Transocean - My Takeaway About The Recent $1 Billion Cash Tender Offer For Notes Maturing 2020-2022

| About: Transocean Ltd. (RIG)

Summary

Transocean is adding $1.5 billion in new debt, and will purchase up to $1 billion in "old debt", maturing in 2020-2022.

I consider this move as important, because it gives Transocean more time and flexibility to deal with its long-term debt while waiting for a rebound.

As a long-term shareholders I have constantly been impressed with management and its ability to adapt to new market paradigms.

Click to enlarge

Source: Deepwater.com - SemiSubmersible Transocean Barents.

This article is an update of my preceding article on Transocean, Ltd. (NYSE:RIG) published on May 6, 2016, which was focused on Q1 2016.

On July 5, 2016, Transocean announced the following:

...Has commenced an offering of U.S. $1.5 billion aggregate principal amount of senior unsecured notes...

Transocean intends to use a portion of the net proceeds from the offering to fund its tender offers to purchase for cash up to U.S. $1.0 billion aggregate principal amount of its 6.500% Senior Notes due 2020, 6.375% Senior Notes due 2021 and 3.800% Senior Notes due 2022...

In short, Transocean is adding $1.5 billion in new debt, and will purchase up to $1 billion in "old debt", maturing in 2020-2022.

Some of those Notes that are being tendered here, were trading in the high 50's low 60's a few months ago. Thus, the actual discount is not necessarily impressive, if we look at the table below:

Principal

$ million

Tender Cap

$ million

Tender offer

$

Early Payment

$

Total

$

6.5% senior notes due 2020 887,164 n/a 915 30 945
6.375% senior notes due 2021 1105,17 n/a 870 30 900
3.80% Senior notes due 2022 696,5 200 730 30 760
Click to enlarge

Per the 10-Q/1Q'16 ending 3/31/2016.

In $million Amount
Total debt 8,453
Less debt due within one year 1,200
Total long-term debt 7,253
Click to enlarge

So, Transocean will have approximately $7.753 billion in long-term debt beginning of 2017 (including a debt due within one-year.)

Transocean is also buying back its debt in the open market, and indicated that at the end of the 1Q'16, the company purchased an aggregate principal amount of $228 million for a total of $189 million.

To present a complete picture of the "debt" segment, it is important also to indicate the "forecasted newbuild CapEx as of 3/31/2016".

In $ million 2016 2017 2018 2019 2020
CapEx on 12 rigs 1,364 374 178 161 1,865
Click to enlarge

This is the cash that Transocean will have to pay for its newbuild program which total $3.942 billion until 2020.

I consider this move as important, because it gives Transocean more time and flexibility to deal with its long-term debt while waiting for a rebound.

The Offshore drilling industry is about to enter an "even more" difficult environment, that may linger until H2 2018 and will put financial pressure on the company. Despite the fact that Transocean has the highest contract backlog among its peers at approximately $14.2 billion as of 7/1/2016, that stretches until 2027.

Click to enlarge

Full-Year 2016 Guidance Summary (2015 and update CC 1Q that lowered a little the previous guidance).

2016 guidance
Fleet average efficiency 95%
Other revenues 260-270
Recharge and other misc. Revenues $ Million 60-70
OPEX $ Billion 2.1-2.3
Depreciation $ Million 875-925
G&A $ Million 160
Net Interest Expenses $ Million 360-370
Annual effective Tax rate 28-30%
CAPEX $ Billion 1.1
Click to enlarge

If we look at the revenue trend compared to the actual backlog, it is evident that Transocean will face a far more difficult financial environment going forward. Tendering activity is nearly gone and day rates are now at nearly break even level.

Here is the graph representing the revenue in 2015-2016.

Click to enlarge

Hence, dealing with the long-term debt now is of a paramount importance.

The recent $1.5 billion unsecure note offerings have not been revealed in detail so far by the company, and I am expecting a 7.5%-9% due 2024?

Conclusion:

This is a positive move in my opinion. It will give more room to maneuver the next couple years that are shaped as quite financially challenging.

Ms Terry Bono said it perfectly in the 1Q'16 conference call:

While we are seeing some positive movement in the macro environment and improved confidence regarding oil prices for the second half of 2016, we expect challenging conditions are likely to continue into 2017, impacting both utilization and day rate. In order for contracting conditions to improve for next year's budgeting cycle, customers need to see these improved oil prices sustain in the coming months.

As a long-term shareholders I have constantly been impressed with management and its ability to adapt to new market paradigms.

Important note: Do not forget to be one of my followers on RIG and other offshore drillers. Thank you

Disclosure: I am/we are long RIG.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.