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Rating Action:

MOODY'S UPGRADE TRANSOCEAN INC.'S SENIOR UNSECURED RATING TO Baa1; OUTLOOK IS STABLE

21 Sep 2005
MOODY'S UPGRADE TRANSOCEAN INC.'S SENIOR UNSECURED RATING TO Baa1; OUTLOOK IS STABLE

Approximately $1.6 Billion of Rated Securities Affected

New York, September 21, 2005 -- Moody's Investors Service upgraded Transocean Inc.'s Baa2 senior unsecured debt rating to Baa1. The outlook is stable. The rating upgrade is based on: (1) a significantly improved financial leverage profile through debt reduction and divestitures and (2) recent improvement in the company's financial results based on rising demand for its deepwater rigs and reduced exposure to the volatile shallow-water Gulf of Mexico market through the sale of its interest in its TODCO affiliate.

The stable outlook assumes that Transocean will maintain conservative financial policies, including not undertaking material speculative newbuilds, funding potential share buybacks out of free cash flow, and maintaining a solid liquidity profile. In view of current highly favorable market conditions and resultant expectations for markedly improved cash flow over the near to medium term, the company faces a number of strategic challenges regarding how this cash flow will be utilized.

A further upgrade of Transocean's ratings will depend on the company's success in generating returns through the drilling cycle that exceed those of its Baa1 peers, as well as demonstration of management's commitment to maintain a conservative financial profile. The company's Baa1 rating could come under pressure if the company experienced a material increase in its financial leverage (RCF/Debt less than 20%).

Transocean has significantly improved its financial leverage and financial flexibility by undertaking an aggressive debt reduction program. With current balance sheet debt of approximately $1.6 billion, the company has successfully achieved its targeted balance sheet debt level of between $1 and $2 billion. The company's debt burden had increased significantly above historical levels as a result of its 2001 acquisition of R&B Falcon Corporation (now known as TODCO), which caused its balance sheet debt to rise to just above $5 billion at December 31, 2001.

A more conservative debt profile will enhance Transocean's ability to withstand the inherent cyclicality of the contract drilling industry and the technical and operating challenges of deepwater drilling. Moreover, the debt reduction should allow the company to generate through-the-cycle debt coverage measures that are in line with those of its Baa1 rated peers.

As the leading deepwater and ultra-deepwater contract drilling company in the world, Transocean's earnings and cash flow in the first half of 2005 have benefited from strong demand for deepwater rigs, which Moody's expects will continue over the near term. Transocean maintains the largest market share of fifth generation drill rigs (rigs built during or after 1999 that are capable of operating in water depths of at least 7,000 feet or greater with a 7,500 psi mud pump system). Most fifth generation rigs are currently under contract at dayrates in the range of $200,000, and Transocean has announced that any fifth generation rigs that become available in 2006 and 2007 will likely garner dayrates close to or in excess of $400,000.

Moody's notes, however, that while Transocean, along with its peers, has shown restraint to date in undertaking speculative newbuilds of deepwater rigs in this most recent upcycle, it remains to be seen to what extent this restraint will continue. Drilling contractors have shown much less restraint with regard to international jackup newbuilds, which could result in dayrate pressures in jackup markets beginning in 2007 when they become available for work. Recently announced new deepwater capacity expected to come on line in the 2008-2009 timeframe could pressure dayrates if demand were to decline.

Transocean has lagged its peers in terms of return on capital, partly due to a large amount of goodwill related to acquisitions and weak performance by its TODCO affiliate (not rated), which it fully divested in June of this year. TODCO is exposed to the commodity shallow-water Gulf of Mexico rig market, which remains exposed to a secular decline in drilling demand and excess rig capacity. Transocean's returns should benefit from the divestiture of TODCO. In the second quarter of 2005, Transocean generated an adjusted EBIT margin of approximately 23%, as compared to 11% in 2004, which is line with the performance of its key Baa1 peers. Moody's notes that Transocean, along with its peers, will be challenged in continuing to improve its returns over the near to medium term due to cost pressures facing the industry as rig activity continues to rise.

Moody's notes that Transocean continues to have a fairly large exposure to the mid-water drilling sector (second and third generation semisubmersibles), which has suffered from weak demand and overcapacity in several regions and has also constrained the company's returns. The company currently has 24 mid-water rigs, accounting for approximately 26% of its total rig fleet. While utilization levels and dayrates for mid-water rigs have been improving from very depressed levels as a result of strong global demand for deepwater rigs, Moody's believes that the current upturn in the market for these lower-end semisubmersible rigs is not necessarily sustainable over the longer term as fewer producers are focusing on opportunities at those water depths and recent increases in demand have mainly been commodity price driven. However, Moody's expects that Transocean may upgrade some of its mid-water rigs or sell some of these rigs into non-drilling markets to alleviate some of the overcapacity in this rig category, which should bode well for its returns.

Transocean's liquidity remains solid. The company has low maintenance capital needs, a substantial backlog, and no planned speculative newbuilds. In addition, Transocean has a considerable cash balance of $943 million (as of June 30, 2005). Management could allocate excess cash flow to share repurchases, an extraordinary dividend, or the resumption of an ordinary dividend. The Baa1 rating and stable outlook assume that any future share repurchases or dividends would be a function of the amount of free cash flow generated.

Ratings upgraded are Transocean Inc.'s senior unsecured notes and debentures to Baa1 from Baa2 and its shelf registration for senior unsecured debt/subordinated debt/preferred stock to (P)Baa1/(P)Baa2/(P)Baa3 from (P)Baa2/(P)Baa3/(P)Ba1.

Transocean Inc. is a drilling service contractor based in Houston, Texas.

New York
John Diaz
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Alexandra S. Parker
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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