Credit rating agency Moody’s has downgraded the Italian oilfield services provider Saipem from the provisional Baa3 long-term issuer rating, into a definitive Ba1 Corporate Family Rating (CFR) with a stable outlook.
The rating agency said it expects very weak conditions in offshore drilling to continue for several years and a challenging environment to win new orders in engineering and construction for the oil and gas industry, with some evidence that demand is weakening even in the Middle East.
While acknowledging Saipem’s upsides such as substantial fleet, revenues of $12 billion, strong market position as one of the world’s leading engineering and construction companies in the oil and gas industry, long term customer relationship with major oil companies such as Eni and Saudi Aramco, and wide geographic diversity, Moody’s also highlighted potential downsides.
Namely, the credit rating agency said Saipem was exposed to lump sum turnkey E&C contracts, which accounted for approximately 75% of contracts in the backlog and recent execution challenges, including large losses in several ongoing projects; exposure to the highly cyclical oil and gas end market, where continued low oil and gas prices have led to reductions in offshore spend on deep and ultra-deepwater projects, leading to pricing pressure and a lack of new awards in both the E&C and drilling space.
Furthermore, Moody’s pointed to the likely strong competition from existing players in the onshore E&C division, as well as new entrants in offshore, pressuring margins for new awards.
Also, the agency sees the potential that Saipem will have to scrap several of its older floaters as it will be difficult to re-contract them in a market where strong negative trends are expected to remain deeply entrenched through 2017.
As mentioned above, Saipem is doing business with some large and stable oil companies, however Moody’s also expects there will be challenges of dealing with companies under financial pressure such as Petrobras and Venezuela’s PDVSA.
The stable outlook, the agency said, reflects Moody’s expectation that Saipem will refinance the $1.6 billion bridge-to-bond facility well in advance of its 18 month maturity date, although there is a six-month extension option to January, 2018.