Schlumberger Ltd. Downgraded To 'A' On Expected Drop In OFS Demand; Outlook Negative

  • We have recently lowered our crude oil and natural gas price deck assumptions, including Brent crude to $30/bbl and WTI to $25/bbl for the remainder of 2020.
  • As a result, we expect North American exploration and production companies to sharply curtail spending plans for this year and 2021, resulting in weaker revenues, margins and cash flow/leverage measures for diversified oilfield services provider Schlumberger Ltd.
  • We are lowering our issuer credit rating and unsecured debt ratings on Schlumberger to 'A' from 'A+'. At the same time, we are affirming our short term issuer credit and commercial paper ratings of 'A-1'.
  • Our negative outlook reflects the potential for a further downgrade if the company does not take steps to improve cash flows and leverage over the next 12 to 24 months, such as reducing capital spending, cutting costs, or limiting shareholder distributions, resulting in funds from operations (FFO)/debt falling below 30% or discretionary cash flow (DCF) to debt falling below 10% for a sustained period.
NEW YORK (S&P Global Ratings) March 26, 2020--S&P Global Ratings today took the rating actions listed above.
Our downgrade reflects a significant drop in demand for oilfield services, leading to higher cash flow/leverage. Based on our revised oil and natural gas price deck assumptions (see "S&P Global Ratings Cuts WTI And Brent Crude Oil Price Assumptions Amid Continued Near-Term Pressure," published March 19, 2020), we now expect capital spending by E&P companies in North America to decline around 30%, with international spending relatively flat to down slightly, in 2020. Although about two-thirds of Schlumberger's revenues in 2019 were generated from international activity, the company is not immune to the dramatic reduction in North American oilfield services demand. We now expect total revenues to decline 10% in 2020, with operating margins dropping by 200 basis points, leading to FFO/debt in the low to mid 30% range and debt/EBITDA above 2.0x in 2020 and 2021.
The negative outlook reflects our view that Schlumberger's current cash flow/leverage remains high for the rating, and the potential for a downgrade if we expect ratios to weaken from current levels. We currently estimate that FFO to debt will increase from just above 30% in 2020 to about 55% in 2022, as oil prices recover and E&P companies resume spending. We also expect DCF to debt to steadily improve from around 5% in 2020 to over 20% in 2022 as the company continues to improve capital efficiency while limiting capital spending and shareholder distributions.
We could lower the rating if we expected FFO/debt to fall below 30% for a sustained period, which would most likely occur if E&P spending falls by more than we currently anticipate, or takes longer to recover. We could also lower the rating if we no longer expected three-year average DCF/debt to exceed 10%, which would most likely occur if the company did not reduce capital spending or shareholder distributions.
We could revise the outlook to stable if the company's FFO to debt approached 45% for a sustained period. This would most likely occur if drilling activity and operating margins increased more quickly than our current expectations, likely in conjunction with an oil price recovery.
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