UPDATE: Baker Hughes (BHGE) credit rating to A- from A+, Outlook Watch Negative from Stable

(Updated - December 5, 2017 1:23 PM EST)

Baker Hughes (NYSE: BHGE) credit rating to A- from A+, Outlook Watch Negative from Stable

• S&P Global Ratings has revised its assessment of Baker Hughes A GE Company's (BHGE) group status to nonstrategic from highly strategic.
• We are assigning a stand-alone credit profile (SACP)of 'a-' to BHGE.
• We are lowering the corporate credit and senior unsecured debt ratings on BHGE and subsidiary Baker Hughes A GE Company LLC (BHGE LLC) to 'A-' from 'A+' and removing them from CreditWatch with negative implications.
• We are affirming the 'A-1' short-term and commercial paper ratings on BHGE LLC and removing them from CreditWatch with negative implications.
• We are assigning an 'A-' senior unsecured debt rating to the company's proposed senior note offering.
• The outlook is stable, reflecting our expectation that BHGE will continue to achieve operating synergies from the merger with Baker Hughes and GE Oil & Gas, as well as from its operations in the North American onshore markets, which should offset weaker markets in the offshore and LNG markets.

S&P Global Ratings today lowered its corporate credit and senior unsecured debt ratings on Baker Hughes, A GE Company and Baker Hughes, A GE Company LLC to 'A-' from 'A+'. We removed the ratings from CreditWatch where we placed them with negative implications on Oct. 20, 2017. The outlook is stable.

At the same time, we affirmed the 'A-1' short-term and commercial paper ratings on BHGE LLC and removed them from CreditWatch.

We also assigned an 'A-' senior unsecured debt rating to BHGE LLC's note offering.

The rating action reflects our revision of BHGE's group status to nonstrategic from highly strategic following General Electric Co.'s (GE Co.) announcement on Nov. 13 that it could look to exit its ownership in BHGE. The rating on BHGE now reflects our assessment of its SACP, which we consider 'a-', based on an analysis of BHGE's stand-alone business and financial risk profiles. As a result, we have lowered the corporate credit rating on BHGE to 'A-' from 'A+'.

The stable outlook reflects our expectation that BHGE will continue to achieve operating synergies from the merger with Baker Hughes and GE Oil & Gas, projected to be up to $1.6 billion by 2020. We expect BHGE to balance share repurchases with cash flows and cash on hand such that expected FFO/debt will remain above 45% and debt/EBITDA below 2x. The company should benefit from the recovery North American onshore markets at least over the next few years, which should offset weaker markets in the offshore and LNG markets until 2020 or later.

We could lower ratings if FFO/debt and debt/EBITDA were expected to remain below 45% and 2x, respectively. This most likely occurs over the next 24 months if the North American market retreats to 2015-2016 levels with no expectation for a near-term recovery. This, in turn, would likely be driven by a retreat in WTI crude oil prices below $45 per barrel, at which point we believe drilling activity would be curtailed due to limited profitability of the E&P sector.

We could raise ratings if we expected FFO/debt and debt/EBITDA to average well above 45% and below 2x respectively. Over the next 24 months, metrics could improve if there is a significant recovery in the offshore and/or LNG markets, contrary to expectations, while onshore markets remained strong. This assumes BHGE sticks to a modest financial policy that would not seek to increase leverage to support increased shareholder returns to the detriment of financial performance.

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