Deepwater Proteus. Source: company's website.
Transocean (NYSE: RIG) has just announced that it has priced an offering of $625 million senior secured notes due 2024. This offering is secured by a lien on the Deepwater Proteus and certain other assets related to the rig. The interest rate for the notes is 6.25%.
Previously, Transocean did a similar transaction for Deepwater Thalassa, issuing $600 million senior secured notes due 2024. The interest rate on those notes was 7.75%.
Let's compare the two issues. Deepwater Thalassa is on a contract with Shell (NYSE: RDS.A) from July 2016 to February 2026 on a dayrate of $488,000.
Deepwater Proteus also works for Shell from August 2016 to May 2026 on a dayrate of $486,000. The contracts are almost identical, the interest rate on bonds is not.
In short, this is a breakthrough for Transocean which finally managed to execute well on a good idea. The previous bond issue was criticized for the high rate - and rightly so!
The 7.75% interest rate on bonds secured by a multi-year contract was no so far from the 9% rate that Transocean got on the issue of $1.25 billion notes due 2023 in July.
Nothing in the oil price outlook or the offshore industry outlook changed since the Thalassa transaction. Transocean's execution improved and it finally managed to get a decent deal.
This step was expected as the company itself elaborated on the issue during the third-quarter earnings calls, but the lower interest rate is a very positive surprise.
Transocean has two more drillships that will be working for Shell - Deepwater Pontus and Deepwater Poseidon, and I fully expect that the company will be able to do a similar transaction for both rigs. This is a big positive for the company which gets liquidity in current uncertain times.
There is only one way to interpret the news - the $625 million issue is certainly positive for Transocean. The company continues to use its main strength, the long-term contract, to obtain financing.
The debt market is most likely closed for other drillers, at least closed in a sense that they will not be able to get reasonable rates.
The upcoming OPEC meeting will be a big driver for all offshore drillers, but this transaction reinforces my conclusion that Transocean will be the most stable stock in case OPEC cannot reach a deal.
OPEC's failure will mean that drillers will have to wait more before the situation will improve and the market finds balance. Time becomes a crucial factor for industry participants, and any actions that buy time improve the outlook for the driller.
In a series of moves in the second half of this year, Transocean obtained significant liquidity and secured its position as one of the industry leaders. The company is far from being out of the woods, and this news won't push it to new yearly highs.
Without the help from oil prices, Transocean's shares will remain stuck in the wide $8 - $13 range. Speaking about the range, I don't think that the lower end of the range will be tested unless there is a serious shock in the oil market.
Make no mistake - the industry situation is very tough and the contracting activity has not bottomed yet. The next year will be tough as well unless oil prices skyrocket after the OPEC meeting.
Transocean has a whole fleet of stacked rigs, and many of these rigs won't see any work in their remaining lifetimes. However, the last few months have been good for the company and the positive developments will provide support for its shares. Absent a big action in the oil market, Transocean shares will likely be trading flat or have a bit of upside in the last month of this year.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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.