S&P Cuts C&J Energy Services (CJES) to 'B+'; Notes Significantly Increased Leverage

Standard & Poor's Ratings Services lowered its corporate credit rating on C&J Energy Services (NYSE: CJES) to 'B+' from 'BB-'

At the same time, we lowered the ratings on the company's revolver and term loans to 'BB' (two notches above the corporate credit rating) from 'BB+'. The recovery rating on the debt remains '1', indicating our expectation of very high (90% to 100%) recovery in the event of a payment default.

"The downgrade on C&J Energy Services Ltd. reflects our assessment of the company's significantly increased leverage, which we no longer view as stronger than its 'B+' rated peers," said Standard & Poor's credit analyst Stephen Scovotti. "Utilization and pricing for the company's completion services has weakened materially in the first half of 2015 and as such, we expect credit measures to be elevated in 2015, with funds from operations to debt below 12% and debt to EBITDA above 6x. However, we do expect that operating performance and credit measures will improve modestly in 2016, as oil prices and drilling activity recover," he added.

The ratings on CJES reflect our assessment of its "weak" business risk, "aggressive" financial risk, and "adequate" liquidity, as defined in our criteria. These assessments reflect our view of the company's participation in the highly cyclical and competitive U.S. oilfield services industry, good geographic and customer diversification in the U.S., and midsize scale compared with its competitors. We assess CJES' liquidity as "adequate," as defined in our criteria. We expect cash sources to cover uses by at least 1.2x over the next 12 months.

The stable outlook reflects our expectation that although operating performance and credit measures will remain weak in 2015, we expect them to improve in 2016. We expect FFO to debt to be about 12% and debt to EBITDA to be greater than 6X in 2015.

We could lower the ratings if FFO to debt fell below 12% for a sustained period. This scenario could occur if operating performance does not materially improve in 2016, as we expect it to do so.

We could consider an upgrade if the company materially improved its credit measures such that FFO to debt improved relative to peers. We believe this could occur if industry conditions get much stronger and the company maintains a more conservative financial policy relative to peers.

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