Prosafe. Help is needed to bridge Credit Insight. Oil Services. Norway 17 March 2016

Transcription

1 Oil Services Credit Insight Norway 17 March 2016 Corporate rating: B+/Negative Public ratings Moody s: N.R. S&P: N.R. Fitch: N.R. Market cap (NOKm) 1,878 Relative spreads, peers Source: SEB and Bloomberg Spread development Source: SEB and Bloomberg Help is needed to bridge 2017 Rating downgraded by two notches We have downgraded by two notches to B+/Negative from BB/Negative given the weak outlook for the accommodation market and the deteriorating financial risk profile, with an upcoming potential funding gap. The demand challenges arising from less offshore activity, as oil companies are doing everything they can to conserve cash, combined with fleet growth has created historically high uncertainty regarding future cash flow for the accommodation market and. The news that the two contracts for for the units Safe Lancia and Safe Regency in Mexico were suspended (Pemex) in the beginning of March and that Petrobras has initiated discussions regarding terms on existing contracts for the units in Brazil have created more uncertainty around the financial situation for. Based on our estimates, will have liquidity challenges in 2017 despite several recent proactive actions to increase cash flow. Therefore, we believe 2017 will be tough for and we calculate a cash deficit of USD m at the end of 2017 that needs to be bridged to keep a comfortable liquidity position above the liquidity covenant of USD 65m. We believe it will be challenging for to bridge the funding gap given the current market prospects without help from stakeholders (banks, equity and yards). Moreover, due to deteriorating credit metrics and potential funding issues, we have cut the rating by two notches to B+/negative. The rating is supported by s global leading market position with an estimated market share of around 50% at the end of Underweight recommendation for all bonds Given the weak outlook and upcoming potential liquidity issues, we have changed our recommendation from Marketweight to Underweight for all bonds. Assumptions and outlook Despite challenging markets, there are opportunities. Tenders are ongoing for work in 2017 and 2018 for a number of West African prospects. However, activity indicators do not forecast any recovery before 2018, but a faster market recovery than we expect due to, for example scrapping, would be a positive credit trigger. Analyst Øystein Bogfjellmo (47) oystein.bogfjellmo@seb.no Key credit metrics & ratios E 2017E 2018E Revenues (USDm) EBITDA (USDm) EBITDA margin 54.9% 58.6% 57.0% 55.4% 50.5% 41.7% 49.8% FOCF (USDm) Adjusted EBITDA net int. cover. (x) Adjusted net debt to EBITDA (x) Adjusted FFO / Net debt 33% 39% 34% 16% 12% 10% 17% The estimates in this research report have been produced in collaboration with SEB equity research analysts Source: SEB Important. All disclosure information can be found on pages 8 9 of this document

2 Credit strengths Strong market position with 50% of the global fleet at the end of 2016 based on our estimates Proven strong support from banks and good access to capital markets Credit concerns Cyclical and capital intensive industry with relatively short-term contracts Plunge in E&P spending combined with strong supply growth in the recent years Liquidity could be an issue Selected outstanding bonds Issuer Ticker Our view Sector Issue date Maturity date Coupon Outst. Amount mid price ASW Recommendation Se PRS08 B Oilservice Nibor NOK 500m Underweight Se PRS09 B Oilservice Nibor NOK 500m Underweight Se PRS10 B Oilservice Nibor NOK 700m Underweight Se PRS11 B Oilservice Nibor NOK 700m Underweight Source: Bloomberg and SEB Enterprise value and capital structure (USDm) Debt maturities (USDm - no bank amortisation in 2016) Source: SEB and Bloomberg Financial statement summary - Adjusted numbers (USDm) Income statement E 2017E Revenues EBITDA Net income (reported) Cash flow statement E 2017E Funds from operations (FFO) Operating Cash Flow Free Operating cash flow Pre-financing cash flow Source: SEB Revenues and EBITDA margin (USDm) (%) E 2017E 2018E Total revenues EBITDA margin Balance sheet E 2017E Adjusted net debt / EBITDA Cash (and equivalents) (x) Total debt ,247 1,838 1, Net debt ,190 1,655 1,621 Equity Total assets (reported) 1,817 2,323 2,979 2, Key credit metrics & ratios E 2017E Net debt to EBITDA (x) Net debt to capital 49% 58% 65% 64% 0.0 FFO / Net debt 34% 16% 12% 10% E 2017E 2018E Equity ratio 41% 37% 30% 32% Source: SEB and financial reports Source: SEB and financial reports SEB Credit Research 17 March

3 Business risk profile Due to the sharp drop in E&P spending (we estimate a drop in global E&P spending by 27% in 2016) the business profile for is currently weak. Oil companies are doing everything they can to conserve cash and, therefore, maintenance work is being deferred. Consequently, the demand for offshore accommodation units is down and revenue visibility is weaker than it has been historically. Both the supply and demand side is expected to push utilisation and day rates to low levels over the next couple of years due to the following: Demand: is typically 75% exposed to oil company opex (maintenance work), while 25% exposed to capex related hook-up and commissioning of new facilities. Although s opex exposure offer some protection from the decline in E&P spending and following deteriorating investment outlook for new projects, demand for offshore accommodation units is down and revenue visibility is historical weak. Despite short lead-times for accommodation vessels in general, we believe a market recovery is unlikely before 2018 due to the current challenging market. However, we believe that deferred maintenance activity to preserve cash will support an eventual faster recovery as maintenance and modification work can be postponed for a period, but has to be done in the long-term regardless of the market. North Sea (particularly Norway), which is one of the core markets for, has one of the strictest and regulated markets in terms of safety-critical maintenance offshore. Supply: The number of accommodation units has increased over the last years, which makes the current market for accommodation rigs heavily oversupplied. However, is the world s largest accommodation player and has a unique position with almost 50% market share at the end of 2016 based on our assumptions. This means that can take responsibility and reduce the supply in the market. Moreover, we believe the market slowdown will encourage and its competitors to scrap vessels in the long-term and reduce the supply, which is supported by: i) the high operating costs associated with warm stacking vessels, ii) the cost of bringing cold stacked vessels back into the market, and iii) the fact that several of the accommodation units are getting older. There is some time to fill the contract gaps given the short lead times for accommodation vessels. We see opportunities in regions other than the North Sea and Mexico as some West African prospects have emerged with large operators, where tenders are ongoing for work in 2017 and However, due to the steep decline in E&P spending and following low demand for accommodation vessels combined with the record large fleet of units, we believe the next couple of years will be tough. Nevertheless, indicators suggest potential demand improvement from 2018 and onwards. Supply keeps growing global floater market (assuming no scrapping) # vessels Growth (%) Floatel Axis Offshore COSL Fred Olsen Energy Cotemar POSH Yiu Lian OOS/Yantai YoY fleet growth (RHA) 0 Source: SEB estimates SEB Credit Research 17 March

4 Fleet overview and credit research base case Fleet overview, status and assumptions Vessel Type Year built Operator Current location Q1/ 16 Q2/ 16 Q3/ 16 Q4/ 16 Q1/ 17 Q2/ 17 Q3/ 17 Q4/ 17 Q1/ 18 Q2/ 18 Q3/ 18 Q4/ 18 Safe Scandinavia Moored 1984 Statoil Norway MSV Regalia DP Idle UK Safe Caledonia DP BP UK Safe Lancia DP Idle Mexico Idle Assumed scrapped Q1/17 Jasminia Moored 1982 Idle Mexico Idle Assumed scrapped Q1/17 Safe Hibernia Moored 1977 Idle Mexico Idle Assumed scrapped Q1/17 Safe Britannia DP Idle Mexico Idle Assumed scrapped Q1/17 Safe Regency DP Idle Mexico Idle Assumed scrapped Q1/17 Safe Bristolia Moored 1983 Idle UK Safe Concordia DP Petrobras Brazil Safe Astoria Moored 1983 Idle SE Asia Idle Assumed scrapped Q1/17 Safe Boreas DP Idle UK Safe Notos DP Delivered Feb 16 (UK) (Undisclosed) Safe Eurus DP Delivery Q3 (Brazil) (Petrobras) Safe Zephyrus DP Delivered Jan 16 (Det Norske) (Norway) Source: SEB and Firm Options In our base case, we have assumed that: All the five rigs in Mexico and Astoria in SE Asia will be idle throughout 2016 and then scrapped in It is perhaps slightly conservative to assume that the whole Mexican fleet is scrapped due to the optionality of having available vessels, but we believe the total number of six scrapped rigs of the total fleet is likely due to their age and as we expect limited redeployment opportunities in general in the short-term. Therefore, we assume no scrapping of the rigs in Brazil, the UK or Norway. We assume USD 700m in capex for 2016 (USD 540m to the three new builds for delivery) and USD 55m from 2017 and onwards (maintenance). We have included the option to exclude two semi-annual bank amortisation of USD 65m, but no refinancing of the 2017 bond or working capital changes is included. Financial risk profile Based on our assumptions, will breach the liquidity covenant (less than USD 65m) and recently amended leverage covenant (6.0x) during 2017, depending on the working capital. We note that has taken several actions to increase the cash flow: USD 70m equity issue (December 2015). Bank amendments (January 2016) Covenant amendments and skipped payments options up to USD 130m. Bond amendments (February 2016). Covenants align with bank. Seller credits from yards (USD 59m in total). Safe Zephyrus (USD 30m). Safe Notus (USD 29m). SEB Credit Research 17 March

5 Nevertheless, we believe 2017 will be challenging for given the weak market. Moreover, Petrobras has commented that it is negotiating terms on existing contracts. This means that both day rates and fleet utilisation probably have some additional downside risk to our assumptions. If we assume in a worst case that no options are exercised and no new contracts are awarded, there will be a cash deficit of around minus USD 150m in the end of 2017 based on our estimates. Credit research cash flow analysis (USDm) 2016E 2017E 2018E EBITDA Interest Tax WC Operating cash flow Capex Maintenance / other capex Free cash flow Debt payments Bank instalments Bond maturities Sellers credit Total New debt Bank Bonds Sellers credit Total Net cash flow Cash start Cash end Source: SEB Credit Research estimates What is needed to bridge 2017? As 2016 is covered with firm contracts, we believe 2017 will be the challenging year given the high uncertainty regarding the cash flow visibility and no expected market recovery before Therefore, the main question is what is needed to bridge the funding gap in 2017? If we assume that all of the five Mexican units will be idle throughout 2016 in addition to Safe Astoria located in SE Asia and then scrapped, will have four rigs on contract in 2017 and five rigs with no contracts in We have used the following assumptions in our calculation for the five uncontracted rigs: Assumptions for calculation the bridge cash deficit Day rate Daily opex EBITDA Cash deficit in Q k/d 65 k/d 135k/d Minus USD 150m Rigs available 5 Total Divide by 365 days Source: SEB Credit Research estimates USD 150m / 135k/d = 1,111 days 1,111 / 365 = 3.05 rig years SEB Credit Research 17 March

6 This means that we need 100% utilisation for three rigs given our assumptions or 60% utilisation for all five units in However, as this only bridges the funding gap to zero, needs higher utilisation or to take additional actions. These actions could be: A new equity issue given the strong demand for the issue in December and potential market recovery in 2018 (current market cap of NOK 1.6bn, equal to USD 190bn). More bank support given the leading market position for and proven previous strong support (amortisation holiday). Postponed maturity for the two seller credits with a total value of USD 59m. Refinancing of the 2017 (USD 78m), that could be possible (or amend and extend). For example with an additional amortisation holiday from the banks (USD 65m semiannual) could keep a cash position above the covenant of USD 65m given the assumption of 60% utilisation for the uncontracted units. Nevertheless, we believe a scenario with 60% utilisation for the uncontracted rigs is unlikely given that the total fleet utilisation in that scenario would be 67% in 2017 (versus 70% utilisation in 2015). The reason for that is the risk that more rigs for could be stacked or scrapped as a consequence of age and the record weak market, in addition to the downside risk related to the two contracts for Petrobras. The abovementioned scenario is dependent on an assumption of market recovery in early Therefore, we believe help from involved stakeholders is needed to bride the funding gap in 2017 and based on our estimates, USD m is probably needed to keep a comfortable liquidity situation. SEB Credit Research 17 March

7 Profit & loss statement (USDm) E 2017E 2018E Total revenues Total expenses EBITDA Depreciation Intangibles amortisation EBIT Net interest expenses Value changes Other financial items Reported pre-tax profit Minority interests Total taxes Net profit EBITDA margin EBIT margin (%) Tax rate (%) 5.3 (6.0) (0.6) Growth rates y-o-y (%) Total revenues (19.0) (13.5) EBITDA n.a (2.4) 3.2 (9.0) (15.9) (1.3) (15.2) 41.1 EBIT (5.9) 1.1 (13.0) (32.7) (15.3) (41.8) Pre-tax profit (9.3) 43.5 (22.3) (6.1) (46.9) (19.1) (74.8) Cash flow (USDm) E 2017E 2018E FFO Changes in working capital Operating cash flow Net capital expenditures Free operating cash flow Dividend paid Acquisitions, divestments net Pre-financing cash flow Net loan proceeds Share issue Other Net change in cash Capex/sales (%) Balance sheet (USDm) E 2017E 2018E Cash and liquid assets Other current assets Long-term financial assets Fixed tangible assets 1, ,048 1,196 1,339 1,943 2,465 2,452 2,378 Intangibles Total assets 2,624 1,314 1,356 1,266 1,376 1,487 1,620 1,817 2,323 2,979 2,845 2,789 Interest bearing debt 1, ,247 1,838 1,680 1,488 Other liabilities Minority interests Shareholders' equity 1, ,024 Total liabilities and equity 2,624 1,314 1,356 1,266 1,376 1,487 1,620 1,817 2,323 2,979 2,845 2,789 Net debt (m) 1, ,190 1,655 1,621 1,429 Net debt/equity (%) Equity/total assets (%) Net debt/ebitda (x) EBITDA Interest cover Main shareholders Management Company information Name (%) Votes Capital Title Name Contact State Street Bank and Trust COB Harald Espedal Internet Folketrygdefonnet CEO Karl Ronny Klungtvedt Phone number (47) RBC Investor Service CFO Stig Harry Christiansen Company description: is the world's leading owner and operator of semi-submersible accommodation/service rigs. The company owns 15 semisubmersible accommodation vessels, of which three are under construction, with delivery scheduled for 2015 (one unit) and 2016 (two units). These units are employed to cater for increased manpower requirements at offshore facilities, typically during the hook-up and commissioning of new facilities, or for brownfield upgrade or maintenance work. The company has over 30 years of operational experience and is domiciled in Cyprus with offices in Singapore, Norway and the UK. Please note: The data in several tables and charts in this document have been adjusted in line with common practice in the field of credit research. This mainly refers to adjustments of operating leases, pensions, derivatives and other contingent liabilities. For a detailed breakdown of the adjustments, please contact the author of this report. SEB Credit Research 17 March

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9 Company specific disclosures and potential conflicts of interest: A member of, or an entity associated with, SEB or its affiliates, officers, directors, employees or shareholders of such members (a) is not, and has never been, represented on the board of directors or similar supervisory entity of, (b) has from time to time bought or sold the securities issued by the company or options relating to the company, (c) SEB or its affiliates beneficially own less than 1% of a class of common equity securities of, and (d) SEB or its affiliates beneficially do not own debt securities of, as of 29 Feb The analyst(s) responsible for this report (jointly with their closely related persons) hold(s) 0 shares, employees of SEB, Oslo Branch hold 0 shares, and SEB, Oslo Branch holds 0 shares in (not including shares held as hedge against derivatives positions). Explanation of Credit Research recommendations: SEB derives its Recommendations from its appraisal of the Credit Rating of the issuer (itself derived from business risk profile and financial risk profile and from other factors). SEB uses the following recommendation system for the corporate bond market: Overweight over the next six months we expect a position in this instrument to exceed the relevant index, sector or benchmark. Marketweight over the next six months we expect a position in this instrument to perform in line with the relevant index, sector or benchmark. Underweight over the next six months we expect a position in this instrument to underperform the relevant index, sector or benchmark. SEB uses the following recommendation system for CDS spreadsheets: Buy we expect the CDS to outperform the sector performance Neutral we take a neutral view on the CDS, and do not recommend either a buy or sell Sell we expect the CDS spreads to underperform the sector performance. Credit Watch Negative When an identifiable event or short term trend has occurred and when additional information is needed to evaluate the impact on the current rating but the likely outcome is a negative rating change. Credit Watch Positive - When an identifiable event or short term trend has occurred and when additional information is needed to evaluate the impact on the current rating but the likely outcome is a positive rating change. Credit Watch Developing When an identifiable event or short term trend has occurred and when additional information is needed to evaluate the impact on the current rating and the likely outcome is uncertain SEB also assigns credit ratings, definitions of which can be found on our website: Methodology SEB s Credit Research assigns its credit rating to an issuer based on the assessment of an issuer s business risk profile as well as its financial risk profile. The business risk profile includes country risk, industry risk, competitive position, and profitability. The financial risk profile includes financial policies, accounting, cash flow adequacy, capital structure and liquidity. The outcome of the assessment of the two risk profiles is weighed together for a final overall rating. In addition to SEB s credit rating assessment, other factors considered in a particular issuer include the credit ratings assigned to a specific issuer by independent agencies, the value and market price of its securities, macroeconomic factors such as interest rates, promised coupon or yield of the specific instruments, and historical spread developments. Credit Research Distribution (as of 1 Mar 2016) A* B* Overweight 20.9% 6.5% Marketweight 70.2% 27.9% Underweight 8.9% 3.0% A* denotes recommendations for all companies covered B* denotes recommendation for companies to which SEB has provided investment banking services in the last 12 months. Recommendation History Instrument Recommendation Date PRS Feb 2016 N3M Marketweight 15 Sep 2015 PRS Feb 2017 N3M Marketweight 15 Sep 2015 PRS Jan 2020 N3M+ 375 Marketweight 15 Sep 2015 PRS Oct 2018 N3M +295 Marketweight 15 Sep 2015 PRS Sep 2019 N3M+310 Marketweight 15 Sep 2015 PRS Feb 2017 N3M +375 Underweight 17 March 2016 PRS Jan 2020 N3M +375 Underweight 17 March 2016 PRS Oct 2018 N3M +295 Underweight 17 March 2016 PRS Sep 2019 N3M +310 Underweight 17 March 2016 Recommendation changes by SEB Credit Research Analysts in the subject company over the past 12 months. If no recommendation changes were made in that period, the most recent change is stated. SEB Credit Research 17 March

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