National Oilwell Varco Inc. Outlook Revised To Negative On Weaker Market Conditions; 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 West Texas Intermediate (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 National Oilwell Varco Inc. (NOV) to be weak for its rating in 2020, before beginning to recover with crude oil prices in 2021.
  • We are affirming the 'BBB+' issuer credit and senior unsecured ratings, and also affirming the 'A-2' short-term and commercial paper ratings
  • We are 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 26, 2020—S&P Global Ratings today took the rating actions listed above.
National Oilwell Varco's (NOV) financial performance will be weak for the rating over the next 12 to 18 months due to the fall in spending by the exploration and production (E&P) industry.   The dual impacts of the coronavirus and Saudi Arabia-Russia price war has significantly weakened crude oil prices and led to a drastic pull back in spending by the E&P industry, particularly in North America, although all markets are affected. As a result, we expect NOV's funds from operations (FFO)/debt to fall below 40% and debt/EBITDA to exceed 2x over the next 12 to 18 months before demand for its equipment and services recovers along with crude oil prices.
The negative outlook reflects our expectation that low crude oil prices and the rapid pull back in spending by the E&P industry, especially North America, will hurt operating earnings and financial measures. As a result, we now expect 2020 financial performance to be well below previous expectations with FFO/debt below 40%, before recovering in 2021 on the back of improving crude oil prices. We note that in the near-term, the rating is supported by NOV's history of conservative financial policies and a track record of generating significant cash flow from working capital in periods of weak market conditions.
We could lower ratings if we do not see a path for FFO/debt to return to above 45% in 2021 and beyond. This would likely reflect a prolonged collapse in crude oil prices, likely due to an extended price war between Saudi Arabia and Russia and/or an expected economic rebound in 2021 fails to occur, such that there is a prolonged decline in North American E&P spending and international markets weaken further than expected.
We could revise the outlook to stable if we expect FFO/debt to exceed 45% for a sustained period. This likely occurs in conjunction with improving crude oil prices that support stronger spending levels by the E&P industry. This most likely will require a stabilization of crude oil prices such that WTI averages around $45 per barrel and Brent around $50 per barrel or better.
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