Fitch Ratings has affirmed
The Rating Outlook is Stable.
Precision's rating reflects the company's execution on debt reduction initiatives, strong liquidity profile, and lack of near-term maturities. Fitch expects continued FCF generation with proceeds allocated towards debt repayment, which should help maintain credit metrics within rating tolerances.
Offsetting factors include uncertainty around increases in E&P development spending as public producers remain disciplined despite historically high prices. Other concerns include supply chain disruptions leading to increased service and labor costs that will have to be offset by continued increases in day rates.
Key Rating Drivers
Improving Rig Count, Higher Costs: Both
Modest Capital Program; Positive FCF: Management has guided towards a capital budget of approximately
Continued Debt Reduction; Strong Liquidity: Fitch expects Precision's liquidity profile will remain strong throughout the rating horizon and views management's
Improving Leverage; Clear Maturity Profile: Fitch's base case forecasts leverage at 3.3x in 2022 and improving thereafter through a combination of expected gross debt reduction and modest increases in pricing and activity levels. The maturity profile also remains muted with no significant maturities until the revolver matures in 2025. Fitch expects debt repayment will largely be aimed at the credit facility in the near term and believes management will look to return capital to shareholders via share buybacks.
Leading Canadian Share: Precision has a leading market share in
Precision's primary peer is
Precision has stronger leverage metrics and a much less significant maturity wall than Nabors. Nabors has more liquidity than Precision due to its larger revolver and higher availability, but Fitch expects both companies to generate free cash flow over their respective forecast periods and utilize the cash to reduce debt.
WTI oil price of
Revenues increase by about 30% in 2022 due to improving rig count and day rates;
Free cash flow to remain positive with proceeds used to reduce debt.
KEY RECOVERY RATING ASSUMPTIONS
The recovery analysis assumes Precision would be reorganized as a going-concern (GC) in bankruptcy rather than liquidated. Fitch assumed a 10% administrative claim.
Precision's GC EBITDA estimate reflects Fitch's view of a sustainable, post-reorganization EBITDA on which the enterprise valuation (EV) is based. The GC EBITDA assumption for commodity sensitive issuers at a cyclical peak reflects the industry's move from top-of-the-cycle commodity prices to midcycle conditions and intensifying competitive dynamics.
The GC EBITDA assumption is relatively in-line with 2025 forecast EBITDA, which represents emergence from a prolonged commodity price decline. Fitch assumes a WTI oil price of
The assumption also reflects loss of customers and lower margins, as E&P companies pressure oilfield service firms to reduce operating costs. It also reflects corrective measures taken in the reorganization to offset the adverse conditions that triggered default, such as cost cutting and optimal deployment of assets.
An EV multiple of 5.0x EBITDA is applied to GC EBITDA to calculate a post-reorganization EV. The choice of this multiple considered the following factors:
The historical bankruptcy case study exit multiples for peer energy companies have a wide range, with a median of 6.1x. The oilfield service subsector ranges from 2.2x-42.5x due to the more volatile nature of EBITDA swings in a downturn. The median is 7.4x.
Fitch uses a 5.0x multiple for Precision because of its high mix of Canadian rigs, weaker competitive position in the
The liquidation estimate reflects Fitch's view of the value of balance sheet assets that can be realized in sale or liquidation processes conducted during a bankruptcy or insolvency proceeding and distributed to creditors.
Fitch assigns a liquidation value to each rig based on management discussions, comparable market transaction values, and upgrade and new building cost estimates.
Different values were applied to top-of-the-line super spec rigs, lower value super spec rigs, non-super spec rigs and higher value international rigs.
The GC value was estimated at approximately
Fitch assumes the secured credit facility will be fully drawn upon default and is super senior in the waterfall. The value allocation in the liability waterfall results in a recovery corresponding to 'RR1' for the secured credit facility and a recovery corresponding to 'RR4' for the senior unsecured notes.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Increased size, scale and/or diversification;
Ability to maintain a competitive asset base in a credit-conscious manner;
Maintenance of liquidity and financial flexibility including low revolver utilization;
Midcycle gross debt/EBITDA below 3.5x on a sustained basis.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Failure to manage FCF that negatively affects liquidity and debt reduction capacity;
Deteriorating bank relationships that result in increasing covenant pressure or reduced liquidity;
Structural deterioration in rig fundamentals that results in weaker than expected financial flexibility;
M-idcycle gross debt/EBITDA above 4.5x on a sustained basis.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
Liquidity and Debt Structure
Strong Liquidity: Precision had
Precision is an oilfield service company that owns and operates a fleet of 226 onshore drilling rigs that operate in
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
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