Fitch Ratings believes the U.S. drilling and service sectors have an elevated exposure to leveraged-buyout (LBO) transactions. Historically, the industry has been an unattractive candidate for large, leveraging deals due to the cyclicality of earnings and cash flow.

"Robust returns to shareholders continue to provide the greatest level of protection to bondholders from LBO risk, consolidation risk or from leveraged recapitalizations," says Adam Miller, associate director, Fitch Ratings.

As commodity prices have increased substantially during the past few years, the increased demand for drilling rigs has resulted in substantial contract backlogs, and these have the potential to mitigate any near-term risk to falling commodity prices.

In addition, equity prices in the sector don't appear to fully value the significant contract backlogs amassed by offshore drilling companies, the credit-rating agency reports. The combination of relatively low equity prices, significant future earnings visibility and the ability to divest noncore assets continue to place bondholders at risk, it adds.

There are potential factors driving hesitation among potential private-equity buyers. These include uncertainty regarding the ability to realize revenue backlogs as costs rise, the market effect of a large supply of newbuild rigs currently under construction and the limited ability for synergies in the sector.

In addition, future exit multiples are expected to remain correlated with commodity prices, injecting a fair degree of uncertainty into the expected future sale price.

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