Transocean - A Clever Financing Strategy Called Survival Of The Fittest

| About: Transocean Ltd. (RIG)
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Summary

Transocean issued on November 29, $625 million of senior secured notes due 2024 to finance Deepwater Proteus.

I was pleased with the interest indicated at 6.25%.

I recommend to take some profit off the table between $13 - $14.

Image: Drillship Deepwater Proteus - Transocean's beacon mag.

This article is an update of my preceding article on Transocean, Ltd. (NYSE:RIG) published on August 7, 2016, which was focused on Q2 2016 results.

On November 29, 2016, Transocean released the following:

Transocean Proteus Limited, one of its wholly-owned indirect subsidiaries (the "Issuer"), has priced an offering of senior secured notes. The Issuer will issue U.S. $625 million in aggregate principal amount of senior secured notes due 2024 (the "Notes") pursuant to Rule 144A/Regulation S to eligible purchasers.

The Notes will be guaranteed by Transocean Ltd., Transocean Inc. and a wholly-owned indirect subsidiary that owns the Deepwater Proteus. The Notes will be secured by a lien on the Deepwater Proteus and certain other assets related to the rig.

The Notes will bear interest at the rate of 6.25% per annum and will be callable after December 1, 2020. The offering is expected to close on or about December 8, 2016, subject to customary closing conditions. The Issuer expects to receive aggregate net proceeds of approximately U.S. $609 million from the offering, after deducting the initial purchasers' discount and estimated offering costs [...]

On October 7, 2016, Transocean announced the following:

Transocean Phoenix 2 Limited, one of its wholly-owned indirect subsidiaries (the "Issuer"), has priced an offering of senior secured notes. The Issuer will issue U.S. $600 million in aggregate principal amount of senior secured notes due 2024 (the "Notes") pursuant to Rule 144A/Regulation S to eligible purchasers.

The Notes will be guaranteed by Transocean Ltd., Transocean Inc. and a wholly-owned indirect subsidiary that owns the Deepwater Thalassa. The Notes will be secured by a lien on the Deepwater Thalassa and certain other assets related to the rig.

The Notes will bear interest at the rate of 7.75% per annum and will be callable after October 15, 2020. The offering is expected to close on or about October 19, 2016, subject to customary closing conditions. The Issuer expects to receive aggregate net proceeds of approximately U.S. $583 million from the offering, after deducting the initial purchaser`s discount and estimated offering costs [...]

Why is it so important?

Because, basically, the company is preserving immediate liquidity by giving off a portion of the long-term contract backlog awarded at much higher day rate than the actual market.

It is basically a win-win situation that a few other offshore drillers have presently, which is increasing the financial effectiveness of the company.

This is the second financing of this type made in a few weeks and announced by the company already in September 2016.

Rig name Note Amount Net proceeds Interest
Deepwater Thalassa Senior secured notes due 2024 $600 million $583 million 7.75%
Deepwater Proteus Senior secured notes due 2024 $625 million $609 million 6.25%

M. Jeremy Thigpen, CEO, at the Barclays' conference in September 8.

So again this is about preserving near term liquidity extending our runway, giving ourselves options if opportunities present themselves over the course of that time horizon. Just a really good job by the finance team and we have other levers that we can pull to, we talk a little bit of the secured financing against the Shell rig contract as well as the Chevron rig in the five year contract and those conversations we continue to have and really at this point looking forward absolute best pricing in term of conditions it gives us flexibility because we do not need it at this point in time.

Transocean has an important part of its current backlog with Shell -- In fact, 4x10-year contracts -- and another 5-year contract with Chevron.

  1. DeepWater Proteus [Shell] - 10-year contract @$486k/d. Backlog remaining ~$1.7 billion
  2. DeepWater Thalassa [Shell] - 10-year contract @$488k/d. Backlog ~$1.7
  3. DeepWater Pontus [Shell] - 10-year contract @$519k/d. Backlog ~$1.9 billion
  4. DeepWater Poseidon [Shell] - 10-year contract @519k/d. Backlog ~$1.9 billion
  5. DeepWater Conqueror [Chevron] - 5-year contract @$599k/d. Backlog ~$1.08 billion.

These five long-term contracts represent a contract backlog of $8.3 billion as of today, which represents nearly 70% of the total backlog of Transocean,now at $11.9 billion on December 1, 2016.

Transocean has a very large portion of its contract backlog in the Drillship segment, as we can see in the chart below:

Do we have an idea of how much cost is involved here?

Construction Costs estimated, indicated by Transocean for the five UDW are:

  1. DeepWater Proteus - $840 million
  2. DeepWater Thalassa - $920 million
  3. DeepWater Pontus - $875 million
  4. DeepWater Poseidon - $885 million
  5. DeepWater Conqueror (Chevron) - $840 million

A total of $4.36 billion (partially paid as of today). With the two financing indicated above Transocean will receive $1.192 billion.

If we add that to what has been already paid the total cost of building these five drillships is covered at approximately 50% and it is very likely that the Deepwater Pontus, DeepWater Poseidon and Deepwater Conqueror will participate as well.

A quick calculation on the back on an old envelope gives me roughly $2.8 billion total financing potential -- assuming $350 million for the Deepwater conqueror contracted with Chevron on a 5-year basis -- which will cover as much as 80% of the total cost of building these 5 drillships.

It is significant to notice that Transocean was able to secure this financing amid a severe market environment and the risk related to long-term contract. I noticed that the interest was quite respectable at 6.25% -- compared to 7.75% previously and the 9% of $1.25 billion notes due 2023 in July -- all considered. This is showing the strength of the company which is the uncontested leader of the offshore drilling sector. One undeniable positive is the interest that sank from 9% to now 6.25%.

One difficult topic is that taping the debt market is great but has its limits, even for the mighty Transocean.

Total debt was $8.26 billion in 3Q'16 and it is difficult to see an increase in debt as a positive, whereas, the net debt may remain stable, because the company will not use its precious cash -- cash on hand end of 3Q'16 was $2.534billion and $3 billion of undrawn revolver facility -- to finance its new build program.

Conclusion:

RIG is the leader in the offshore drilling industry and should be accumulated regularly with a long-term investment horizon. A look at the contract backlog is enough to understand why.

I have always asserted the past six months that RIG is trading within a range $9-$13 and recommended a buy at or below $10.

The recent OPEC news created a strong rally for the offshore drillers and other oil stocks, but it is not really sustainable and will probably correct as soon as the excitement will be replaced by honest common sense. Who really thinks OPEC will be able to cut production and dance together and chant loudly "Cumbaya"?

I recommend to take some profit off the table between $13 - $14.

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.