Great write up by Standard $ Poors (very hard to believe they wrote it??? They seem to understand the business)
Hanover Compressor Affirmed; Outlook Now Neg.: S&P
Updated: Tuesday, January 29, 2002 02:52 PM ET Printer-friendly version
Following is a press release from Standard & Poor's:
NEW YORK (Standard & Poor's) Jan. 29, 2002--Standard & Poor's today affirmed its ratings on Hanover Compressor Co., and revised the outlook on the company to negative from stable.
The ratings affirmation follows substantial media attention concerning Hanover's use of off-balance sheet financings and the accounting for various joint ventures. At this time, the publicized critiques of Hanover and the ensuing drop in the company's share price are unlikely to trigger an immediate change in Hanover's ratings for the following reasons: --Standard & Poor's has always included all of Hanover's synthetic lease transactions and associated rental charges in the compilation of Hanover's debt leverage and fixed charge coverage measures. Treating all synthetic lease transactions as debt, total debt-to-book capital as of Sept. 30, 2001 was about 59%. --Standard & Poor's assumes that the company's international partnerships to date have contributed minimally to the company's cash flow and profitability. --Standard & Poor's believes that Hanover's exposure to Enron Corp. is immaterial. --The recent volatility in the company's stock price is prompting management to rethink its growth strategies. If more conservative growth strategies are adopted, creditors are likely to benefit from moderating free cash flow deficits and a diminished reliance on external financing. --Standard & Poor's estimates that Hanover has good liquidity, which is supported by strong cash flow generation, a highly discretionary capital spending budget, about $107 million of borrowing capacity under a $350 million bank credit facility maturing in November 2004, and the absence of significant debt maturities until 2004.
However, Standard & Poor's is revising its outlook on Hanover to negative because Hanover's slumping stock price will likely force the company to delay refinancing its $150 million subordinated note issued to Schlumberger Ltd. in conjunction with its September 2001 acquisition of Production Operators Corp. ( not rated), with primary common equity, which was an assumption that had been incorporated into the company's current rating. If Hanover chooses to refinance the note to Schlumberger with debt or preferred stock, such that the company's fixed charges materially increase, Standard & Poor's could negatively revise the company's ratings.
The ratings on Hanover reflect its participation in the capital-intensive oil and gas compression service industry, an aggressive growth strategy, and somewhat aggressive capital structure. These weaknesses are mitigated by the company's position as the largest participant in its industry and relatively stable cash flows (compared with other oilfield service companies) throughout the commodity pricing cycle.
Houston, Texas-based Hanover competes in the market for transportable natural gas compression equipment, which is used in the production, processing, gathering, and storage of natural gas. Hanover's operations span the major natural gas-producing regions of the U.S., and the company has expanded into Canada, Latin America, and other international regions where operating margins, contract lengths, and demand growth rates tend to be greater than in the U.S. Hanover also fabricates compression and production equipment, but these two business segments are smaller than the higher-margin equipment rental business.
Reflecting an aggressive growth strategy, Hanover's aggregate horsepower (hp) has risen to about 3.5 million from about 1.5 million at year-end 1999. Consolidation in the industry has decreased competition significantly and two companies now dominate the rental market. Hanover primarily competes against Universal Compression Holdings Inc., the second-largest provider of natural gas compression equipment, with a total fleet of about 2.1 million hp. Although near-term demand for compression equipment may weaken due to falling gas prices, a severe downturn in the compression industry is unlikely because compression generally is not removed from a well until the marginal cost of production-- which is usually very low--exceeds the wellhead price. Intermediate-term fundamentals are excellent because consumption of natural gas is inceraisn,g gas fields in the U.S. are maturing, production decline rates are accelerating, and exploration and production companies are gradually owning less of their installed compression.
Hanover's financial profile is characterized by somewhat high debt leverage and a historic willingness to outspend its internally generated cash flow to pursue growth. Treating all synthetic lease transactions, a subordinated note to Schlumberger related to the acquisition of Production Operators, and a $58 million joint-venture note payable to Schlumberger as debt, total debt-to-book capital on Sept. 30, 2001 was about 59%, when compared with 53% at year-end 2000. Incorporated in the company's rating is the ultimate retirement of the seller's note through the issuance of new primary common equity. The note's interest rate increases every six months starting in March 2002, which provides Hanover with an incentive to refinance it.
Although Standard & Poor's expects that Hanover will experience some softening in the rental business due to falling gas prices (and as a result, some weakening in profitability and cash flow measures), the company historically has been able to maintain its high utilization rates (currently 93%) and rental equipment pricing through most points in the natural gas pricing cycle. In the medium term, EBITDA and rent interest coverage is expected to fall between 4 times (x) and 5.0x, while funds from operations to total debt should range between 20% and 30%. Financial flexibility is provided by a highly discretionary capital spending budget, access to a $350 million bank credit facility, and the absence of significant near-term debt maturities. OUTLOOK: NEGATIVE The negative outlook reflects Standard & Poor's concerns regarding Hanover's ability and willingness to refinance the $150 million subordinated note issued to Schlumberger with equity. An outlook change to stable is possible if Hanover is successful in rebalancing its capital structure. DOW JONES NEWS 01-29-02 02:52 PM |
