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Global Credit Research - 18 Aug 2010
New York, August 18, 2010 -- Moody's Investors Service downgraded the senior unsecured rating
for Transocean, Inc. (RIG) to Baa3 from Baa2. Moody's
also downgraded Transocean's short-term rating to Prime-3
from Prime-2. Moody's downgraded the ratings for the
debt at Transocean Worldwide Inc. (formerly GlobalSantaFe Corp.)
and Global Marine to Baa3 from Baa2 while also leaving those specific
ratings under review for further downgrade. Transocean Inc.'s
outlook remains negative.
"The downgrade to Baa3 reflects Moody's view that Transocean
potentially faces significant liability exposure due to its involvement
in the blowout and subsequent oil spill from the Macondo well and a concern
as to whether it will be fully protected under its indemnification from
BP," said Ken Austin, Moody's Vice President.
"While the Baa3 can absorb a moderate amount of gross incremental
debt to satisfy potential liabilities, the negative outlook considers
ongoing uncertainty surrounding this situation and the risk that Transocean
could face a more adverse outcome that could further weaken Transocean's
Transocean's Baa3 rating considers the potential that the company
could incur costs and liability related to its role as driller of the
Macondo well. Based on cash balances of $2.88 billion
at 6/30/10, forecasted free cash flow and some incremental debt
, we believe that RIG can satisfy a potential obligation of up to
$6.0 billion and remain within the profile of a Baa3 rating.
However, the negative outlook reflects the risk of an outcome of
a potentially larger obligation, which could require a significant
amount of incremental debt which would then cause the company's
credit metrics and liquidity profile to no longer be compatible with an
investment grade rating.
Although RIG has not been held legally responsible for the cause of the
blowout and spill, is not paying for the clean-up costs,
and has what it believes is a contractual indemnification from BP,
Moody's believes the company may still face material liability exposure.
Since the negative outlook was placed on Transocean's ratings on
June 10, 2010, the amount of oil that has flowed from the
well has been much greater than originally contemplated, and the
potential liability exposure grew as a result of it. Although the
investigations as to the root cause of the blowout and oil spill are still
ongoing, in Moody's view, there is a risk that RIG is
likely to face a material obligation.
While RIG believes its contractual indemnity with BP as well as its $1
billion in insurance coverage largely covers any liability from the Macondo
well incident, Moody's believes that RIG could still be held
directly liable for certain obligations and that BP may challenge its
indemnification. In that case, Moody's believes RIG
would likely have to satisfy potential obligations either from fines,
penalties, or lawsuits, until such time when and if BP fulfills
its obligations under the indemnification.
The review for further downgrade for the Transocean Worldwide Inc.
and the Global Marine ratings is due to Moody's re-evaluation
of the notching of these notes due to their position within Transocean's
capital structure given that they are not guaranteed by Transocean,
Ltd., the parent company. The review also reflects
the lack of sufficient information for these two subsidiaries and that
Moody's may withdraw these ratings if there is insufficient information
to maintain those ratings going forward.
From a fundamental standpoint, RIG still possesses a solid investment
grade profile given the company's position as the largest offshore
rig operator, a still robust contracted backlog ($27.5
billion at 7/15/10), a leverage level compatible with the Baa2 peers
, and currently good liquidity. Despite the weakening of
the offshore drilling market, RIG's earnings and cash flow
outlook remain good as the company is expected to generate positive free
cash flow over the next couple of years, even after additional debt
reduction. However, the overriding risk of RIG's ultimate
liability stemming from its role as the drilling contractor for the Macondo
well carries a bit of an asymmetrical risk relative to its fundamental
The immediate impact is that Transocean's costs will increase due
to the legal costs incurred to evaluate its liabilities and defend itself
in the numerous lawsuits that have been filed against the company,
although its insurance coverage can cover a lot of those added costs.
RIG will also likely bear liabilities related to the deaths of its employees
on the rig as well as possible fines related to oil that spilled from
the rig itself. In addition, it is anticipated that tougher
regulations will be implemented for the Gulf of Mexico, which is
likely to drive costs higher for those that operate in the Gulf of Mexico
(GOM ) region, and possibly worldwide.
Until such time that it becomes clear that RIG is not held responsible
for any costs, fines, and lawsuits stemming from the blowout,
or that it is clear that BP will unequivocally protect RIG under its indemnification,
the possibility of an adverse outcome is still present and can still have
a disproportionate impact on RIG's overall credit profile and liquidity.
If more information is revealed that indicates to Moody's that this
risk is rising, or if new facts are made known that points to RIG's
liability being significantly higher than the current ratings can accommodate,
the ratings could be quickly downgraded further.
Other factors that would be considered for a further downgrade include:
operators (E&P companies) are successful in invoking force majeure
clauses that results in outright cancellation of contracts; new regulatory
requirements or penalties that create a significant impediment to RIG's
ability to operate in the GOM; or an extension of the GOM drilling
moratorium beyond the end of 2010, or similar regulatory restrictions
in other major offshore markets that in turn results in a further dampening
of dayrates around the world.
Conversely, if it is determined that any liabilities owed by RIG
are clearly defined and can be managed without the need for substantial
incremental gross debt and gross leverage remains within the 3.5x
range, the ratings could be affirmed with a stable outlook.
Furthermore, if it is determined that RIG will have no significant
liabilities and/or that BP will completely honor the indemnification to
RIG, the ratings could be upgraded back to the Baa2 level.
The principal methodology used in rating Transocean, Inc was Global
Oilfield Services Rating Methodology rating methodology published in Decemeber
2009. Other methodologies and factors that may have been considered
in the process of rating this issuer can also be found on Moody's website.
Transocean, Inc., which is a wholly-owned subsidiary
of Transocean Ltd, headquartered in Zug, Switzerland,
is a leading provider of offshore contract drilling for oil and gas companies
around the world.
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, parties not involved in the ratings,
public information, and confidential and proprietary Moody's
Investors Service's information.cs' information.
Moody's Investors Service considers the quality of information available
on the issuer satisfactory for the purposes of maintaining a credit rating.
Moody's Investors Service adopts all necessary measures so that the information
it uses in assigning a credit rating is of sufficient quality and from
reliable sources; however, Moody's Investors Service does not
and cannot in every instance independently verify, audit or validate
information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
and accurate data may not be available. Consequently, Moody's
Investors Service provides a date that it believes is the most reliable
and accurate based on the information that is available to it.
Please see the ratings disclosure page on our website www.moodys.com
for further information.
Please see the Credit Policy page on Moodys.com for the methodologies
used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's downgrades the ratings for Transocean to Baa3 with a negative outlook
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