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Moody's Downgrades Baker Hughes, Halliburton

One month after scuttling their planned merger, Baker Hughes Inc. and Halliburton Co. were dealt another setback on Friday after Moody's Investors Service downgraded their credit ratings.

Moody's downgraded Baker's senior unsecured rating from A2 to Baa1 and its commercial paper rating from Prime-1 (P1) to Prime-2 (P2). Meanwhile, Halliburton's senior unsecured debt rating was also downgraded from A2 to Baa1, and its short-term rating was reduced from P1 to P2. The outlook for Baker is stable, but the outlook for Halliburton is negative.

The downgrades at both companies were initiated last October. Halliburton and Baker -- the world's second- and third-largest oilfield service (OFS) operators, respectively -- announced plans to merge in November 2014, but the deal unraveled and was called off at the beginning of May (see Daily GPIMay 2Nov. 17, 2014).

Terry Marshall, Moody's senior vice president, said Friday that the Baker downgrade reflects "elevated leverage and developing business model underpinned by the current OFS segment weakness and the failed Halliburton merger. Baker plans significant cost cutting and restructuring measures that will improve EBITDA and leverage in 2017, which will support the Baa1 rating."

Although Baker's operating income is materially dependent on the drilling cycle and capital spent by producers, Moody's acknowledged that its earnings and cash flow volatility are partially offset by the company's geographic diversification and wide range of products and services. The ratings service also gave a nod to Baker's restructuring plans, which are designed to save $500 million by the end of 2016 (see Shale DailyMay 4).

Moody's added that Baker had $2.2 billion in cash and cash equivalents at the end of March. The company also has a $2.5 billion committed revolving credit facility that matures in September, but Moody's said it expects a renewal this month.

"Baker has excellent liquidity, a conservative financial policy and, pro forma for $1 billion of debt reduction and $1.5 billion of share buybacks, will have cash equivalent to about 90% of its balance sheet debt at the end of 2016," Moody's said.

In a separate statement, Moody's Vice President Andrew Brooks said the amount of debt Halliburton incurred to finance its failed bid to merge with Baker, combined with a weak OFS environment, "have eroded Halliburton's credit metrics to levels which no longer support its A2 rating.

"Depending on the pace of a broader energy market recovery, Halliburton's debt leverage should peak in 2016, subsiding in subsequent years but is unlikely over the next several years to fall inside the 2.0x debt/EBITDA level that prevailed prior to 2015."

Like Baker, Moody's said the diversification of Halliburton, as well as its size, scale and leadership in technology, should help it whether the downturn in commodity prices. But the recovery is expected to be uneven because the company is concentrated "in a severely depressed North American market that has been heavily pressured by the collapse in crude oil prices, chronically weak natural gas prices, reduced drilling activity and an oversupply condition and marginal returns in pressure pumping."

Moody's reported that Halliburton has strong liquidity. According to the ratings services, the OFS company had a $3.5 billion cash balance at the end of March, and has full availability under its $3.0 billion revolving credit facility.

Last month, Baker said it was realigning its operations and changing its senior leadership (see Daily GPI,May 27). Meanwhile, Halliburton President Jeff Miller said that with the proposed merger with Baker now off the table, the company should see a 25% decline in structural costs in 2016 (see Shale Daily,May 3).

According to Moody's, long-term debt obligations with a Baa1 rating are considered to be in the high end of medium-grade risk, and are subject to moderate credit risk. The obligations may also contain certain speculative characteristics. An A2 rating is used for obligations in the mid-range of debt considered upper-medium-grade and subject to low credit risk.

Moody's considers issuers of P1 short-term debt to have a superior ability to repay them, while P2 issuers have a strong ability to repay.

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