Investing.com -- S&P Global Ratings has announced an upgrade in the credit rating for Canada-based CES Energy Solutions (OTC: CESDF ) Corp. The new rating, raised to ’B+’ from ’B’, comes as a result of the company’s debt reduction efforts, which saw it pay down C$50 million of fixed-rate debt in 2024. The company’s funds from operations (FFO) to debt ratio ended the year at 62%.

The ratings agency anticipates that CES Energy’s leverage metrics will continue to be robust, despite an expected decrease in North American oilfield activity in 2025. The stable outlook reflects S&P’s belief that the company’s variable-cost structure, strong market position, and sensible financial policy will enable it to weather the slowdown and maintain an average FFO/debt ratio of around 58% over the next two years.

In 2024, CES Energy repaid C$50 million of fixed-rate debt, improving its debt maturity profile. The company’s C$550 million secured revolving credit facility matures in November 2028, while its C$200 million unsecured notes mature in 2029. Despite a forecasted slowdown in North American oilfield activity, CES Energy’s main operating region, the company is expected to maintain a strong FFO to debt ratio of 58% over the next two years.

The company is projected to generate about C$190 million of free cash flow in 2025. S&P believes that the company will prioritize debt reduction over buybacks to maintain its leverage target of debt to EBITDA of 1.5x or less.

CES Energy’s drilling and completions fluids segment, which accounts for approximately 50% of its revenue, is largely influenced by the North American rig count. Despite macroeconomic uncertainty, the production chemicals volumes are expected to consistently contribute to cash flows. However, the drilling and completion fluids segment is more susceptible to volatility due to its dependence on capital spending by exploration and production companies.

S&P forecasts a revenue decline of 8% in 2025, with the EBITDA margin dropping to 14% from 15.3% in 2024, due to lower rig counts impacting product demand and pricing. However, a slight improvement is expected in 2026 driven by higher commodity prices and improved demand conditions.

The company’s U.S. business, which accounts for 66% of total revenue, has limited direct exposure to ongoing tariff uncertainty. Most of CES Energy’s customer contracts include cost pass-through mechanisms, which could help offset higher costs.

Despite its variable-cost structure being advantageous in previous downturns, CES Energy’s mid-teens EBITDA margin (15% in 2024) lags behind ’B+’ rated peers. The company’s financial policy continues to support the higher rating, with a track record of reducing capital spending, cutting dividends, and limiting buybacks to preserve cash and manage leverage during downturns.

The stable outlook reflects S&P’s expectation that CES Energy will generate about C$190 million of free cash flow in 2025 and limit buybacks in favor of debt reduction to maintain its leverage target of Debt/EBITDA of 1.5x or lower.

S&P could lower the rating within the next 12 months if FFO to debt approaches 30% on a sustained basis. This would likely occur if the company adopted a more aggressive financial policy favoring shareholder returns over maintaining its leverage target.

While unlikely within the next 12 months, the rating could be raised if the company improved its profitability and increased its scale in line with higher-rated peers while maintaining FFO/debt around 60%.

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