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21 Aug 1997
MOODY'S ASSIGNS Baa2 TO POSSIBLE GLOBAL MARINE SR. UNSECURED NOTES; UPGRADES UNSECURED BANK REVOLVER TO Baa2; AND UPGRADES EXISTING SR SECURED NOTES TO Baa1
New York, 08-21-97 -- Moody's Investors Service assigned a Baa2 rating to a possible Global Marine, Inc. 10 to 15 year senior unsecured note offering of up to $300mm and upgraded to Baa2 Global's $250 million two year unsecured, guaranteed bank revolver and its anticipated revision to a $250mm five-year unsecured, unguaranteed revolver. Moody's also upgraded from Ba1 to Baa1 Global's $224 million of 12.75% senior secured notes due 1999 and upgraded from (P)B1 and (P)b1 to (P)Ba1 to (P)ba1, respectively, any subordinated notes or preferred stock subsequently issued under Global's $75mm universal shelf. Global expects to call the 12.75% notes, secured by 22 drilling rigs, when first redeemable in December, 1997. If issued, the unsecured notes would fund the secured note call and, together with surging cash flows and roughly $200mm in revolver drawings, would fund a portion of the firm's $560mm 1997 capex and acquisitions budget.
The new senior unsecured ratings are therefore prospective to: retirement of the secured notes with up to a $300mm note offering; to Moody's standard review of the new indenture and amended revolver agreements, and to the notes and bank debt being pari passu. The outlook is stable.
Though in the midst of an especially strong recovery, offshore contract drilling remains a global, highly capital intensive, cyclical business. Individual bond ratings require a sector-wide perspective since rig day rates are highly sensitive to worldwide rig supply and demand. The majority of the sector's rigs can compete in multiple international markets and the major drillers compete worldwide on service and price for individual E&P firm's worldwide drilling business.
These Global Marine ratings actions occur during a worldwide shallow and deep water drilling recovery following the sector's disastrous 1980's/early 1990's period. The contract drilling recovery boom has been supported, so far, by supply-side discipline. Surging cash flows are funding sector-wide fleet refurbishments and upgrades, balance sheet clean-ups, and investment grade ratings for the conservatively leveraged top firms. Strong equity prices and balance sheet discipline are fostering all-stock mergers that further consolidate the industry. The sector problems of the 1980's grew from nearly a decade (1970's/early 1980's) of sector investment decisions based on unrealistic expectations that OPEC could administer hydrocarbon prices that far exceeded the intrinsic value of hydrocarbon production. It took nearly 15 years of rig attrition and the current offshore drilling surge to bring rig supply and demand into balance. Regardless of future demand side patterns, Moody's observes that the supply-side of the drilling sector is now largely governed by shareholder-owned firms gauging capital structure and investment decisions on the reality that their customer base, integrated and independent E&P firms, is itself an extremely capital intensive cyclical business possessing no sustainable control over the price of its production. On the rig demand-side, strong global hydrocarbon consumption since the mid-1980's, innovative cost reductions and technology enhancements, and producer's needs to show increasing production and reserve volumes to Wall Street, are driving a worldwide boom in drilling. One innovation, deep water subsea completions, increases the requirement for floating rigs for subsequent development drilling that previously were drilled directionally from fixed production platforms.
However, it is premature to assess competitors' and clients' eventual strategic reactions to the current boom. Hence, the assigned Baa2 ratings are prospective to management's commitment to its own strategy to reduce gross debt to approximately $300mm by 12/31/98. Although the sector's rated issuers are currently pursuing conservative expansion and financial strategies, and their E&P client base is pursuing robust 3 to 5 year drilling budgets, the sector remains inherently cyclical. Day rate declines towards variable cost-based pricing are possible when sector rig utilization declines below 80%-85%. Additionally, Moody's observes that soaring rig day rates could soon limit GOM jack-up demand by impacting the economics of marginal Gulf of Mexico (GOM) Continental Shelf properties. The interplay between prospect geology/economics, GOM day rates, and increasing offshore oil field service costs generally, will reveal itself over the next several quarters.
Accordingly, if Global chose to materially exceed its 12/31/98 $300mm gross debt target in order to achieve its business objectives, Moody's would review the ratings at that time to assess whether sector/Global's prospects remain sufficiently robust to reduce gross debt to roughly $300mm prior to a downturn. Moody's will also assess Global's and its competitors' target debt structure as the drilling recovery progresses. To meet its approximately $300mm gross debt target, Global will cover over $550mm of 1997 capex/acquisition outlays and roughly $60mm of scheduled 1998 capex with forecasted EBITDA exceeding $800mm in the 1997/1998 period. At the new Baa2 level, Moody's would not want Gross Debt/EBITDA to exceed roughly 3x to 4x at the trough.
At $4.5 billion, Global has the second largest equity market capitalization and one of the highest market value per rig ratios in the contract drilling sector. Global's EBITDA/Interest Expense exceeds 7x and should finish the year above 9x, Debt/EBITDA is running at a low 1.1x rate, Debt/Book Capital is 31%, and Debt/Enterprise Value is the lowest in the drilling sector at 5.5%. Fleet utilization is 99% and rigs are progressively rolling into current market day rates that are 40%-50% above 1996 levels and 200%-300+% above early 1990's levels. In addition, Global is substantially increasing its participation in deep water markets, a significant move since deepwater markets may be less cyclical than shallower provinces. Furthermore, Global's exposure to the U.S. Continental Shelf jack-up rig market (water depth less than 350 feet) is diversified by its participation in numerous other strong jack-up markets worldwide.
Specifically, the assigned ratings are based on: the sector's and Global's rig utilization rates that are approaching effective full capacity utilization; Global's powerful earnings and cash flow momentum that may be sustainable for two or three years, possibly longer; approximately $1 billion of tax loss carry-forwards shielding surging earnings from taxes for several years; strong current and projected debt and interest coverage; and management's stated conservative debt and acquisitions strategy. Additionally, the offshore sector's strong recovery may be followed by more normal cyclical patterns, less severe than the extraordinary 1980's depression that followed a drilling asset construction boom. The 1970's/early 80's extreme commodity price expectations, high cost structures, tax incentives, excess hydrocarbon production capacity, and subsequent declines in oil consumption fueling the boom and bust, are absent today.
The rating is also supported by: Global's position as a leading offshore drilling contractor, within an increasingly favorable industry structure held principally by fewer, public, pure-play firms; a U.S./worldwide imbalance of deep water rig demand over rig supply that appears to be safe from meaningful newbuild competition for at least two to three years; Global's relatively young, diversified, premium fleet; participation in multiple hot offshore markets; and additional diversification from its leading role in the growing turnkey drilling market. Additionally, Global has been a conservative bidder during the sector's current wave of acquisitions. Global has strong positions in the GOM, West African, and North Sea markets, and has deployed 2 rigs on contract into the strong South American market. Global's increased presence in the strong deep water market will earn semi-submersible rates in the $150,000-$180,000 range this year.
The ratings are restrained by: Global's large 1997 capex outlays; the ability, to a degree, of major E&P companies to resist surging jack-up rates by trading down to less expensive rigs on certain jobs; vulnerability of jack-up rig demand in the GOM to U.S. gas prices; and the fact that contract driller's pricing power is significantly reduced when industry utilization rates fall below 85%-90% trending down to thin variable cost pricing at the trough. The ratings are restrained by high demand-side cyclicality since rig demand is vulnerable to sustained hydrocarbon price declines and geological disappointments. Further constraints include the sector's/Global's extremely high capital intensity; cost overrun risks of fixed-price turnkey drilling; high sector investment risk in newbuild projects costing from $80-$100 million for a premium jack-up to $300 million for a fourth generation deep water semi-submersible rig; the sector's need to work-out suitable contractual risk sharings for newbuilds with E&P clients; uncertainties concerning Global's/competitors' strategic use of mounting cash reserves; and risks that the sector's current returns will eventually dilute newbuild discipline within the sector and/or attract formation of new firms sponsored by one of many cash rich private growth capital funds.
Barring further strategic moves by Global, the ratings anticipate that Global could be net debt free within two years, in spite of roughly $600 million of upgrade capex plus acquisitions in 1997/98. The ratings anticipate that in a future sector downturn, Global's EBITDA could fall 65%-75% from our current 1997 forecast (over $335 million) and still produce a Gross Debt/EBITDA ratio of roughly 3.5x and EBITDA/Interest Expense of 3.0x, at the cycle trough. Through 12/31/98, projected EBITDA appears to cover capex and debt service by a wide margin and Global's $300mm gross debt target appears attainable. EBITDA averaged $51mm a year in 1992-96, was $91mm in 1995, $182mm in 1996, and $146mm in 1H97. Moody's believes 1998 EBITDA could substantially exceed 1997 with rig contracts rolling into market rates and full year's earnings from the upgraded Celtic Sea, two acquired semi's, and the Glomar Explorer. Global believes 1997/98 cash flows and low 1998 capex could enable retirement of the projected $200mm revolver debt and boost cash to over $300mm by year-end 1998.
With 31 premium rigs, Global is a leading contract driller participating in the 250-350 foot zone (jack-up rigs) of the outer continental shelf and in deep water drilling (semi-submersibles and drill ships). The firm owns 23 premium cantilever jack-ups built in the 1980's; 4 third generation and 1 fourth generation semi-submersible rigs; 1 drill ship; and leases a second drill ship, the Glomar Explorer, which is being fitted to operate in up to 7,500 foot waters. The firm recently acquired two of the four third generation semi's which are capable of working in 1,200 and 1,500 foot waters, are upgradable to work in 3,000 foot waters, and are currently on contract. Global also operates a turnkey drilling fleet of 16 leased rigs (15 jack-ups and 1 semi) and believes it is the leading turnkey driller in the world.
The day rate fleet is a capital intensive, fixed cost, currently high margin (but variable margin) business. The turnkey fleet is a talent-intensive, fixed margin, variable cost business. Typically, Global would be paid a fixed contract price to attain a specified total measured depth. While diversifying Global's cash flows, the 16-rig turnkey fleet provides a non-capital intensive opportunity to more intensively participate in numerous drilling provinces and geological environments. Global believes this makes it a more valuable, knowledgeable partner for E&P clients. On the other hand, the fixed price turnkey contracts expose Global to potential cost overruns that can arise from unforeseen geologic complexities that can greatly complicate contract completion. However, individual contract risks are largely diversified across a large turnkey contract portfolio. Global notes that, on an annual basis, it has never lost money in this business and has a long record of contract completions at costs to Global that are significantly below estimated costs built into contract pricing. The turnkey fleet serves a growing market. Many land-based independent E&P firms are now sufficiently large that they must go offshore in search of high impact reserve additions, but lack offshore and/or international capability. Global's turnkey fleet fills that niche. Global Marine is headquartered in Houston, Texas.
No Related Data.
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