Fitch Ratings has affirmed Transocean Inc. (Transocean; NYSE:
RIG) and its affiliate's long-term Issuer Default Rating (IDR) and
senior unsecured ratings at 'BBB-'. The Rating Outlook remains
Stable.
Approximately $9.9 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 the
largest global offshore driller, strong backlog ($25 billion as of
July 16, 2014), favorable rig fleet high-grading and margin
improvement efforts, and heightened financial flexibility. These
considerations are offset by the possibility of a weaker than
expected offshore market, focus on returning cash to shareholders,
and Macondo litigation uncertainty. However, Fitch believes the
company's current and projected leverage profile (Fitch calculated
2.6x LTM debt/EBITDA as of June 30, 2014); Fitch base case
forecasts, excluding debt assumed at Transocean Partners LLC (NYSE:
RIGP) and non-controlling cash flows, debt/EBITDA of 3.0x in 2015)
and financial flexibility provides sufficient headroom at the
current 'BBB-' rating to warrant a Stable Outlook.
SOFTENING OFFSHORE MARKET
Near-term offshore demand has moderated as international oil
companies (IOCs) focus on cash flows and shareholder returns and
national oil companies (NOCs), including Petrobras, delay drilling
programs further depressing market conditions. However, Fitch
expects medium-term demand to expand mainly due to declines in
existing offshore reserve bases that will necessitate IOCs and NOCs
explore for new and develop existing challenging resources (e.g.,
pre salt, ultra-deepwater, arctic). On the supply-side, new builds
equal to roughly one-third of the working worldwide rig fleet are
scheduled to be delivered through 2018. This will materially
increase the supply of offshore rigs and raise the average
worldwide fleet quality.
Fitch believes that utilization and day rates for existing,
lower specification rigs will remain under pressure over the
near-term. Further, the rate of absorption could heighten
downmarket competition leading to some lower specification rig
displacement and, potentially, stacking and/or attrition. Fitch
views 2016 as the company's likely inflection point with a large
proportion of its legacy backlog having rolled off and the majority
of competitive newbuilds reaching the market. However, a prolonged
aversion by the market to fleet attrition and/or a sustained period
of depressed demand could push back the inflection point.
Transocean's delivery of six drillships (five contracted) and five
high-specification jackups (uncontracted) between the first quarter
of 2016 and second quarter of 2017 should support financial results
in either case.
EXECUTION OF TRANSOCEAN PARTNERS IPO
Transocean completed its IPO for Transocean Partners LLC, an
affiliated MLP-like yield vehicle, on July 31, 2014. Upon closing,
Transocean transferred to RIGP a 51% ownership interest in the
entities that own and operate the three company-owned rigs
(established as individual RigCos). Transocean, through an
affiliated holding company, owns a 70.8% interest in RIGP and
retains a 49% ownership in each RigCo. Under the terms of the
omnibus agreement, RIGP has the right of first refusal on the
remaining RigCo interests, the right to purchase not less than a
51% interest in four of the six drillships identified as dropdown
candidates (five are currently under construction), and the
opportunity to purchase existing or future rigs, subject to certain
conditions.
Fitch believes RIGP will provide Transocean with additional
financial flexibility by introducing a willing and privileged
affiliate purchaser to monetize assets at tax-advantaged multiples.
The dropdowns will improve Transocean liquidity to pay down
corporate debt and fund its fleet renewal program. Meanwhile,
Transocean's ownership of RIGP units and direct interest in the
initial RigCos will provide additional on-going cash flows.
Nevertheless, Fitch recognizes that the establishment of RIGP
introduces the risk of corporate asset quality dilution and a
weakened cash flow profile that could be heightened if offsetting
adjustments are not made to the corporate balance sheet.
Additionally, the generally higher leverage employed by MLPs (RIGP
has minimal initial debt), relative to corporate drillers, could
reduce the distribution prospects during a cyclical downturn.
Fitch expects proceeds from RIGP to help improve Transocean's
financial flexibility near-term and does not anticipate the
formation of RIGP to be a medium-term credit concern. The
combination of a measured dropdown plan, application of RIGP debt
proceeds to corporate debt repayment, manageable RIGP leverage
profile, retention of a direct RigCo ownership and/or substantial
RIGP interest, and the involvement of Transocean management in
day-to-day operations and strategic decisions will help mitigate
corporate asset quality and cash flow risks.
FORECASTED CASH FLOWS PRESSURED, BUT SUFFICIENT FINANCIAL
FLEXIBILITY
Fitch's base case forecasts Transocean, excluding
non-controlling RIGP cash flows, will be over $1.5 billion and $1.1
billion FCF negative in 2014 and 2015, respectively. These FCF
estimates consider dividend payments consistent with the current
$3.00 per share. Fitch expects Transocean to fund its cash flow
shortfall principally with cash-on-hand and asset sale proceeds,
but recognizes the company may also delay capital spending and,
potentially, cut or suspend the dividend. Fitch's base case results
in debt/EBITDA, excluding debt assumed at RIGP and non-controlling
cash flows, of over 2.9x and about 3.0x in 2014 and 2015,
respectively. Fitch anticipates leverage metrics will become
pressured in 2016 and forecasts, in some stress scenarios, metrics
could move into the debt/EBITDA rating sensitivity of 3.5x-4.0x.
However, Fitch believes that Transocean has sufficient financial
flexibility and headroom at the current 'BBB-'rating to absorb some
additional market weakness
ADEQUATE LIQUIDITY POSITION
Transocean had cash and equivalents of over $2.5 billion,
inclusive of the RIGP IPO proceeds, as of pro forma June 30, 2014.
Additionally, the company had $526 million in restricted cash
investments associated with the required cash collateralization of
the outstanding Eksportfinans loans ($517 million) and other
contingent obligations ($9 million). Supplemental liquidity is
provided by the company's $3 billion senior unsecured credit
facility due June 2019, including a $1 billion sublimit for the
issuance of letters of credit. No revolver balances were
outstanding as of June 30, 2014. The company's target liquidity
profile is $3.5-$4.5 billion with $1.5-$3 billion consisting of
cash.
HEIGHTENED MATURITIES PROFILE
Transocean has annual senior notes maturities equal to $1.1
billion, $1 billion, $750 million, and $1.3 billion between 2015
and 2018. These represent the company's 4.95% senior notes due
November 2015, 5.05% senior notes due December 2016, 2.5% senior
notes due October 2017, 6.0% senior notes due March 2018, and
7.375% senior notes due April 2018. This excludes Eksportfinans
principal amortization that is cash collateralized. 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,
2014). Other 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, 2013,
the company's funded status was negative $356 million, which is
below the previous year-end's estimate of negative $581 million.
The main drivers for the improvement in funded status are actuarial
gains and continued growth in plan assets. Fitch considers the
level of pension obligations to be manageable and notes that the
recent U.S. benefits freeze helps to alleviate any future
pension-related credit risks.
The company had approximately $5.3 billion in other contingent
obligations on a multi-year, undiscounted basis as of June 30,
2014. These obligations consist of purchase commitments ($5.1
billion) and operating lease payments (nearly $200 million). Fitch
does not consider the obligations to be credit concerns, which are
generally accounted for in operating and capital costs.
RATING SENSITIVITIES
Positive: Future developments that may, individually or
collectively, lead to a positive rating action include:
--Improvements in day and utilization rates across the company's
core fleet suggesting strengthening market conditions;
--Further progress in implementing the company's asset strategy
to focus on the high-specification and ultra-deepwater markets;
--Resolution of the Macondo litigation on credit neutral terms
that reduces payment and funding uncertainty;
--Mid-cycle debt/EBITDA of 2.0x-2.5x on a sustained basis.
Positive rating actions are unlikely over the medium-term given
the softening offshore market and negative free cash flow profile,
including dividends.
Negative: Future developments that may, individually or
collectively, lead to a negative rating action include:
--Lower than expected rig utilization and day rates and margins
indicating a material deterioration in market conditions and/or
asset quality and mix;
--Acquisitions and/or shareholder friendly actions that are
inconsistent with the capital structure and expected cash flow
profile;
--Robust dropdown activity and/or RIGP leveraging that
significantly weakens asset quality and RIGP cash flow
prospects;
--Macondo and/or other legal settlements/rulings that require
the payment of considerable fines with unfavorable payment terms
that deteriorates financial flexibility;
--Through-the-cycle debt/EBITDA of 3.5x-4.0x on a sustained
basis.
Negative rating actions will be closely linked to management's
ability to manage its balance sheet through the current cycle.
However, at this time, Fitch believes that Transocean has
sufficient financial flexibility to maintain leverage metrics
consistent with the current rating over the near-term.
Fitch has affirmed Transocean and its affiliate's ratings as
follows:
Transocean Inc.
--Long-term IDR at 'BBB-';
--Senior unsecured notes/debentures at 'BBB-';
--Senior unsecured bank facility at 'BBB-'.
Global Santa Fe Inc.
--Long-term IDR at 'BBB-';
--Senior unsecured notes at 'BBB-'.
The Rating Outlook remains Stable.
Fitch has withdrawn Transocean's short-term IDR and commercial
paper rating, since the company no longer actively maintains a
commercial paper program.
Additional information is available at
'www.fitchratings.com'.
Applicable Criteria and Relevant Research:
--'Corporate Rating Methodology Including Short-Term Ratings and
Parent and Subsidiary Linkage' (May 28, 2014);
--'Updating Fitch's Oil and Natural Gas Price Deck' (Aug. 8,
2014);
--'Fitch: Driller MLPs May Heighten Asset and Cash Flow Risks'
(April 14, 2014);
--'Fitch: Drilling Downturn May Spur Deals; MLPs Add
Flexibility' (Aug. 27, 2014);
--'Fitch: Offshore Drillers Face Softening Market' (May 22,
2014);
--'Non-Traditional MLP Assets (Changing Mix, Changing Risks)'
(May 6, 2014).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and
Parent and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393
Updating Fitch's Oil & Gas Price Deck
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=754047
Non-Traditional MLP Assets (Changing Mix, Changing Risk)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=747370
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=858654
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Fitch Ratings, Inc.Primary AnalystDino Kritikos,
+1-312-368-3150DirectorFitch Ratings, Inc.70 W. Madison
StreetChicago, IL 60602orSecondary AnalystSean T. Sexton, CFA,
+1-312-368-3130Managing DirectororCommittee ChairpersonGlen
Grabelsky, +1-212-908-0577Managing DirectororMedia RelationsBrian
Bertsch, +1-212-908-0549brian.bertsch@fitchratings.com