Moody's Lowers Outlook on CGG S.A. (CGG) to Negative; Notes Continued Soft Market Conditions
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Moody's Investors Service has today changed to negative from stable the outlook of CGG S.A. (NYSE: CGG) and its subsidiaries. Concurrently, the Ba3 corporate family rating (CFR) and all other ratings of the group have been affirmed.
RATINGS RATIONALE
Due to ongoing soft market conditions, CGG reported weaker-than-expected operating performance for the first half of the year. A focus on returns and cash flow growth by the oil majors has led to cautious seismic spending since the end of the second quarter of 2013 leading to lower pricing. Whilst the long term outlook for the seismic industry remains positive based on the likely continuation of exploration activity into deeper waters, Moody's expects the current challenging backdrop to persist for a longer period of time than initially anticipated and that as a result the group's high leverage may not reduce to a level more commensurate with its current ratings over the next 12 to 18 months.
CGG's leverage, as measured by adjusted debt to EBITDA minus multi-client amortization, stood at 6.1x for the LTM ending June 2014 compared to 4.7x at year-end 2013. Moody's previously stated that a downgrade of the CFR could occur in the event of continuing deterioration in operating performance resulting in leverage sustainably above 4.5x.
More positively, the ratings also reflect (i) the group's position as leader in seismic equipment and among the two largest players in marine seismic services worldwide; (ii) its geographic diversification; and (iii) its good liquidity position.
Additionally, Moody's views the capacity reduction in the industry led by CGG and its main peers as positive but also believes that it only reflects a stronger-than-expected deterioration in market conditions compared to at the start of the year.
WHAT COULD CHANGE THE RATING - DOWN
A downgrade of the CFR could occur in the event of limited improvement in operating performance, resulting in Moody's expectation that leverage will fail to fall towards 4.5x over the next 12 to 18 months and/or weakening liquidity position. Moody's could also consider downgrading the ratings in event of any material acquisitions or change in financial policy.
WHAT COULD CHANGE THE RATING - UP
Given the negative outlook, positive pressures are unlikely in the near term but could arise in the event of material improvements in profitability translating into leverage falling towards 3x on a sustained basis. Any potential upgrade would also include an assessment of market conditions and the company's success in achieving its portfolio rebalancing.
PRINCIPAL METHODOLOGIES
The principal methodology used in these ratings was Global Oilfield Services Rating Methodology published in December 2009. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.
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