Fitch Affirms Transocean's LT IDR at 'BBB-'; Outlook Stable
CHICAGO -- August 28, 2013
Fitch Ratings has affirmed the long-term Issuer Default Rating (IDR) and
senior unsecured debt ratings of Transocean Inc. (Transocean) and its
affiliates at 'BBB-'. In addition, Fitch has affirmed the short-term IDR and
commercial paper ratings of Transocean Inc. at 'F3'. The Rating Outlook has
been revised to Stable from Negative. A full list of ratings follows at the
end of this release.
The ratings reflect Transocean's sizable and high-quality asset base, its
earnings and cash flow profile and moderately levered capital structure. The
company is the largest offshore driller in the world, possessing many of the
premium deepwater drilling rigs in the industry. It owns or has ownership
interests in 80 offshore drilling rigs, excluding rigs under construction and
rigs held for sale, with 46 of the 80 being premium ultra deepwater, deepwater
and harsh environment drilling rigs that have recently commanded higher
dayrates. Transocean's cash flow from operations in 2012 was approximately
$2.7 billion which supported capex of $1.4 billion and dividends of $278
million resulting in $1 billion in free cash flow FCF).
In terms of financial flexibility, Transocean's liquidity is quite robust with
approximately $6.2 billion in total liquidity on June 30, 2013 consisting of
over $3.3 billion of cash and equivalents, nearly $2 billion under its $2
billion unsecured revolver due 2016 and $900 million under its undrawn secured
revolver due 2015. The unsecured revolver includes a covenant imposing a
maximum debt-to-tangible capitalization ratio of 0.6 to 1.0. As of June 30,
2013, this ratio, as defined, was 0.4 to 1.0. Scheduled debt maturities are
immaterial for the remainder of 2013 - $52 million in 2014 and approximately
$1.18 billion in 2015. Liquidity levels are elevated due to uncertainty
related to remaining Macondo contingencies that may exist.
The revision in Outlook to Stable stems from the efforts the company has made
to reduce debt, its prudent dividend policy, its management thus far of
Macondo related contingencies and improving credit metrics. Since the end of
2012, the company has reduced debt and its scheduled DOJ/Macondo settlement
payment liabilities from approximately $13 billion to slightly under $11
billion as of June 30, 2013. Additionally, Transocean's $2.24/share annual
dividend ($816 million/year) is viewed by Fitch as reasonable given its rating
level and expectations for future cash flow. LTM debt/EBITDA improved to
approximately 3.0x as of June 30, 2013 versus approximately 4.1x as of June
30, 2012. Fitch's expectation is that this metric will improve further.
Offsetting factors include potential remaining Macondo multidistrict
litigation contingencies as well as pressures to improve share price for
equity holders. While unknown at this point, Fitch believes remaining Macondo
contingencies should be manageable within the context of Transocean's current
ratings. In regard to improving share price, Transocean has been studying the
potential formation of a master limited partnership (MLP) or MLP-like
structure. Fitch would expect that, if ultimately formed, the impact on
Transocean would be credit neutral and not negative.
Expectations for Credit Metrics and FCF
Fitch expects LTM debt/ EBITDA to be approximately 3x for 2013, decreasing to
2.5x and potentially lower going forward given expected lower debt levels and
stronger EBITDA generation. Given a robust growth-oriented capital spend of
$2.4 billion in 2013, expectations are for negative FCF this year after capex
and dividends. In future years, the agency expects cash flow from operations
to strengthen to produce FCF that is more neutral after capex and dividends.
Negative: Future developments that could lead to negative rating action
--A large, adverse liability or settlement outcome well in excess of recorded
estimated loss contingencies for Macondo as of June 30, 2013;
--New shareholder-friendly actions that are materially detrimental to
Transocean's credit profile;
-- A significant reduction in revenue and cash flow due to industry and/or
-- A material and extended drop in oil prices that drives new dayrates and
contracting revenue significantly lower.
Positive: Future developments that could lead to positive rating action
--Resolution of remaining Macondo related issues in a satisfactory manner;
--Continued operational improvement, much stronger industry conditions and
resulting cash flow or substantial debt reduction.
Fitch affirms Transocean Inc.'s and its affiliate's ratings as follows:
--Long-term IDR at 'BBB-' ;
--Senior unsecured notes at 'BBB-';
--Senior unsecured bank facility due 2016 at 'BBB-';
--Short-term IDR at 'F3';
--Commercial paper at 'F3'.
--Long-term IDR at 'BBB-';
--Senior unsecured notes at 'BBB-'.
Additional information is available at www.fitchratings.com.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 5, 2013).
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and
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Sean T. Sexton, CFA, +1-312-368-3130
Fitch Ratings Inc.
70 West Madison Street
Chicago, IL 60602
Daniel Harris, +1-312-368-3217
Mark A. Oline, +1-312-268-2073
Brian Bertsch, +1-212-908-0549
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