Patterson-UTI Energy Inc. Downgraded To 'BB+' As Capital Expenditure Cuts Weaken Credit Metrics; Outlook Negative

  • Conditions in the North American oilfield services industry are expected to materially weaken given the substantial drop in crude oil prices.
  • We expect U.S.-based contract driller and pressure pumping Patterson-UTI Energy Inc.'s (PTEN's) credit metrics to weaken materially due to significant declines in capital expenditure budgets by exploration and production companies seeking to lower their cash burn.
  • We are lowering our issuer credit rating on PTEN and our ratings on the company's unsecured debt to 'BB+' from 'BBB'.
  • We are assigning a '3' recovery rating to PTEN's senior unsecured notes.
  • The negative outlook incorporates our view that funds from operations to debt will decline tobelow 20% in 2020, as demand for pressure pumping significantly declines, while rig demand 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 lowered West Texas Intermediate (WTI) assumptions, resulting in significantly weaker market conditions in pressure pumping and anticipated weak demand for drilling rigs. We forecast FFO to debt could temporarily weaken below 20% in 2021.
We could lower rating if were expect FFO to debt to remain below 20% for a sustained period. This would likely occur if capex budgets are further cut or E&P companies cannot emerge successfully from Chapter 11 bankruptcy, likely as a result of oil prices staying low into 2021.
We could revise our outlook back to stable if oil prices rise, resulting in increased demand for pressure pumping and improved rig utilization and day rates. Alternatively, we could revise the outlook to stable if PTEN's credit ratios improve such that FFO to debt remains above 40% and debt to EBITDA declines and stays below 2x on a sustained basis.
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