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MARC downgrades Offshore Works Capital's Sukuk ratings.

The rating action resolves the MARC Watch Negative status of OWC's rated obligations, which was initiated on November 12, 2010. The outlook on the ratings is stable.

OWC is a funding vehicle of oilfield services provider Offshoreworks Holdings (OHSB). MARC's decision to downgrade OWC's long-term rating was prompted by OHSB's weakened credit metrics following a sharp decline in revenue for the first nine months of 2010 (9M2010). This had resulted in a fairly significant earnings and capital erosion.

The predictability of OHSB's revenues and cash flow level continues to be impacted by the uncertain timing of work orders and slow receivables turnover. The aforementioned factors have greatly compromised the effectiveness of the structural protection afforded by the minimum required contract cover ratio (CCR) of 2.5 times (x) and assigned contract revenues. While substantial covenant headroom continues to be maintained in relation to OWC's CCR, as indicated by the 4.2x coverage of outstanding Sukuk by the value of outstanding contracts as at June 30, 2010, actual cashflow received by designated revenue accounts was below expectations.

The stable rating outlook incorporates MARC's expectation of an improved earnings outlook based on the group's outstanding order book of MYR 1.6 billion ($522.7 million) as at end-October 2010, but still vulnerable financial prospects. Rating stability is also conditioned upon OHSB reducing its debt and/or increasing its equity base in order to reach a ratio of total debt to tangible net worth not exceeding 2.0x (currently 2.5x) by 2012.

OHSB is the holding company of the Offshoreworks Group which participates in the underwater diving, geosurveying, construction and engineering, and ship management and chartering segments of the oilfield services sector. Its client base is mostly comprised of oil majors.

Underwater diving operating subsidiary Offshore Subsea Works Sdn Bhd (OSS) holds an estimated 70 per cent share of the domestic oil and gas diving market segment. The underwater diving segment contributed 72 per cent of the group's revenue in 2009 and accounted for 71 per cent of its MYR 1.6 billion ($522.7 million) outstanding orderbook as at end-October 2010. The division reported a MYR 42.5 million ($13.8 million) pre-tax loss in 9M2010, as a result of a sharp decline in work orders during the period of lower offshore activities and reliance on chartered third-party diving support vessels as a result of major overhaul performed on an owned vessel, the Offshore Stephaniturm.

The results of the underwater diving segment will likely drive the group's overall financial performance in the next 12 to 18 months, given the composition of the group's outstanding orderbook.

The underwater surveying and construction segments which generated 17 per cent and 10 per cent of consolidated revenue respectively in 2009 had also reported lower revenue in 9M2010. Their revenue for the nine months to September 30, 2010 were 47 per cent and 36 per cent of their 2009 full year results. The underwater survey division recorded a profit before tax of MYR 13.5 million ($4.4 million) while the construction segment registered a loss of MYR 13.1 million ($4.2 million) during the period. MARC notes that approximately 40 per cent of the water surveying division's outstanding orderbook of MYR 323.3 million ($105.6 million) as at end-October 2010 relates to contracts expiring in the next 12 to 14 months, providing it moderate revenue and earnings visibility As in previous years, the construction segment's contribution to overall results is expected to remain modest.

OHSB recorded a consolidated pre-tax loss of MYR 42.3 million ($13.8 million) for 9M2010 compared to a profit of MYR 40.7 million ($13.2 million) a year ago. The weaker-than-expected consolidated performance of the group largely reflected the underwater diving segment's operating losses. Although its cash flow from operations for the nine-month period turned positive, its elevated receivables and payables levels suggest continued challenges in working capital management.

MARC believes that the long collection period for OHSB's receivables will continue to limit cash flow generation during periods of high activity. OHSB's on-balance sheet liquidity is adequate for its operating needs, with about MYR 140.6 million ($45.9 million) of cash as at September 30, 2010. There are no principal repayments under the rated facilities until 2013 which should alleviate near-term refinancing risk although OHSB will still need to generate discretionary cash flow to meet a MYR 28.8 million ($9.4 million) debt maturity in 2011.

As a result of operating losses during 9M2010 and further drawdown of availability under the Sukuk, the group's debt-to-equity ratio deteriorated to 2.46x as at end-September 2010 (December 2009: 1.71x) which MARC considers to be aggressive compared to other issuers in its rated universe of oilfield service providers.

The ratings could be lowered if OHSB is unable to restore the group's operating profitability and cash flow generation to a level commensurate with its ratings over the next six to 12 months.

2011 CPI Financial. All rights reserved.

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Publication:CPI Financial
Date:Jan 16, 2011
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