Baker Hughes Co. Outlook Revised To Negative From Stable On Difficult Market Conditions; 'A-' Ratings Affirmed

  • The coronavirus and market share war between Saudi Arabia and Russia have led to a steep fall in crude oil prices and resulting demand for oilfield services and equipment.
  • S&P Global Ratings has lowered its crude price assumptions. Notably, we expected Brent to average $30 per barrel and WTI $25 per barrel for the remainder of 2020.
  • Under these assumptions, we expect exploration and production spending to significantly fall, especially in North America, resulting in weak market conditions across the oilfield services industry.
  • We expect the financial performance of Baker Hughes to be weak for its rating in 2020, cushioned by its turbomachinery division, before beginning to recover with crude oil prices in 2021.
  • We are affirming the 'A-' issuer credit and senior unsecured ratings, and revising the outlook to negative from stable.
  • The negative outlook reflects the expectation that challenging market conditions will result in near-term financial performance that is weak for the rating, including FFO/debt below 40%.
NEW YORK (S&P Global Ratings) March 25, 2020—S&P Global Ratings today took the rating actions listed above.
We expect financial measures to weaken in 2020, following the steep decline in spending by the exploration and production (E&P) sector.   We expect Baker Hughes (BKR) and its peers in the oilfield services (OFS) and equipment (OFE) industries to face weak and uncertain markets in 2020, as the Saudi Arabia-Russia price war and coronavirus drive crude oil prices and resulting E&P demand for services significantly lower. As a result, we expect funds from operations (FFO)/debt to fall below 40% in 2020, before recovering in 2021 on the back of improving crude oil prices. We also expect that BKR will maintain modest financial policies including a focus on cash flow generation that will align capital spending and share repurchases, the company has no share repurchases authorized at this time, with operating cash flows.
The negative outlook reflects our expectation that BKR's financial measures will weaken in 2020, before improving in 2021, supported by its backlog of contracted LNG work and exposure away from very weak North American markets. We expect FFO/debt will be weak for the rating, below 40%, until markets recover starting in 2021 after expected market improvement at our $45 per barrel West Texas Intermediate (WTI) and $50 per barrel Brent crude oil price assumptions for 2021. We expect BRK to maintain conservative financial policies that support cash flow generation and its balance sheet.
We could lower ratings if FFO/debt approaches 30% for a sustained period. This most likely occurs over the next 24 months if crude oil prices fail to recover to levels that support improving market conditions. This could result from a protracted price war and market share battle between Saudi Arabia and Russia that leads to persistent low crude oil prices that are below most breakeven levels, and/or the expected negative impact on the global economy from the coronavirus is deeper and more protracted than currently anticipated.
We could revise the outlook to stable if we expected FFO/debt and debt/EBITDA to average above 45%. We expect this would follow a recovery in North American and international oilfield services demand, and continued growth in demand for LNG equipment supported by a stabilization and improvement crude oil prices.
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