ABERDEEN oil drilling heavyweight KCA Deutag has had its credit rating cut by a prominent market analyst which noted high debt levels at the firm.

S&P Global Ratings said it had downgraded KCA Deutag Alpha’s debt to CCC+ in junk bond territory amid concerns about potential pressure on the company’s finances.

The rating cut, from B-, may be greeted with dismay in Scotland’s key oil services sector as the North Sea industry emerges from the deep downturn triggered by the crude price slump from 2014.

Read more: Oil tycoon hails signs of recovery in North Sea after 'really tough' times

KCA Deutag developed out of the Abbot Group which Alasdair Locke sold to US private equity firm First Reserve for £906 million in 2007.

The company operates around 110 drilling rigs in oil and gas basins stretching from the North Sea to South East Asia.

The downgrade provides a sign that trading conditions remain tough in the oil services sector although the partial recovery in the crude price since late 2016 has encouraged some firms to increase activity.

S&P noted that KCA Deutag (KCAD) is being hampered by the fact that demand for rigs is still relatively weak leaving the market oversupplied and hire rates under pressure.

Exploration activity in the North Sea has fallen to record lows.

Read more: Aberdeen oil well specialist to pay first dividend for years

“In our view, the company’s business model is sound. However, it cannot support the current high debt level and the associated hefty interest expenses,” said S&P of KCA Deutag.

The agency observed: “We now view the capital structure as unsustainable, given the very high debt level and negative free operating cash flow (FOCF) in the short term.”

It added: “Short-term liquidity pressure could also become more serious as the company approaches its sizable maturity in May 2021.”

S&P noted that KCA Deutag is due to repay $375m bonds in 2021, with a further $1.5 billion maturing over the following two years.

Read more: Crude price warning bodes ill for North Sea

The agency said it would consider lowering the rating if KCA Deutag does not address its capital structure and liquidity over the coming 12 months.

It suggested remedies could include the company’s shareholders pumping in money.

S&P signalled confidence that the issues would be addressed.

Noting that it regarded the outlook as stable, the agency said: “We anticipate that the current tight headroom under KCAD’s financial covenants will be addressed by its shareholders and other internal initiatives, without putting immediate pressure on the rating.”

The note was issued shortly after KCA Deutag announced plans for a leadership change.

On Monday the firm announced that a veteran of the oil services and private equity businesses, Joseph Elkhoury would become its new chief executive on July 1.

It said current chief Norrie Mackay planned to retire later this year.

KCA Deutag’s chairman Bob Ellis said Mr Mackay had made a huge contribution since joining the group eight years ago.

Mr Ellis said Mr Mackay had spearheaded a successful growth strategy which culminated in the acquisition of the Omani and Saudi Arabian businesses of Dalma Energy in 2018, and the establishment of the Turan Drilling & Engineering joint venture in Azerbaijan.

Read more: Bumper North Sea contract highlights scale of decommissioning challenge

Pamplona Capital Management took control of KCA Deutag in 2010 as the oil services industry grappled with the fallout from the global downturn triggered by the financial crisis of 2008.

The latest report to bondholders included on the group’s website shows KCA Deutag Alpha incurred a $215.2m pre tax loss in 2018, compared with a $127.6m loss in the preceding year. Sales increased to $1.26bn from $1.16bn.

In the results announcement Mr Mackay said KCA Deutag had strong liquidity at the end of the year, with $186.4m available under undrawn facilities. The group said it had a stable contract backlog of $5.6bn at March 1 across a blue chip customer base.

KCA Deutag had not responded by the time of publication to our invitation to comment on S&P’s observations.