S&P Lowers Outlook on Ensco plc (ESV) to Negative; Follows Reduced Outlook for Offshore Drilling Rebound

Standard & Poor's Ratings Services revised its rating outlook on Ensco plc (NYSE: ESV) to negative from stable and affirmed its 'BBB+' corporate credit rating and 'A-2' short-term rating.

"The outlook revision follows a reduction in our expectations for recovery in demand and day-rates in the offshore contract drilling industry," said Standard & Poor's credit analyst Ben Tsocanos. "We view improvement as unlikely before 2017 due to an oversupply of rigs and reduced capital spending by exploration and production companies due to weak oil and gas prices," he added.

Ensco has taken steps to weather a prolonged industry downturn, including deferring delivery of a new-build drillship until 2017, cold-stacking uncompetitive rigs, reducing expenses and proactively refinancing its 2016 debt maturities. Based on our lower assumptions for Ensco's ability to replace expiring contracts next year, however, we project debt leverage to be weaker than our expectations for the rating.

We base our "strong" assessment of Ensco's business risk on its large and geographically diversified fleet of high quality, relatively new offshore rigs, high utilization levels, and revenue visibility from a $7.4 billion contract backlog. We assess Ensco's financial risk as "significant," incorporating our expectation that Ensco will continue to generate healthy cash flow relative to ongoing capital-spending requirements despite weak industry supply-demand dynamics. We assess Ensco's liquidity as "strong," reflecting our expectation that liquidity sources will exceed uses by more than 1.5x over the next 24 months, even if EBITDA declines by 30%, the minimum required for a designation of adequate.

The negative rating outlook reflects our expectation that Ensco's credit measures will be weak for the rating through 2016. We project that leverage will deteriorate in 2015 and 2016 with debt to EBITDA above 3x and FFO to debt below 30% next year. We forecast that leverage will begin to improve in 2017, assuming gradual improvement in offshore contract drilling markets in the context of higher oil prices, with debt to EBITDA returning below 3x and FFO to debt approaching 30%.

We would consider a downgrade if our forecast credit measures were to weaken below our current expectation, and that we no longer forecast improvement in 2017 such that both debt to EBITDA is above 3x and FFO to debt is below 30%. Such a scenario could result in further deterioration in demand for offshore drilling services or operating underperformance on the company's part.

We could consider a stable outlook if we expected Ensco's credit measures to improve such that FFO to debt is above 30% and debt to EBITDA is below 3x on a sustained basis. Improvement would likely require recovery in offshore contract drilling market conditions.

You May Also Be Interested In

• London Stock Exchange Group Plc. (LSEG:LN) (LNSTY) PT Raised to GBP88 at HSBC
• Duolingo (DUOL) stock climbs on news it will join the S&P MidCap 400
• BP (BP) PT Raised to $43 at Piper Sandler