QGOG’s rigs facing early termination?

Fitch Ratings has downgraded its ratings on the QGOG-sponsored oil vessel-backed financings to ‘BB’ from ‘BB+’. Concurrently, Fitch has removed the rating from Rating Watch Negative and assigned a Negative Outlook.

The rating action affects approximately $316.5 million of senior secured notes issued by QGOG Atlantic / Alaskan Rigs Ltd. A full list of rating actions follows at the end of this press release.

The downgrade reflects Fitch’s view related to Petrobras’ willingness to honor underlying charter and service agreements in the event of a performance-related breach, and the continued pressure on global day-rates and asset values caused by stressed oil prices and changes in worldwide supply and demand dynamics.

While the Atlantic Star and Alaskan Star (rigs) have historically performed well, these mid-water assets are considered less strategic than the ultra-deep water assets within Petrobras’ overall fleet and therefore may be more vulnerable to contract termination. The continued decline in market day-rates for assets with higher specifications adds pressure to the contracted day-rates for Atlantic and Alaskan, making these contracts less attractive to Petrobras and more vulnerable to potential restructuring.

The ratings are ultimately supported by the credit quality of Petrobras, the underlying long-term contracts, QGOG’s position as one of Petrobras’ top performing service providers and the credit quality of QGOG Constellation. The Negative Outlook reflects the Negative Outlook on the sponsor’s rating and the negative demand fundamentals for the underlying equipment.

KEY RATING DRIVERS

— Petrobras’ Willingness to Honor Existing Charter and Services Agreements

While Petrobras has indicated its intention to continue honoring the terms of existing charter agreements, the company recently announced a 37% reduction in capex investments over the next five years. Although the exploration and production (E&P) contracts remain strategic capex investments and the bulk of Petrobras’ fleet relates to production, Petrobras will focus on the most strategic and best operating assets within the chartered fleet. Although the underlying assets backing the transaction have relatively strong historical performance, any considerable downtime in the future could increase the risk of contract termination.

Additionally, Petrobras may approach operators in an attempt to restructure certain contracts in order to reduce expenses over the medium term. The continued decline in global dayrates for assets with higher technology and capabilities may increase the risk of restructuring for these contracts as Petrobras may perceive them as less attractive.

— Market Conditions Heighten Performance Pressure

Global offshore market conditions have pressured utilization, day rates, and, as a result, asset values of mid-water semisubmersibles. Built in 1980 and updated in 2011, the Atlantic Star and Alaskan Star rigs are second-generation semisubmersibles. Recently, older mid-water assets in the global offshore marketplace have been scrapped rather than re-contracted to operate. Moreover, in Fitch’s view, mid-water semisubmersibles are not considered as strategic to Petrobras’ offshore production plans as ultra-deepwater (UDW) rigs. These factors imply a low likelihood that the Atlantic Star and Alaskan Star would be re-contracted in today’s environment outside of Brazil and underline the importance of a strong operating performance to avoid any performance-related contract termination.

— Strong Historical Performance with Isolated Periods of Downtime

During 2013 and 2014, performance of the Atlantic Star and Alaskan Star was excellent, with both vessels recording average uptime levels near 99%. However, during the first quarter of 2015 (1Q15) operational uptimes for the both averaged 84.7% and 91%, respectively. Performance during 1Q15 for Alaskan Star was affected by the suspension of the rig ordered by the Brazilian Ministry of Labor and Employment (MTE) and the National Petroleum Agency (ANP) due to compliance with certain equipment standards and procedures. This suspension was extended for a few days of 2Q15, affecting uptime levels for 2Q15 as well. Performance for Atlantic Star during 1Q15 was affected by the blowout preventer (BoP). The vessel is back to operations.

While Queiroz Galvao Oleo e Gas S.A. (QGOG) is one of the best operators in Petrobras’ fleet, Fitch believes that given the nature of the assets and the contracted day-rates, these charter and services agreements are exposed to early termination in the event of a major performance mishap. With current market conditions and market day-rates for newer UDW assets close to the contracted day-rates for the Alaskan Star and Atlantic Star, Petrobras may approach the operator in an attempt to restructure certain contracts to reduce expenses over the medium term.

— Credit Quality of QGOG Constellation

On June 8, 2015, Fitch affirmed QGOG Constellation’s Issuer Default Ratings (IDRs) at ‘BB-‘, removed the ratings from Negative Watch and assigned a Negative Outlook. The action reflects the lower than expected short-term impact of the contracting ban with Petrobras as well as the uncertainty surrounding the timing when the ban will be lifted. The rating action also reflects the better than expected liquidity position. The transaction is directly and indirectly exposed to the credit quality of QGOG Constellation as the charter and service agreements have termination clauses relating to bankruptcy and performance.

— De-leverage Limits Exposure to Stressed Market

Exposure to market day-rates and depressed asset values is significantly mitigated, since the transaction continues to de-lever at a relatively fast pace.

RATING SENSITIVITIES

The ratings are sensitive to changes in the credit quality of Petrobras as offtaker, resolution by the Brazilian General Comptroller (CGU) of the temporary ban review, changes in the credit quality of QGOG Constellation, and the operating performance of the underlying assets.

Additionally, the ratings are sensitive to changes in the Brazilian oil and gas industry dynamics and overall market dynamics for midwater assets, and on Fitch’s perception of Petrobras willingness to honor the existing conditions under the contracts

DUE DILIGENCE USAGE

No third party due diligence was provided or reviewed in relation to this rating action

TRANSACTIONS SUMMARY

The notes are backed by the flows related to the charter agreements signed with Petroleo Brasileiro (Petrobras) for the use of the moored semi-submersibles Atlantic Star and Alaskan Star. Queiroz Galvao Oleo e Gas S.A. (QGOG) is the operator of the vessels and QGOG Constellation S.A. (QGOG Constellation) is the primary sponsor of the transaction.

Fitch has downgraded the following rating:

–Series 2011-1 senior secured notes due 2019 to ‘BB’ from ‘BB+’; Outlook Negative assigned.

Source: Fitch Ratings