S&P Downgrades Diamond Offshore Drilling (DO) to Junk
- Top 10 News for 12/2: Crude Rips on OPEC Cut; Starbucks' Schultz Steps Down; Nonfarm Payrolls Flat in Nov.
- Unemployment Rate Drops to 4.6%
- Bond yields slip on U.S. jobs data, euro steady before Italy vote
- Alibaba (BABA) Founder Jack Ma Discuss Plans to Retire; 'I Don't Want to Die at the Office'
- Starbucks Coffee (SBUX) CEO Howard Schultz to Step Down, Appointed Executive Chairman; Kevin Johnson New CEO
News and research before you hear about it on CNBC and others. Claim your 2-week free trial to StreetInsider Premium here.
S&P Global Ratings said today that it lowered its corporate credit rating on Houston-based offshore drilling company Diamond Offshore Drilling Inc. to 'BB+' from 'BBB'. The rating outlook is negative.
At the same time, we lowered our issue-level rating on the company's unsecured debt to 'BB+' from 'BBB' and assigned a '3' recovery rating, indicating our expectation for meaningful (50%-70%; lower half of the range) recovery in the event of a payment default.
"The downgrade reflects our revised assessment of Diamond's business risk profile and our revised assumptions for utilization of the company's uncontracted fleet, in light of continued weak market conditions, resulting in higher leverage than we had previously anticipated in 2017 and 2018," said S&P Global Ratings' credit analyst Carin Dehne-Kiley. Although the company has taken steps to respond to the market downturn, such as reducing operating costs, cold-stacking rigs, lowering capital expenditures, and cutting its dividend, we believe demand for offshore contract drilling services will remain depressed until the latter half of 2018 and that the market is oversupplied with rigs. We also believe that companies with cold-stacked rigs will find it increasingly difficult to recontract them even when the market recovers, since we expect customers to favor working, warm-stacked or newbuild rigs. As of Sept. 1, 2016, Diamond had 14 of its 28-vessel fleet cold-stacked. In addition, although all seven of Diamond's sixth generation, ultra-deepwater rigs are under contract through at least mid-2019, two are contracted with Brazilian national oil company Petrobras, which has sent an early termination notice for one (currently under dispute).
Our corporate credit rating on Diamond reflects our assessment of the company's business risk profile as satisfactory, its financial risk profile as aggressive, and its liquidity as strong. It also reflects our view that Diamond is a moderately strategic subsidiary of Loews Corp. under our group methodology criteria. Diamond is 53% owned by Loews. We consider Diamond moderately strategic because we believe that the company is important to the group's long-term strategy and has the long-term commitment of Loews' management. We also believe that in periods of stress, the group would provide support to Diamond if needed, as was demonstrated by the elimination of the $400 million special dividend in 2015 and the common dividend in 2016. As a result, the corporate credit rating is one notch above Diamond's stand-alone rating of 'bb'.
The negative outlook reflects our expectation that Diamond's FFO to debt could fall and remain below 12% for a sustained period, which could occur if market conditions deteriorate further or if we no longer expect an industry recovery in 2018. We could also lower the rating if the company makes a significant, debt-financed acquisition that doesn't add to near-term cash flow.
We could revise the outlook to stable if we expect FFO to debt to remain above 12% for a sustained period, which would most likely occur if the company were able to further reduce costs or if its offshore drilling activity recovered more quickly than we currently anticipate.
Serious News for Serious Traders! Try StreetInsider.com Premium Free!
You May Also Be Interested In
- Moody's Assigns 'Ba3' Rating to Ritchie Bros. Auctioneers (RBA); Outlook Stable
- Moody's Lowers Outlook on Zayo Group (ZAYO) to Stable; Ratings Affirmed
- S&P Places Ingram Micro (IM) Ratings on CreditWatch Negative
Create E-mail Alert Related CategoriesCredit Ratings
Related EntitiesStandard & Poor's, Definitive Agreement
Sign up for StreetInsider Free!
Receive full access to all new and archived articles, unlimited portfolio tracking, e-mail alerts, custom newswires and RSS feeds - and more!