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Fitch Downgrades Transocean Inc. to 'B+'; Outlook Negative

CHICAGO--(BUSINESS WIRE)--Fitch Ratings has downgraded Transocean Inc. (Transocean; NYSE: RIG) and its affiliate's Long-Term Issuer Default Rating to 'B+' from 'BB'. The Rating Outlook remains Negative. A full list of rating actions follows at the end of this release.

The downgrade reflects lower than previously expected E&P capital spending and offshore rig tendering activity, as well as Fitch's extended offshore driller recovery profile assumption. These assumptions result in forecasted metrics remaining above Fitch through-the-cycle levels for a 'BB' category credit over the rating horizon.

The Negative Outlook considers the heightened offshore rig re-contracting risk and potential for a deeper and longer than previously forecasted offshore drilling downcycle. Fitch continues to estimate the recovery inflection point to be the second half of 2018 but understands this may change given the evolving hydrocarbon pricing environment, rig oversupply cycle, and offshore E&P spending trends. Fitch anticipates an uptick in rig tendering activity will lag supportive oil & gas price levels (estimated at $65 - $70/barrel for deepwater) by at least six to 12 months. This should help rig utilization rates with a preference towards larger, established drillers, which could lead to somewhat higher utilization rates relative to peers. Day rates, however, are anticipated to remain challenged and range bound reflecting the market imbalance and economics required to put stacked rigs to work.

Transocean has undertaken numerous actions to manage its credit profile to-date including the early retirement of debt, eliminating the dividend, deferring uncontracted newbuild deliveries, proactively rationalizing undifferentiated/uneconomic legacy rigs (announced 25 scrapped or held for sale, about 50% of industry total), reducing operating costs, increasing rig uptime, and mitigating Macondo-related credit risks. Fitch expects the company to exhibit a near neutral free cash flow (FCF) profile in 2016, as well as continue to retire debt and maintain adequate liquidity over the next couple of years. This should help the company improve its near-term capital structure, but the declining cash flow and evolving asset profiles remain credit concerns.

Approximately $8.3 billion of debt, excluding the outstanding Eksportfinans loans, is affected by today's rating action.

KEY RATING DRIVERS

Transocean's ratings are supported by its market position as one of the largest global offshore drillers with a strong backlog ($14.6 billion as of April 21, 2016) and floater-focused rig fleet largely contracted with financially stronger IOCs. The company's high-grading and margin improvement efforts and adequate near-term financial flexibility, including that afforded by the deferral of approximately $735 million in uncontracted newbuild capex payments until 2020, also support the rating. These considerations are offset by the company's continued need to generate and conserve liquidity given the weak offshore rig market outlook, unfavorable capital market conditions, heightened maturities profile, and contracted newbuild capex commitments.

Fitch believes the company's current (Fitch calculated year-ended 2015 debt/EBITDA of 1.9x) and near-term leverage profile are consistent with a higher rating. However, Fitch forecasts leverage metrics could exceed through-the-cycle levels over the rating horizon as current contract coverage meaningfully declines in 2017 with...


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