TEXT-S&P rates Tuscany International Drilling 'B'
Overview -- Canada-based oilfield services company Tuscany participates in an industry that is subject to cyclical demand and price volatility, especially for drilling services. -- We are assigning our 'B' long-term corporate credit rating to the company. -- The stable outlook reflects our expectation that Tuscany will continue to improve its business operations and financial measures in 2012 and 2013. Rating Action On Nov. 7, 2012, Standard & Poor's Ratings Services assigned its 'B' corporate credit ratings to Tuscany International Drilling Inc. de C.V. (Tuscany). The outlook is stable. Rationale The ratings on Tuscany reflect our assessment of its "vulnerable" business risk profile and "aggressive" financial risk profile. Such assessment is based on the company's participation in an industry that is subject to cyclical demand and price volatility, especially for drilling services. It also reflects Tuscany's relatively small scale in a highly competitive industry with relatively low barriers of entry. Mitigating these factors are the company's technologically advanced and relatively young fleet of drilling rigs designed to operate in Latin American exploration and production (E&P) markets with outdated infrastructure, experienced management team, and low annual maintenance capital spending requirements given its relatively new fleet. Tuscany is focusing on providing contract drilling and work-over services with equipment rentals to oil fields in Colombia, Ecuador, Brazil, Trinidad and Tobago, and Central Africa. As of June 30, 2012, the company's fleet was composed of 41 rigs, 78% of which are less than five years old. Tuscany's operating 37 rigs posted a utilization rate of 84.2% as of June 30, 2012, compared with a fleet of 19 rigs and 64.9% as of June 30, 2011. The company is refurbishing the remaining four rigs and expects to contract them out by the end of 2012. We are expecting a significant improvement in Tuscany's operating performance during 2012 and afterwards compared with prior years, as this will be the first year of the entire fleet's operation following the acquisitions in Brazil (Drillfor), Colombia, and Central Africa (Caroil) that increased the company's fleet by 22 rigs. We believe that Tuscany will achieve relatively strong cash-flow protection metrics in the near term due to the rise in rigs and improved operations. As a result, in 2012 and 2013, we expect funds from operations (FFO) to total debt in a range of 20% to 25% and total debt to EBITDA of approximately 3.0x to 3.5x. This assumes utilizations rates of about 85% and average revenue per day of approximately $30,000 per rig. We anticipate that the company will generate free operating cash flow of about $10 million in 2012 and $20 million in 2013 as a result of its minimum capital investments requirements. However, in the long term, severe industry downturns could erode the company's day rates and utilization rates, which we consider as an inherent industry risk. Liquidity We assess Tuscany's liquidity as "adequate." Our liquidity assessment is based on several assumptions and considerations: -- We expect sources of liquidity to exceed uses by more than 1.2x during the next 12 months; -- Sources of liquidity include the company's cash position of about $15 million as of June 2012, about $20 million of availability on its existing revolver facility due 2015, and expected annual FFO in the $50 million - $60 million range; -- Manageable debt maturities in 2013 of about $17 million under its $210 million credit agreement; -- Approximately $20 million of capital expenditures per year will be for maintenance; -- No material dividend payments or further acquisitions for the next two years; and -- Adequate room under a few existing financial covenants under its credit agreement including leverage and interest coverage covenants. Although the company does not generate any free operating cash flow yet, we believe that its recent increase in rig count will allow it to cover its budgeted operating costs and capital expenditures to generate free operating cash flow of about $10 million in 2012 and $20 million in 2013. Outlook The stable outlook reflects our expectation that Tuscany will continue to improve its business operations and financial measures in 2012 and 2013. Also, it incorporates our expectation that the company would be able to maintain FFO to total debt above 25% and total debt to EBITDA below 3.5x. We could lower the rating if market fundamentals are significantly weaker than expected and if the company makes debt-funded acquisitions raising the leverage metric above 3.5x. Rating upside would most likely depend on a further improvement of the company's financial risk profile. That could occur if Tuscany increases its cash-flow generation to levels higher than anticipated, leading to more robust leverage and cash flow protection metrics, such as total debt to EBITDA below 2.0x. Related Criteria And Research -- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012 -- Key Credit Factors: Global Criteria For Rating Oilfield Services And Equipment Companies, July 30, 2012 -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 Ratings List Rating Assigned Tuscany International Drilling Inc. Corporate Credit Rating B/Stable/-- Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.
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