Fitch Downgrades Transocean Inc. to 'BB+'; Outlook Revised to Stable
Fitch Ratings has downgraded Transocean Inc. (Transocean; NYSE: RIG) and
its affiliate's long-term Issuer Default Rating (IDR) and senior
unsecured ratings to 'BB+' from 'BBB-'. The Rating Outlook has been
revised to Stable from Negative.
The downgrade reflects Fitch's view that the combined effects of the
weak oil price environment and offshore rig oversupply cycle have
introduced heightened levels of revenue risk that are anticipated to
result in leverage metrics exceeding Fitch's through-the-cycle levels
over the rating horizon. Fitch recognizes that the company has
undertaken numerous actions to protect credit quality to date. These
include the early retirement of debt, the proposed cancellation of the
third and fourth instalments of its dividend, the deferral of
uncontracted newbuild deliveries, the rationalization of legacy rigs (20
scrapped floaters announced; about 50% of the current industry total),
and the mitigation of Macondo-related credit risks.
Despite today's rating action, Fitch expects the company to exhibit a
positive free cash flow (FCF) profile, continue to retire its debt, and
maintain adequate liquidity over the near term. Further, Fitch views
Transocean as an eventual consolidator that will enhance the company's
long-term competitive position and credit prospects.
Approximately $8.8 billion of pro forma debt, excluding the outstanding
Eksportfinans loans and considering the July 2015 early debt retirement,
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 ($18.6 billion as of
July 15, 2015), favorable floater-focused rig fleet, high-grading and
margin improvement efforts, and financial flexibility, including that
afforded by uncontracted newbuild delivery delays and pending
cancellation of the dividend. These considerations are offset by the
company's continued need to generate and conserve liquidity given their
maturity and capex profiles to minimize the use of additional debt
funding. Fitch believes the company's current and near-term leverage
profile (Fitch calculated 2.8x latest 12 months [LTM] debt/EBITDA as of
June 30, 2015; Fitch base case forecasts consolidated debt/EBITDA of
2.7x in 2015) are consistent with a 'BBB-' rating. However, Fitch
forecasts leverage metrics exceeding through-the-cycle levels over the
rating horizon as higher contracted day rates begin to roll-off and
lower market day rates become a larger revenue contributor beginning in
OIL PRICE WEAKNESS, RIG OVERSUPPLY CYCLE CONTRIBUTE TO PROLONGED
Offshore drillers continue to face depressed market conditions due to
lower demand and a significant oversupply of rigs, including newbuilds.
The over 50% drop in oil prices has compounded the effects of the
oversupply cycle resulting in weaker market dayrates than previously
expected. Fitch's base case assumes market dayrates for
high-specification ultra-deepwater rigs of $300,000/day over the near
term. This is a downward revision from our previous base case estimate
of $325,000/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 expects operators to be cautious,
particularly larger, established drillers, about bidding at or below
cash breakeven levels. Our view is 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 the floater market's rationalization process will
generally be more orderly and rebalance more quickly than the jackup
market. However, 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, as a result, has pushed back its
anticipated market inflection point to late 2017/early 2018, with a
recovery to more robust operating and financial metrics not likely to
happen until after that point.
POSITIVE FCF PROFILE FORECAST NEAR TERM, BUT LEVERAGE METRICS PRESSURED
Fitch's base case forecasts Transocean, excluding cash flows to
non-controlling interests, will be $835 million and $625 million FCF
positive in 2015 and 2016, respectively. These FCF estimates assume the
pending dividend cancellation is approved. Fitch's base case results in
debt/EBITDA, excluding cash flows to non-controlling interests and cash
collateralized Eksportfinans loans, of 2.7x and 2.9x in 2015 and 2016,
respectively, benefiting from the retirement of debt at maturity, higher
contracted backlog revenues, and further margin improvement efforts.
Leverage metrics, however, are projected to exceed Fitch's
through-the-cycle levels beginning in 2017 followed by a prolonged
Transocean's current backlog and scheduled delivery of five contracted
ultra-deepwater rigs in 2016-2017 with five- or 10-year terms should
help provide some support to through-the-cycle financial results.
Further, Fitch recognizes that the company has additional financial
flexibility following the favorable use of most levers over the past
year should the downcycle persist and liquidity become constrained.
Fitch's key assumptions within our rating case for Transocean include:
--Brent oil price that trends up from $55/barrel in 2015 to $65/barrel
in 2016, $75/barrel in 2017, and a longer-term price of $80/barrel;
--Contracted backlog is forecast to remain intact with no renegotiations
--Market dayrates are assumed to be $300,000 for higher-specification
ultra-deepwater rigs with other rig classes seeing similarly steep price
discounts through 2016 followed by a moderate dayrate recovery
--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
--Capital expenditures consistent with company guidance of $1.85 billion
in 2015 with spending levels thereafter largely based on the current
newbuild delivery schedule;
--Dividend payments forecast to be cancelled beginning in the fourth
quarter of 2015;
--No Transocean Partners LLC (NYSE: RIGP) dropdowns or other related
Positive: Future developments that may, individually or collectively,
lead to a positive rating action include:
--Heightened day and utilization rates across the company's core fleet
suggesting strengthening market conditions;
--Demonstrated commitment by management to lower debt levels;
--Mid-cycle debt/EBITDA of 3.0x-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.
Positive rating actions are unlikely medium term given the weak offshore
market and forecasted leverage metrics over the rating horizon. However,
Fitch believes the company has exhibited a willingness to manage the
balance sheet through-the-cycle and anticipates the credit profile to
become more consistent with our positive sensitivities as the cycle
Negative: Future developments that may, individually or collectively,
lead to a negative rating action include:
--Material, sustained declines in rig utilization and day rates, as well
as margins, indicating further deterioration in market conditions and/or
asset quality and mix;
--Higher debt levels resulting from increased capex, leveraging
acquisitions, or shareholder-friendly actions;
--Mid-cycle debt/EBITDA above 4.0x on a sustained basis.
Negative rating actions may follow if the offshore market continues to
exhibit weakening trends that materially curtail debt reduction efforts
and/or limit revenue and recovery visibility.
ADEQUATE NEAR-TERM LIQUIDITY POSITION
Transocean had approximately $3.8 billion of cash and equivalents as of
June 30, 2015. Subsequent to the company's July 2015 early retirement of
the remaining $900 million of debt due November 2015, pro forma cash and
equivalents are approximately $2.9 billion as of Aug. 6, 2015.
Additionally, the company had approximately $304 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 July 28, 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. Fitch believes that the company can largely
retire the scheduled maturities with cash-on-hand and forecasted
positive 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 June 30, 2015). 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.
FULL LIST OF RATING ACTIONS
Fitch has downgraded the following ratings and assigned Recovery Ratings
--Long-term IDR to 'BB+' from 'BBB-';
--Senior unsecured notes/debentures to 'BB+/RR4' from 'BBB-';
--Senior unsecured bank facility to 'BB+/RR4' from 'BBB-'.
Global Santa Fe Inc.
--Long-term IDR to 'BB+' from 'BBB-';
--Senior unsecured notes to 'BB+/RR4' from 'BBB-'.
The Rating Outlook has been revised to Stable from Negative.
Additional information is available on www.fitchratings.com
Corporate Rating Methodology - Including Short-Term Ratings and Parent
and Subsidiary Linkage (pub. 17 Aug 2015)
Recovery Ratings and Notching Criteria for Non-Financial Corporate
Issuers (pub. 12 Jun 2015)
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