TEXT-S&P rates Tuscany International Drilling 'B'

Wed Nov 7, 2012 4:33pm EST
 
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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with outdated infrastructure, experienced management team, and low annual 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.