Calfrac Well Services Ltd. Outlook To Stable From Positive On Weaker-Than-Expected Cash Flows; 'B-' Rating Affirmed

  • S&P Global Ratings revised its outlook on Calgary, Alta.-based Calfrac Well Services Ltd. to stable from positive.
  • We believe estimated lower drilling activity in North America would lead to Calfrac generating significantly weaker cash flow leverage metrics over the next 12 months.
  • S&P Global Ratings also affirmed its 'B-' long-term issuer credit rating on Calfrac and 'B-' issue-level rating on Calfrac Holdings L.P.'s unsecured debt.
  • The stable outlook reflects S&P Global Ratings' view that Calfrac will generate funds from operations-to-debt above 12% over the next two years while generating break-even free cash flows and maintaining adequate liquidity.
TORONTO (S&P Global Ratings) May 24, 2019--S&P Global Ratings today took the rating actions listed above. The outlook revision to stable primarily reflects Calfrac's weaker-than-expected cash flow leverage metrics owing to our estimated subdued drilling activity in North America (especially Canada) in the next 12 months. Under our base-case scenario, we estimate Calfrac to generate 2019-2020 average funds from operations (FFO)-to-debt and debt-to-EBITDA of 15%-18% and about 4x, respectively, as lower utilization rates and weak pricing weigh on the operating results. These estimated leverage metrics are much weaker than our previous conservative estimates (FFO-to-debt of about 25% and debt-to-EBITDA of 3x) and primarily underpin our outlook revision.
Calfrac's financial risk profile reflects our view of the company's highly susceptible cash flows and leverage metrics to the industry's inherent volatility, as evidenced in our estimates. We expect drilling activity and Calfrac's utilization rates (especially in Canada) to decrease in 2019, underpinned by our expectations of muted industry activity, which is reflected by our hydrocarbon price and Canadian local price differential assumptions. Consequently, we expect earnings and cash flows to decline in 2019, which will result in FFO-to-debt below 20% compared with our previous estimate of the mid 20% area. However, in our view, Calfrac's restricting its capital spending within internally generated cash flows, in light of weaker market conditions, limits the risk of debt increase and liquidity deterioration.
The stable outlook reflects S&P Global Ratings' view that Calfrac's existing business mix, and the geographic breadth of its operations, should remain stable during the 12-month outlook period. In addition, we expect the company will generate FFO-to-debt in the 15%-18% range over the next two years while generating break-even free cash flows and maintaining adequate liquidity.
We could lower the rating if the company's adjusted FFO-to-debt sustainably drops to the bottom of the 0%-12% range while Calfrac is generating significant negative free cash flows and its liquidity position deteriorates. This could occur if North American drilling activity is weaker than we expect, which would, in turn, reduce Calfrac's equipment utilization and lead to weaker earnings and cash flows.
Assuming the company's business mix and geographic diversification do not change during our current outlook period, we could take a positive rating action if the company is able to strengthen its cash flow and leverage metrics. We could raise the rating if the company generates adjusted FFO-to-debt sustainably above 20% over the next 12 months. In such a scenario, we would expect Calfrac to generate positive free cash flows and stable-to-improving margins.
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