S&P Global Ratings ranks its rated global portfolio of oilfield services (OFS) and drilling companies, from strongest to weakest. We rank companies, in turn, by the rating, outlook, stand-alone credit profile (SACP), business and financial risk profiles, and liquidity assessment.

Investment-grade companies are ranked by business risk profile, then financial risk profile. Speculative-grade companies are ordered by financial risk profile, then business risk profile. Companies are then listed in alphabetical order, if not distinguished by these factors.

In line with our corporate rating methodology, the final rating may differ from the SACP when group, government, or rating above the sovereign considerations apply. The SACP may also differ from the anchor. When it does, as for a third of the ratings, we have applied one or more modifiers, which may include liquidity or comparable rating analysis. The anchor and active modifiers of each company are included below (Tables 1 and 2), but do not influence the ranking. For our more detailed analysis, refer to company-specific pages on RatingsDirect.

Most of our business risk assessments are closely correlated with the corresponding competitive positions (Chart 3). Where they diverge, it is usually because we consider industry risk higher, and this constrains the competitive position. Government or group ownership is an explicit rating factor for only a few companies, resulting in a final rating higher than the SACP.

For our sector outlooks and analysis, as well as ranking lists for other subsectors of oil and gas industry, see Related Research below.

Table 1

Table 2

The tables and charts here provide an overview of the 45 entities we rate in this industry. We rate seven entities as investment-grade ('BBB-' and above) and 38 as speculative-grade ('BB+' and below). This weighting to lower ratings highlights the subsector's exposures to business and financial stresses.

Chart 1

Across the corporate universe, about 60% of our ratings are speculative-grade (Chart 1). Ratings below 'BB+' in OFS and drilling account for approximately 85% of the ratings. Moreover, almost 50% are in the 'CCC' category or below, highlighting depressed industry conditions and very high default risks in the short term. Weak capital-market access will make it difficult for low-rated companies to refinance debt. We believe offshore drillers, in particular, are likely to engage in debt restructurings we would view as distressed--thus tantamount to default--this year.

Chart 2

Our outlooks on the ratings within the sector are overwhelmingly negative (Chart 2), with 80% having a negative outlook or CreditWatch with negative implications. When the COVID-19 pandemic hit, the sector's credit quality was already on shaky ground. Although market activity had picked up before the pandemic since the bottom of the cycle in 2016, OFS companies had never recaptured their pre-downturn margins and had weak credit metrics overall. The demand destruction from COVID-19 has only made the situation worse.

We expect global demand for OFS to fall in 2020 due to an expected 15%-30% drop in oil and gas exploration and production (E&P) spending this year. In response to the drop in commodity prices caused by the COVID-19 pandemic demand shock and the slow supply response by OPEC, E&P companies sharply curtailed capital expenditures (capex) for the rest of the year to protect cash flows and balance sheets. In the U.S., including the prolific Permian basin, E&P operators abruptly dropped rigs and hydrofracturing crews when oil prices collapsed in March. E&P companies were quick to announce reductions in their 2020 capex budgets, in many cases by as much as 50% compared to previous guidance.

In contrast, international activity has been more resilient due to the long-cycle nature of the projects and deeper pockets of international and national oil companies. However, we expect international exploration activity to decline, particularly offshore, where project economics are challenged by low oil prices.

OFS companies are adjusting to the downturn by cutting costs, including reduction in workforce and investments, and merging with peers to gain economies of scale. These self-help measures are unlikely to be enough to meaningfully improve leverage without a recovery in overall demand.

Chart 3

Chart 4

The most common financial risk profile assessment in this sector is highly leveraged (Chart 4). The OFS industry was still experiencing pricing pressures and demand weakness, both of which never really recovered since the oil price decline of 2014-2015. Thus, most OFS and drilling companies came into the year with very high cash flow leverage. We project the COVID-19 pandemic to push many into default, as indicated by a proportion of almost 50% of ratings in the sector at 'CCC+' or below.

Chart 5

We consider most OFS and drilling issuers to have adequate or better liquidity (Chart 5). Despite very high leverage, which we view as unsustainable for many companies, the sector overall has small amounts of short-term maturities. Several companies also have gone through bankruptcies, shifting debt maturities out further. Therefore, typically, the amount of cash OFS and drilling companies maintain, combined with cash generation and liquidity resources, will cover uses to which they have committed over the next 12 months by 1.2x or more. For almost a third of these ratings, we use a comparable rating analysis to fine-tune the outcome. In this sector, the modifier is most often negative, resulting in a rating one notch below the anchor.

The ratings and scores in this report are as of June 9, 2020, and we will not update it. To keep it concise, the list only discloses scores for the main rated entity of larger corporate groups. We may omit certain entities, such as subsidiaries or holding companies, where the ratings are linked to those on their parent companies.

Chart 6

Related Criteria

• Rating Government-Related Entities: Methodology And Assumptions, March 25, 2015
• Corporate Methodology, Nov. 19, 2013
• Group Rating Methodology, Nov. 19, 2013
• Ratings Above The Sovereign--Corporate And Government Ratings: Methodology And Assumptions, Nov. 19, 2013

Related Research

• Global Oil And Gas Integrated And Exploration & Production Companies, Strongest To Weakest, June 18, 2020
• COVID-19- And Oil Price-Related Public Rating Actions On Corporations, Sovereigns, And Project Finance To Date, June 10, 2020
• Country Risk Assessments Update: May 2020, May 11, 2020
• S&P Global Ratings Completes Review Of Canadian Oil And Gas Company Ratings, May 4, 2020
• U.S. Upstream Oil And Gas Rating Action Summary And Key Takeaways Following The March 2020 Hydrocarbon Price Deck Revision, May 19, 2020
• Harsh Downturn Prompts Rating Actions On Multiple European Oil And Gas Companies, March 25, 2020
• S&P Global Ratings Cuts WTI And Brent Crude Oil Price Assumptions Amid Continued Near-Term Pressure, March 19, 2020
• ESG Industry Report Card: Oil And Gas, Feb. 11, 2020