Stressed Out: Low Oil Prices Attack Energy Service Providers

 | Jan 27, 2016 | 1:15 PM EST
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This article is part of a Real Money series on 20 distressed companies investors should consider adding to their distressed watch list.

Call it the reverse Midas touch. Nearly every company that touches oil and gas has been a victim of falling share prices.

Earlier this week, Real Money examined the exploration-and-production companies (E&P) that have been most affected by the glutted market. Today we're going to look at the oil-and-gas service providers that have also been hurt by low prices and have earned a spot on Real Money's "Stressed Out" list.

McDermott International (MDR): This Texas-based company designs and installs structures for offshore and deepwater oil and gas companies. Moody's downgraded McDermott's corporate rating further into "junk" territory, to B1 from Ba3, citing the risk of project cancellations due to the plunge in oil prices.

"The nature of McDermott's business, which includes sizeable fixed priced offshore and subsea oil & gas projects, lends itself to volatility in orders, project timing, revenues and profitability and encompasses high execution risk," Moody's said.

The concerns were echoed in a note from Morgan Stanley earlier this month. An analyst team led by Ole Slorer reiterated its Underweight rating on the company due to "higher company specific risk around winning new work and executing at profitable margins."

While Moody's described McDermott's liquidity as "adequate," the company operates in an industry prone to project cost overruns even in the good times. As an example, the company lost several projects in 2013 and 2014, which was a more halcyon time. The shares trade around $2.69 and are down 20% over the past month. It has a $500 million note coming due in 2021, which is currently quoted at $65.50, having fallen sharply at the start of 2016, according to data provided by Thomson Reuters. On Wednesday, McDermott announced it was awarded an installation project in the Gulf of Mexico by Anadarko Petroleum (APC), while generally considered a positive, the health of Anadarko must also be considered.

Tidewater (TDW): This Louisiana-based company provides offshore vessels to the energy industry. Shares of the company fell 82% over the past year. In its third-quarter filing with the Securities and Exchange Commission, the company acknowledged that its customers' activity is directly influenced by oil and gas prices, which in turn affects Tidewater. Making matters worse, the does a lot of business in Brazil and Venezuela. While that is not unusual for the industry, it does expose Tidewater to country risk. As an example, Tidewater has had to pay fines totaling $39 million for its Brazilian subsidiaries "alleged failure" to secure necessary licenses. It is something Tidewater is currently contesting. The company reported a debt load of $1.5 billion during a December presentation, while the bulk of the notes come due in 2020, its ability to meet those obligations during prolonged low oil prices could be tenuous.

For the third quarter, the company saw a 32% decrease in global vessel revenues compared to the third quarter of 2014, while operating costs fell 25% over the same period. Global operating profit fell 72%, with the biggest losses coming from the Americas and Sub-Saharan Africa/Europe.

The Deal: Transocean drills into dividends as offshore contractors flounder

Transocean (RIG): Shares of this Swiss-based company are down 37% over the last year. In the last month it saw one of its contracts terminated by Royal Dutch Shell (RDS) and it confirmed its intent to delist from the Swiss Exchange, citing cost concerns. The company's credit rating was downgraded by Moody's in October to Ba2 from Ba1 due to market conditions. It is under review for another potential downgrade by Moody's, along with other oil and gas companies.

"Although the company has taken proactive measures to cut costs, defer large capital commitments and maintain strong liquidity, Transocean is entering a potentially prolonged period of declining cash flow generation and significant debt maturities," Peter Speer of Moody's wrote in October.

In a Goldman Sachs note issued earlier this month, an analyst team led by Waqar Syed reiterated its sell rating on Transocean, citing liquidity concerns. Specifically, the team was worried about the $1.6 billion in debt Transocean has coming due through 2017.

Weatherford International (WFT): Shares of this Texas-based oil and gas services provider are down 41% over the last year and trading at about $5.93. Its Moody's corporate family rating is Ba1 as of October but the company is currently under review for a downgrade.

"While we believe that Weatherford will generate free cash flow and will focus on debt reduction through 2016, it will continue to be modest and not sufficient to offset overall moderate cash flow generation stemming from a prolonged oilfield service cyclical downturn," Gretchen French of Moody's wrote when issuing the October rating.

RBC Capital Markets has an Outperform rating on Weatherford but it lowered its price target to $9 from $11. The company has $950 million in debt coming due through 2017, which Kurt Hallead of RBC Capital Markets categorized as "manageable" based on the company's ability to generate free cash flow of $565 million in 2016. However, Hallead also acknowledged that the company recorded negative free cash flow in seven of the last eight years and oil below $35 a barrel tests RBC's investment thesis.

Needless to say, the health of these companies is contingent on a sustainable oil rally.

For more on Real Money's 20 distressed companies to watch:

Stressed Out: Introducing Real Money's Distressed Index

Stressed Out: Is Avon Using Vanishing Cream on Its Cash?



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