Weatherford’s Compliance Status after Its Credit Rating Downgrade
Weatherford International: Life after Its Credit Rating Downgrade
Moody’s downgrades Weatherford’s debt
On May 13, credit rating agency Moody’s downgraded Weatherford International’s (WFT) Corporate Family Rating (or CFR) from Ba3 to B1. Moody’s also downgraded WFT’s Speculative Grade Liquidity Rating from SGL-3 to SGL-4. Overall, Moody’s rating outlook on Weatherford International remains negative.
CFR ratings reflect the relative likelihood of a default on a corporate family’s debt and debt-like obligations. In May, Fitch Ratings also downgraded WFT’s long-term issuer default ratings and senior unsecured ratings.
What a rating downgrade means
Weatherford International may continue to stay highly leveraged. Moody’s credit rating downgrade reflects Weatherford’s cash flow constraints and possible liquidity concerns. Moody’s expects WFT’s reliance on external sources of capital associated with debt repayment to increase in the future.
According to Moody’s, obligations rated B are considered speculative and are subject to high credit risk. The SGL-4 rating reflects weak liquidity as opposed to adequate liquidity indicated by the SGL-3 ratio.
What are the rationales for a downgrade?
Upstream capital spending is expected to stay weak while drilling activities will remain muted in 2017. This will constrain oilfield service companies (or OFS) like Weatherford International’s cash flows, resulting in only moderate free cash flow in 2016.
This can also increase WFT’s reliance on external sources of capital, which again can pressure Weatherford’s cash flow and credit metrics. WFT constitutes 0.05% of the iShares Core US Value ETF (IUSV).
Weatherford International’s debt profile
As shown in the table above, Weatherford International (WFT) is currently in compliance with all the debt covenants. WFT now has a ~$1.9 billion draw-down facility from April, down from $2 billion earlier. This facility will fall to ~$1.5 billion after its amortization in July 2017, and it will decline to $1.4 billion in July 2018.
In addition, WFT maintains ~$500 million of cash balances on an ongoing basis. WFT’s total debt was ~$7.1 billion on March 31, including a revolver draw-down of ~$1.0 billion. Patterson-UTI Energy’s (PTEN) total debt was $841 million on March 31, 2016.
In the next article, we will discuss Weatherford International’s historical valuation multiples.
Browse this series on Market Realist: