Moody's Investors Service (Moody's) placed the ratings of eleven offshore drilling companies under review for downgrade. The companies under review include, Diamond Offshore Drilling, Inc. (A3), Ensco plc (Baa1), Noble Corporation (Cayman Island) (rated subsidiaries Baa3), Rowan Companies Inc. (Baa3), Transocean Inc. (Ba1 Corporate Family Rating or CFR), Atwood Oceanics, Inc. (Ba2 CFR), Seadrill Partners LLC (Ba3 CFR), Shelf Drilling Midco, Ltd. (Ba3 CFR), Ocean Rig UDW Inc. (B2 CFR), Paragon Offshore plc (B2 CFR), and Pacific Drilling S.A. (B3 CFR). Moody's also affirmed the P-2 Commercial Paper Ratings for Diamond Offshore and Ensco plc, respectively.
RATINGS RATIONALE
"The review reflects Moody's concern that offshore drilling contractors will face an extremely challenging operating environment through at least 2017," said Sajjad Alam, Moody's Analyst. "Sustained weak crude oil prices and a steady supply of newbuild rigs will cause significant credit erosion as contracted backlogs, revenues and cash flows continue to fade. Against this macro backdrop, fewer offshore drilling opportunities will be available, resulting in a potentially prolonged period of lower dayrates and fleet utilization."
Our review will focus on each drilling company's financial flexibility and liquidity, contracted revenue backlog, fleet quality/capability, customer composition, market position, and newbuild capex commitments and contract exposure. We will also consider industry-specific factors such as global offshore rig demand, newbuild supply, rig retirements and potential dayrates within the context of our assumed commodity prices.
Crude oil prices showed renewed weakness in July and benchmark Brent prices are down about 30% to $44/barrel (WTI down ~35% to $39/barrel) after briefly stabilizing around the $60-$65/barrel level during May and June, 2015. Moody's expects oil prices to remain volatile and rise minimally through 2017. Upstream capital spending is likely to continue at low levels as producers re-align their respective cost structures to manage through a low and uncertain commodity price environment.
Moody's expects lower E&P capital spending will lead to a protracted downturn for the offshore contract drilling industry, which is already struggling with an overcapacity problem and has experienced sharply lower dayrates in 2015 in the context of limited customer contract awards.
The full effect of this downturn on offshore drillers' earnings potential and leverage position hasn't been fully revealed because of the long-term nature of offshore drilling contracts. Leverage is expected to increase sharply by the end of 2017 as current drilling obligations are completed or are replaced with lower price contracts.
In light of these adverse industry developments and the likely prolonged nature of this challenging operating environment, there is a substantial risk for ratings downgrades. Moody's will conduct an in-depth analysis of each of the specified rated drillers over the next couple of months and reach a rating conclusion based on our view of each company's projected financial performance and ability to navigate this industry downturn.
The principal methodology used in these ratings was Global Oilfield Services Industry Rating Methodology published in December 2014. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
Ratings Under Review for Downgrade:
Issuer: Diamond Offshore Drilling, Inc.
....Senior Unsecured Rating, A3
....Outlook, Under Review
Issuer: Ensco plc
....Senior Unsecured Rating, Baa1
....Outlook, Under Review
.Issuer: Ensco International Incorporated
....Senior Unsecured Rating, Baa1
....Outlook, Under Review
.Issuer: Pride International, Inc.
....Senior Unsecured Rating, Baa1
....Outlook, Under Review
Issuer: Noble Corporation (Cayman Island)
....Backed Senior Unsecured Commercial Paper Rating P-3
.Issuer: Noble Drilling Corporation (debt assumed by Noble Holding (U.S.) Corporation)
....Backed Senior Unsecured Rating, Baa3
.Issuer: Noble Holding International Limited
....Backed Senior Unsecured Rating, Baa3
....Backed Senior Unsecured Shelf Rating, (P)Baa3
....Outlook, Under Review
Issuer: Rowan Companies Inc
....Senior Unsecured Rating, Baa3
....Outlook, Under Review
Issuer: Transocean Inc.
....Corporate Family Rating, Ba1
....Probability of Default Rating, Ba1-PD
....Senior Unsecured, Ba1(LGD4)
....Outlook, Under Review
Issuer: Atwood Oceanics, Inc.
....Corporate Family Rating, Ba2
....Probability of Default Rating, Ba2-PD
....Senior Unsecured, Ba3(LGD5)
....Senior Unsecured Shelf Rating, (P)Ba3
....Outlook, Under Review
Issuer: Seadrill Partners LLC
....Corporate Family Rating, Ba3
....Probability of Default Rating, Ba3-PD
....Outlook, Under Review
.Issuer: Seadrill Operating LP
....Senior Secured Credit Facility, Baa3
....Backed Senior Secured Credit Facility, Ba3(LGD3)
....Outlook, Under Review
Issuer: Ocean Rig UDW Inc.
....Corporate Family Rating, B2
....Probability of Default Rating, B2-PD
....Senior Unsecured, Caa1(LGD6)
....Outlook, Under Review
.Issuer: Drill Rigs Holdings Inc.
....Backed Senior Secured Notes, B3(LGD4)
....Outlook, Under Review
.Issuer: Drillships Financing Holding Inc.
....Backed Senior Secured Credit Facility, B2(LGD3)
....Outlook, Under Review
.Issuer: Drillships Oceans Ventures Inc.
....Backed Senior Secured Credit Facility, B2(LGD3)
....Outlook, Under Review
Issuer: Shelf Drilling Midco, Ltd.
....Corporate Family Rating, Ba3
....Probability of Default Rating, Ba3-PD
....Senior Secured Credit Facility, B1(LGD5)
....Outlook, Under Review
.Issuer: Shelf Drilling Holdings, Ltd.
....Senior Secured Second Lien Notes, Ba3(LGD3)
....Outlook, Under Review
Issuer: Paragon Offshore plc
....Corporate Family Rating, B2
....Probability of Default Rating, B2-PD
....Senior Secured Credit Facility, Ba3(LGD2)
....Senior Unsecured, Caa1(LGD5)
....Outlook, Under Review
Issuer: Pacific Drilling S.A.
....Corporate Family Rating, B3
....Probability of Default Rating, B3-PD
....Senior Secured Credit Facility, B3(LGD3)
....Senior Secured Notes, B3(LGD3)
....Outlook, Under Review
.Issuer: Pacific Drilling V Ltd.
....Backed Senior Secured Notes, Caa1(LGD4)
....Outlook, Under Review
Ratings Affirmed:
Issuer: Diamond Offshore Drilling, Inc.
....Senior Unsecured Commercial Paper at P-2
Issuer: Ensco plc
....Senior Unsecured Commercial Paper at P-2
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