Fitch Ratings has upgraded PGS ASA's Long-Term Issuer Default Rating (IDR) to 'CCC' from 'RD' and concurrently withdrawn it.

The upgrade followed the company's successful execution of its debt amendments through a Scheme of Arrangement, which effectively extended the maturities to 2022.

We view the debt restructuring as positive, allowing for sufficient liquidity headroom through 2022. However, the company's debt remains high and we expect its liquidity to be insufficient to cover debt amortisation in 2023, which, combined with uncertainty regarding access to capital markets, will result in the company running out of liquidity under our base-case forecasts.

While we expect some gradual recovery in the seismic market, the company's unsustainable debt level, short liquidity runway and minimal free cash flow (FCF) generation constrain the rating.

Fitch is withdrawing the ratings as PGS has chosen to stop participating in the rating process. Therefore, Fitch will no longer have sufficient information to maintain the ratings. Accordingly, Fitch will no longer provide ratings (or analytical coverage) for PGS.

KEY RATING DRIVERS

Restructuring Completed: In February 2021, PGS's proposed debt amendments were approved via a Scheme of Arrangement following large-scale support by lenders representing 95.3% of total debt. Fitch viewed the successful execution of the Scheme as a prerequisite for the company to be able to avoid a liquidity inflection point, following demand destruction in 2020 that drove steep cash flow deterioration as well as a near-term wall of debt maturities entering 2021.

Debt Quantum Remains High: While the recently executed debt amendments help to alleviate near-term liquidity risk, the total debt quantum remains virtually unchanged at USD1.2 billion. We view this level as unsustainable for the business, given our expectation of minimal FCF generation and limited capital market access in the next two to three years.

High Refinancing Risk: We expect PGS to be able to meet contractual amortisation through 2022 under the new maturity schedule post-restructuring. However, based on our assumption of a very gradual recovery in the offshore seismic market, we expect FCF generation to be insufficient to cover the USD375 million of debt maturing in 2023. This, alongside a further USD562 million maturing in 2024, yields high refinancing risk as we expect traditional capital market access to remain limited for the company and further lender concessions may not be forthcoming.

Gradual Seismic Market Recovery: Despite the recent rapid recovery in oil and gas prices on the back of higher demand and favourable supply dynamics, we expect exploration budget cuts to only be reversed gradually. This is because oil producers will be cautious with ceding pricing concessions from service providers and will focus on core, rather than frontier, assets.

Weak FCF Generation: Even if the seismic services market recovers, as per our base-case forecast, we expect PGS's FCF generation will be less than USD10 million a year in the coming years, which makes it challenging for the company to reduce gross debt to manageable levels, and adds to refinancing risk in 2023. Options for incremental cash savings are minimal given the company's already substantial cost cuts, and any upside to our expectations would likely have to be driven by a substantial market recovery.

DERIVATION SUMMARY

Nabors Industries, Ltd. (CCC+) is the largest contract driller globally, with substantial exposure to lower-cost onshore production areas, whereas PGS operates exclusively in higher-cost offshore regions. Moreover, PGS is active in marine seismic acquisition, a niche segment of the exploration business, which Fitch views as higher-risk than drilling but less capital-intensive.

Nabors' rating was upgraded to 'CCC+' in December 2020 following the completion of a distressed debt exchange. Nabors' liquidity position is still constrained, as 75% of cash on balance sheet is restricted and some maturities remain in 2021, with the rest in 2023-2024. Nabors' lower leverage and larger size yields lower refinancing risk than for PGS.

CGG SA (B-(EXP)/Positive) has a more flexible business model than PGS after its exit from seismic acquisition activities. CGG's refinanced capital structure and liquidity position post-refinancing are also stronger than those of PGS as CGG had almost twice as much cash on balance sheet at end-2020 compared to PGS and the newly issued bond extends maturities to 2027. CGG is also 20% bigger than PGS based on 2019 Fitch-adjusted EBITDA.

KEY ASSUMPTIONS

Fitch's Key Assumptions Within its Rating Case for the Issuer

- Average of 5.75 vessels in 2021 (five active in 1Q21 and 4Q21, seven in 2Q21 and six in 3Q21), increasing to six in 2023

Vessel utilisation rate of 75% in 2021, increasing to 80% in 2023

EBITDA at almost USD300 million in 2021, recovering to USD400 million in 2023

MultiClient library investment of USD150 million in 2021, increasing to USD175 million as vessel utilisation increases and to USD210 million as the number of vessel in operation increases.

RATING SENSITIVITIES

Not applicable as the rating has been withdrawn.

BEST/WORST CASE RATING SCENARIO

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

LIQUIDITY AND DEBT STRUCTURE

Liquidity Insufficient by End-2022: As of end 2020, PGS had USD178 million of cash on balance sheet with no further available credit line. We expect the company to generate marginally positive FCF (USD6 million-7 million a year) in 2021 and 2022. We expect the company to be able to repay the USD135 million term loan B (TLB) amortisation in September 2022 and USD28 million excess cash flow (ECF) amortisation in December 2022. However, available cash at the beginning of 2023 would be only marginally above USD30 million. Unless the seismic market recovery is stronger and faster than we currently expect, we expect PGS to run out of cash in 1H23.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG CONSIDERATIONS

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.

Following the withdrawal of PGS's rating, Fitch will no longer be providing the associated ESG Relevance Scores.

RATING ACTIONSENTITY/DEBT	RATING		PRIOR
PGS ASA	LT IDR	CCC 	Upgrade		RD
	LT IDR	WD 	Withdrawn		RD

VIEW ADDITIONAL RATING DETAILS

Additional information is available on www.fitchratings.com

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