Fitch: Drilling Downturn May Spur Deals; MLPs Add Flexibility
28 August 2014 - 3:41AM
Business Wire
The cyclical downturn in the offshore oil and gas-drilling
market may provide an opportunity for drillers with financial
flexibility to buy high-yield peers at favorable prices, Fitch
Ratings says. In this environment, master limited partnerships
(MLPs) may provide additional financial flexibility for corporate
parents looking to acquire assets.
Near-term offshore demand has moderated, and new builds equal to
roughly one-third of the working worldwide rig fleet are scheduled
to be delivered through year-end 2018. This has led to contracting
delays and it will also probably result in shorter contract terms
and lower day rates over the near-term. These factors may lead
drillers to favor buying rather than building as a means to improve
asset quality and gain market share. Secondary benefits of
consolidation would likely include improved driller pricing power
and, if necessary, a more orderly fleet attrition process.
High-yield offshore drillers could be seen as attractive
acquisition targets, since some newer smaller drillers have higher
quality fleets and limited financial flexibility to ride out a
prolonged downturn. Those high-yield drillers with a large share of
contracts rolling off during this time are likely to come under
pressure.
We have previously stated that establishing an MLP has the
potential to introduce asset quality and cash flow risks at the
parent level, if asset profiles and capital structures are not
co-managed properly. However, an affiliated MLP can also be used to
help fund an acquisition at the corporate parent via dropdown
proceeds, or to purchase peers directly at tax-advantaged
multiples. Both options provide further acquisition advantages to
corporate drillers with an affiliated MLP. In either case, parent
driller stakeholders would directly (via a corporate acquisition)
or indirectly (via an MLP acquisition) improve asset quality and
cash flow prospects, as well as reduce the need for debt at the
corporate parent to fund an acquisition. Affiliated MLP
stakeholders would realize additional asset and cash flow
growth.
The above article originally appeared as a post on the Fitch
Wire credit market commentary page. The original article can be
accessed at www.fitchratings.com. All opinions expressed are those
of Fitch Ratings.
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Fitch RatingsDino KritikosDirectorCorporate Finance, Energy+1
312 368-315070 W. Madison St.Chicago, ILorSimon
KennedyDirectorFitch Wire+44 20 3530 1387orMedia RelationsBrian
Bertsch, +1 212-908-0549brian.bertsch@fitchratings.com