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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
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
Transocean Inc. is a drilling service contractor based in Houston,
Corporate Finance Group
Moody's Investors Service
Alexandra S. Parker
Senior Vice President
Corporate Finance Group
Moody's Investors Service
No Related Data.
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