Moody's downgrades Petrofac

Moody's Investors Service said it downgraded Petrofac Ltd.'s issuer rating and senior notes to Baa3 from Baa2. The outlook is stable. This concludes the review that began April 27.

The downgrade follows the company's announcement of an incremental £30 million loss on its Laggan-Tormore project, leading Petrofac to expect total losses on the project in 2015 of $250 million, compared with an April estimate of $195 million.

The rating action also reflects Moody's expectations that leverage over the next two years will be sustained above 2.0x. The agency said the company could potentially reduce leverage by selling part of its Mexican assets or reducing dividends, but no announcements have currently been made and any asset sales would result in reduced scale for Petrofac, which is already small compared to many Baa2 rated peers.

The Baa3 issuer rating currently reflects Petrofac's leading position in its core onshore engineering and construction business, its previously good execution track record and focus on project risk management, the strong backlog that grew to $21 billion as of May 31 and its strong market position, especially in the Middle East, Moody’s said.

The agency said these positives are weighed on by weak oil and gas industry fundamentals, significant revenue generation from large lump-sum turnkey projects that entail considerable risk from cost overruns and recent execution problems, low diversification and increased Moody's-adjusted gross leverage of 2.7x as of Dec. 31, 2014.

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