Fitch Downgrades Transocean Inc. to 'BB+'; Outlook Revised to Stable
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 2017.
OIL PRICE WEAKNESS, RIG OVERSUPPLY CYCLE CONTRIBUTE TO PROLONGED RECOVERY PROSPECTS
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 MEDIUM TERM
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 recovery.
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.
KEY ASSUMPTIONS
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 contemplated;
--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 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 $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 funding activity.
RATING SENSITIVITIES
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 improves.
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 as follows:
Transocean Inc.
--Long-term IDR to 'BB+' from 'BBB-';
--Senior unsecured notes 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.
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