The road ahead will become increasingly difficult for severely stressed oilfield services and drilling companies that are facing the challenge of refinancing billions in debt maturing over the next four years. The probability of defaulting on that debt is at new highs.
With crude oil prices cratering and producers slashing capital spending, the financial strain in the oilfield services and drilling sector continues to amplify. Many companies have seen their chances of default spike in recent weeks, according to the S&P Global Market Intelligence perception of default signal model that calculates the likelihood of a company defaulting on its debt or entering bankruptcy protection over a one- to five-year horizon.
Some of the biggest drillers are in the worst position. Offshore driller Transocean Ltd. has seen its probability of default rise from below 10% on Feb. 21 to a high of 25.3% on March 16. Land driller Patterson-UTI Energy Inc. has seen its odds of default rise from less than 1% on Feb. 21 to a high of 18.2% on March 16.
Even the oilfield services majors have seen a significant impact. Schlumberger Ltd., the world's largest public oilfield services company, has seen its probability of default rise from less than 1% on Feb. 21 to more than 10% on March 16, while Halliburton Co. saw its default probability jump from 0.6% on Feb. 21 to more than 18% by March 16.
Wall of debt
North American oilfield services companies and drillers face a $32 billion wall of debt maturing between 2020 and 2024, and sector companies face a high risk of defaulting as extreme headwinds driven by a market in decline have made refinancing much more difficult, Moody's analyst Sreedhar Kona said in a March 18 note to clients.
Investment-grade companies — those Moody's has rated at Baa3 or higher and have a lower risk of default — include oilfield services majors Schlumberger, Halliburton, Baker Hughes Co. and National Oilwell Varco Inc. Combined, they hold more than 35% of the sector's debt maturing through 2024.
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About $7.5 billion of the $11.5 billion investment-grade oilfield services debt maturing through 2024 belongs to A1-rated Schlumberger and its Baa1-rated affiliate Schlumberger Holdings Corp. Baker Hughes and Halliburton split the bulk of the remaining debt among the investment-grade companies, holding $1.8 billion and $1.2 billion of debt, respectively.
Despite the debt level, the size, broad service offerings and wide geographic footprint of the major oilfield services companies improve their ability to access capital markets, Kona said.
Conversely, the smaller regionally specific or service-focused oilfield services companies — particularly land drillers and offshore drillers with limited services that have been struggling to improve their credit strength since the 2016 oil-price collapse — face the most significant financing risk, Kona said.
These speculative-grade companies that Moody's rates lower than Baa3, or "junk" status, have a higher risk of default and hold 65% of the sector's total debt due to mature through 2024, according to Moody's.
Fundamentals alone not strong enough to keep offshore drillers afloat
For offshore drillers, which hold close to $9 billion of 2024 maturing debt, the refinancing risk is heightened by a delay in the anticipated recovery of the offshore market amid much lower oil prices.
With $4.3 billion of debt, Transocean accounts for half of the maturing debt for offshore drillers, standing out among sector companies due to its significant asset base and high balance sheet debt. Still, Valaris PLC and Noble Holding International Ltd. are in somewhat worse situations, lacking the benefit of Transocean's large contract backlog, Kona said.
"In today's oilfield, the fundamentals alone are not strong enough to keep many of the companies in the sector afloat," Raymond James analyst Praveen Narra said.
Raymond James cut the suitability ratings of its entire sector coverage to High Risk/Speculation, from mostly High Risk/Growth. Narra noted that while banks will attempt to reduce their exposure to the energy industry as a whole, oilfield services companies could take the brunt of the rebuff.
"Banks are unlikely to be willing to increase exposure by extending new credit to protect existing exposure. We suspect banks will attempt to reduce exposure through covenant breaks, but will only be stringent if a company needs new capital," Narra said.
Falling rig count elevates financing risks for onshore operators
Land drillers, among them Precision Drilling Corp. and Nabors Industries Ltd., account for $2.8 billion of the speculative-grade debt maturities through 2024. These companies depend on the active rig count, and as equipment providers, would be able to generate sufficient free cash flow "if they can maintain significant levels of utilization," Kona said.
Maintaining healthy utilization rates, however, depends on producers' spending, and producers are slashing budgets as crude oil prices crumble amid an OPEC-Russia production war.
West Texas Intermediate crude oil futures settled March 19 at $25.22 per barrel, up 23.8% on the session but down 58.7% year-to-date. Brent crude futures closed at $28.47/bbl, rising 14.4% on the day but dropping 58.2% year-to-date.
As the crude oil price continues to deflate, Narra said, based on a 2020 strip price of $35/bbl WTI crude oil, producers representing an estimated 30% of the active rig count could cut upstream spending by 50% year over year compared to 2019.
Narra expects the U.S. rig count will average 500 in 2020, down 45% from the 2019 average. Drilling activity could get cut in half from current levels, and completions activity should fall faster than rigs in the early days, before outperforming drilling in the second half of 2020, he said March 19.
The declining rig count will strain cash flow for land drillers and elevate their refinancing risk, Kona said.