service industry, and the
prospects for future industry consolidation. |
