Fitch Ratings has downgraded Transocean Inc. (Transocean; NYSE: RIG) and
its affiliate's Long-term Issuer Default Rating to 'BB' from 'BB+'. The
Rating Outlook has been revised to Negative from Stable.
The downgrade reflects heightened offshore rig re-contracting risk and
Fitch's lower and longer offshore rig recovery profile following the
downward revision of our oil & gas price assumptions. Fitch expects E&P
companies to continue to reduce capital budgets to conserve liquidity
and preserve balance sheets. This has and is likely to continue to
broadly curtail offshore exploration activities and earlier stage
developments resulting in fewer tenders and more short-term contracts
for the next couple of years. These risks have resulted in a moderate
increase in Fitch's forecasted base case leverage profile over the
near-term, but, more importantly, increased the uncertainty around
forecasted non-current backlog revenues. Current contract coverage
within Fitch's base case decreases from roughly 90% in 2016 to under 70%
in 2017 with further declines thereafter.
The Negative Outlook considers the potential for a deeper and longer
than forecast offshore drilling downcycle that could result in
Transocean's leverage profile remaining above Fitch's through-the-cycle
levels for a 'BB' credit over the rating horizon. Fitch has pushed back
its recovery inflection point estimate into the second half of 2018 from
late 2017/early 2018.
Fitch's inflection point estimate remains at risk for further delays due
to the evolving hydrocarbon pricing environment, rig oversupply cycle,
and offshore E&P spending trends. E&Ps will likely need to be highly
confident that supportive prices are sustainable before meaningfully
committing capital to new offshore projects given their higher
development costs and multi-year development periods. Fitch believes
that an uptick in demand could lag supportive oil & gas price levels
(estimated at $65 - $70/barrel for deepwater) by at least six-12 months.
Fitch continues to recognize that Transocean has undertaken numerous
actions to protect credit quality to-date including the early retirement
of debt, eliminating the dividend, deferring uncontracted newbuild
deliveries, proactively rationalizing undifferentiated/uneconomic legacy
rigs (22 scrapped floaters announced; about 50% of industry total),
reducing operating costs, increasing rig uptime, and mitigating
Macondo-related credit risks. Fitch expects the company to exhibit a
positive free cash flow (FCF) profile, retire a considerable amount of
debt, and maintain adequate liquidity over the next couple of years.
This should help better align the company's capital structure with its
evolving asset profile. Fitch also views Transocean as an eventual
consolidator and management as capable through-the-cycle value creators
that will enhance the company's long-term competitive position and
credit prospects.
Approximately $8.5 billion of debt, excluding the outstanding
Eksportfinans loans, is affected by today's rating action. A full list
of rating actions follows at the end of this release.
KEY RATING DRIVERS
Transocean's ratings are supported by its market position as one of the
largest global offshore drillers, strong backlog ($16.8 billion as of
Dec. 6, 2015), favorable floater-focused rig fleet, high-grading and
margin improvement efforts, and adequate near-term financial
flexibility, including that afforded by uncontracted newbuild delivery
delays. These considerations are offset by the company's continued need
to generate and conserve liquidity given current unfavorable capital
market conditions, heightened maturities profile, and considerable
newbuild capex commitments. Fitch believes the company's current and
near-term leverage profile (Fitch calculated 2.6x latest 12 months [LTM]
debt/EBITDA as of Sept 30, 2015; Fitch base case forecasts consolidated
debt/EBITDA of 2.7x in 2015 and 3.3x in 2016) are consistent with a
higher rating. However, Fitch forecasts leverage metrics could exceed
through-the-cycle levels over the rating horizon as current contract
coverage meaningfully declines in 2017 with re-contracting risk elevated
in this very weak market environment.
OIL PRICE WEAKNESS, RIG OVERSUPPLY CYCLE CONTRIBUTE TO DELAYED RECOVERY
PROSPECTS
Offshore drillers continue to face depressed market conditions due to
lower demand and a significant oversupply of rigs, including newbuilds.
The roughly 70% drop in oil prices has compounded the effects of the
offshore rig oversupply cycle resulting in continued market dayrate
weakness. Fitch's base case assumes market dayrates for
high-specification ultra-deepwater rigs of $275,000/day. This is a
downward revision from our previous base case estimate of $300,000/day
due to the increasingly competitive contracting environment. Other rig
classes are projected to see similarly steep price discounts. Fitch also
recognizes that market dayrates could reach cash breakeven levels (about
$200,000/day for high-specification ultra-deepwater rigs), but continues
to expect operators will be cautious, particularly larger, established
drillers, about bidding at or below cash breakeven levels. Fitch's view
remains that while customers may, in most cases, prefer the lowest cost,
highest quality assets careful consideration will be given to an
operator's size, staying power, geological familiarity, and historical
operating performance.
Fitch anticipates that the floating rig rationalization process will
generally be more orderly than the jackup market and that it will
rebalance more quickly. Fitch believes that the more competitive jackup
market environment provides fewer economic incentives for operators to
rationalize over the near-term. Offshore rig demand could lag a recovery
to supportive oil price levels (currently estimated at $65 - $70/barrel
for deepwater) by at least six-12 months to encourage operators to
allocate additional capital to offshore projects. Fitch has pushed back
its recovery inflection point estimate into the second half of 2018 from
late 2017/early 2018 with a risk for further inflection point revisions.
A recovery to more robust operating and financial metrics is not likely
to happen until after that point.
POSITIVE FCF PROFILE FORECAST NEAR TERM, BUT LEVERAGE METRICS PRESSURED
MEDIUM TERM
Fitch's base case forecasts Transocean, excluding cash flows to
non-controlling interests, will be approximately $825 million and $450
million FCF positive in 2015 and 2016, respectively. Fitch assumes that
all surplus FCF will be allocated towards debt reduction over the next
few years. Fitch's base case results in consolidated debt/EBITDA,
excluding cash collateralized Eksportfinans loans, of 2.7x and 3.3x in
2015 and 2016, respectively.
Leverage metrics, however, are anticipated to move higher and could
exceed through-the-cycle levels thereafter. The Fitch base case
currently forecasts consolidated debt/EBITDA of approximately 4.5x in
2017 followed by gradual leverage metric improvements. Given the current
market environment, Fitch has placed increasing weight on its stress
case scenarios that currently forecast that consolidated debt/EBITDA
could reach and exceed 5x in 2017. Fitch believes, however, that prices
and offshore demand are likely to recover in the out years as large
capex cuts made across the industry to date begin to result in
meaningful supply reductions.
KEY ASSUMPTIONS
Fitch's key assumptions within our rating cases for Transocean include:
Fitch Base Case:
--Brent oil price that trends up from $45/barrel in 2016 to a
longer-term price of $65/barrel;
--Current contracted backlog is forecast to remain intact with no
renegotiations contemplated;
--Market dayrates are assumed to be $275,000 for higher-specification
ultra-deepwater rigs with other rig classes seeing similarly steep price
discounts through 2017 followed by some modest dayrate improvements
thereafter;
--Fleet composition considers announced rig retirements and attempts to
adjust for uncompetitive rigs due to their technological obsolescence,
undifferentiated market position, or cost prohibitive through-the-cycle
economics;
--Capital expenditures consistent with company guidance of $2 billion in
2015 with spending levels thereafter largely based on the current
newbuild delivery schedule;
--No dividend payments forecast following its recently approved
cancellation beginning in the fourth quarter of 2015;
--No Transocean Partners LLC (NYSE: RIGP) dropdowns or other related
funding activity.
Fitch Stress Case makes the following key adjustments to the Fitch Base
Case:
--Brent oil price that trends up from $35/barrel in 2016 to a
longer-term price of $45/barrel;
--Market dayrates are assumed to be $200,000 for higher specification
ultra-deepwater rigs with other rig classes seeing similarly steep price
discounts;
--Capital expenditures assume some further newbuild deferrals in the out
years.
RATING SENSITIVITIES
Positive: No positive rating actions are currently contemplated over the
near-term given the weak offshore oilfield services outlook. However,
future developments that may, individually or collectively, lead to a
positive rating action include:
For an upgrade to 'BB+':
--Demonstrated commitment by management to lower gross debt levels;
--Mid-cycle debt/EBITDA of approximately 3.5x on a sustained basis;
--Further progress in implementing the company's asset strategy to focus
on the high-specification and ultra-deepwater markets.
To resolve the Negative Outlook at 'BB':
--Demonstrated ability to secure tenders that constructively contribute
to the backlog and cash flows signalling the company's ability to manage
the industry's re-contracting risk and bridge its financial profile
through-the-cycle;
--Illustrated progress towards management's liquidity target of $4-$5
billion, while repaying scheduled maturities by year-end 2017;
--Mid-cycle debt/EBITDA of around 4.0x on a sustained basis.
Negative: Future developments that may, individually or collectively,
lead to a negative rating action include:
--Failure to generate positive FCF, repay near-term maturities, and
retain adequate liquidity over the next couple years;
--Material, sustained declines in rig utilization and day rates
signalling a heightened level of re-contracting and recovery risk;
--Mid-cycle debt/EBITDA above 4.5x - 5.0x on a sustained basis.
Fitch does not anticipate taking any further negative rating actions
until visibility of the post-2016 cash flow, leverage, and liquidity
profiles become clearer through a demonstrated ability to secure
tenders, pay down debt, and manage financial flexibility over the next
12-24 months. Further material deteriorations to the company's backlog
and liquidity profile, as well as to the offshore contracting
environment, could accelerate a negative rating action.
ADEQUATE NEAR-TERM LIQUIDITY POSITION
Transocean had approximately $2.2 billion of cash and equivalents as of
Sept. 30, 2015. The company also had approximately $443 million in
restricted cash investments associated with the required cash
collateralization of the outstanding Eksportfinans loans and other
contingent obligations. Supplemental liquidity is provided by the
company's $3 billion senior unsecured credit facility due June 2019,
including a $1 billion sublimit for letters of credit. The company had
$3 billion in available borrowing capacity as of Sept. 30, 2015 with the
ability to request a $500 million upsizing of the facility, subject to
the current, as well as any additional prospective, banks' willingness
to participate.
HEIGHTENED MATURITIES PROFILE
Transocean has annual senior notes maturities equal to $1 billion, $749
million, and $1.25 billion between 2016 and 2018. These represent the
company's 5.05% senior notes due December 2016, 2.5% senior notes due
October 2017, 6% senior notes due March 2018, and 7.375% senior notes
due April 2018. This excludes Eksportfinans principal amortization that
is cash collateralized. Management has been actively repurchasing debt
(approximately $292 million through Sept. 30, 2015) with cash in an
effort to incrementally improve near-term liquidity (nearly 85%
repurchased related to 2016-2018 maturities) by capturing a par discount
(over 6%) and reducing interest payments. Fitch continues to forecast
that the company can largely retire the scheduled near-term maturities
with cash-on-hand and FCF.
Transocean, as defined in its bank credit agreement, is subject to a
maximum debt to tangible capitalization ratio of 0.6 to 1.0 (0.4 as of
Sept. 30, 2015), excluding intangible asset impairments and certain
other items. Other customary covenants consist of lien limitations and
transaction restrictions.
MANAGEABLE OTHER LIABILITIES
Transocean maintains several defined benefit pension plans, both funded
and unfunded, in the U.S. and abroad. As of Dec. 31, 2014, the company's
funded status was negative $462 million. Fitch considers the level of
pension obligations to be manageable and notes that the U.S. benefits
freeze helps to alleviate any future pension-related credit risks. Other
contingent obligations are principally comprised of purchase commitments
totalling approximately $5.3 billion on a multi-year, undiscounted basis
as of June 30, 2015.
Fitch downgrades the following:
Transocean Inc.
--Long-term IDR to 'BB' from 'BB+';
--Senior unsecured notes/debentures to 'BB'/RR4 from 'BB+'/RR4;
--Senior unsecured bank facility to 'BB'/RR4 from 'BB+'/RR4'.
Global Santa Fe Inc.
--Long-term IDR to 'BB' from 'BB+';
--Senior unsecured notes to 'BB'/RR4 from 'BB+'/RR4.
The Rating Outlook has been revised to Negative from Stable.
Additional information is available on www.fitchratings.com
Applicable Criteria
Corporate Rating Methodology - Including Short-Term Ratings and Parent
and Subsidiary Linkage (pub. 17 Aug 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362
Recovery Ratings and Notching Criteria for Non-Financial Corporate
Issuers (pub. 07 Dec 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=873504
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=999058
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=999058
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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