S&P Lowers Outlook on Atwood Oceanics (ATW) to Negative

Standard & Poor's Ratings Services said it affirmed its 'BB' corporate credit and senior unsecured debt ratings on Atwood Oceanics (NYSE: ATW) and revised the outlook to negative from stable. The recovery rating on the company's senior unsecured notes remains '3', indicating our expectation for meaningful (higher half of the 50% to 70% range) recovery if a payment default occurs.

"The outlook revision reflects our expectation that Atwood's credit measures will deteriorate meaningfully in 2017 and 2018 due to depressed industry conditions, despite our anticipation of adequate debt ratios for the rating in 2016," said Standard & Poor's credit analyst Christine Besset.

Based on our assumptions that the two drillships under construction will be delivered at the end of 2017 and mid-2018, respectively, and lower day-rates and utilization rates for the rest of the fleet, we forecast funds from operations (FFO) to debt will fall below 20% in 2017 and 2018, compared with more than 30% expected at the end of fiscal 2016. We note that the recent delay in the deliveries of the two drillships under construction defers required capital spending, which we view positively.

Our reassessment of the company's business risk profile reflects our anticipation that Atwood's fleet of active rigs will shrink in 2017 as we expect market conditions to remain depressed and utilization rates to drop. As a result, the company's cash flow size and asset diversity will likely worsen, with most of company's EBITDA relying on a handful of rigs.

The negative outlook reflects our expectation that Atwood's credit measures will deteriorate in 2017 and 2018, such that FFO to debt will fall below 20%. We expect that oversupply in new rigs and low commodity prices will heighten competition and recontracting risk over the next two years, resulting in downward pressure on day rates and utilization levels. We could consider a downgrade if the FFO–to-debt ratio remained less than 20% for a sustained period without a clear path for improvement.

We could return the outlook to stable if we believe that the company can sustain FFO to debt above 20%. This would most likely occur if the company can successfully contract its available rigs in 2017 and 2018 and we believe an industry upturn is likely in 2018.

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