Outlook On Helmerich & Payne Inc. Revised To Negative On Weaker Credit Metrics; 'BBB+' Rating Affirmed

  • We expect U.S.-based onshore driller Helmerich & Payne Inc.'s (H&P's) credit metrics to weaken following a significant decline in capital expenditure budgets as exploration and production companies seek to lower their cash burn.
  • Moreover, we are forecasting negative discretionary cash flow in 2020 and 2021, largely driven by lower demand for onshore drilling, as well as the company's current substantial dividend. Though the company has publically expressed interest in re-evaluating its dividend.
  • We are affirming our 'BBB+' issuer credit rating on H&P and revising the outlook to negative from stable.
  • The negative outlook incorporates our view that funds from operations to debt will decline below 60% and debt to EBITDA will rise above 1.5x over the near-term as demand for rigs declines and day rates weaken.
NEW YORK (S&P Global Ratings) March 26, 2020—S&P Global Ratings today took the rating actions listed above.
We expect rig utilization, and to a lesser extent, day rates, will be considerably lower than what we had previously estimated.  Thus far, exploration and production (E&P) companies have cut their capital expenditure (capex) budgets by an average of at least 30%, which we anticipate will result in the release of spot rigs early in 2020 and contracted rigs in late 2020 and early 2021. Moreover, smaller and less creditworthy E&P companies could face bankruptcy without a healthy financing environment to emerge from Chapter 11 bankruptcy.
The negative outlook reflects our expectation that funds from operations (FFO) to debt could weaken below 60% in 2021, while debt to EBITDA could temporarily rise above 1.5x. Under our new West Texas Intermediate (WTI) pricing assumptions, we anticipate rig demand will decline significantly during the second half of 2020 and into 2021 as upstream E&P companies drop spot rigs immediately and contracted rigs soon after.
We could lower the rating if we expect FFO to debt to decline tobelow 60% and debt to EBITDA to rise and stay above 1.5x for a sustained period. This would likely occur if capex budgets are further cut and E&P companies cannot emerge successfully from Chapter 11 bankruptcy, likely as a result of oil prices staying low into 2021. Alternatively, we could lower the rating if discretionary cash flow remains at its currently negative levels as a result of H&P's current dividend payout.

We could revise our outlook back to stable if oil prices rise and demand for rigs, utilization levels, and day rates improve. Alternatively, we could revise the outlook to stable if H&P achieves FFO to debt above 60% and its debt to EBITDA declines and stays below 1.5x. This would likely occur if H&P substantially cuts its dividend while rig fundamentals stabilize.
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