Do Drillers Have A Refinancing Problem?

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Includes: DO, ESV, NE, RDC, RIG, SDLP, SDRL
by: Vladimir Zernov
Summary

Transocean gets a 6.875% interest rate on bonds secured by a modern drillship working on a lucrative contract until 2028.

Obviously, the lending market remains very cautious on the industry.

I discuss leading drillers and whether the current situation on the bond market has a real negative impact on them.

With Brent (BNO) around $60 per barrel and no breakthroughs on the contract front, offshore drilling stocks continue to trade on speculation, driven by fears of collapse on the downside and fueled by optimism regarding future oil prices and contract activity on the upside.

Since most drillers carry a material debt load and the rebound in dayrates is getting postponed month by month, the situation on the debt raising front is worth monitoring for anyone interested in the industry. Fortunately, investors and traders in all offshore drilling stocks have a company that they can rely on for constant flow of news regarding current interest rates for drillers - Transocean (RIG).

Due to aggressive moves on the M&A front (purchase of Songa Offshore and, most recently, purchase of Ocean Rig), Transocean has to be an active player on the debt field, providing interest rate data on a regular basis. As my loyal readers know, I'm very skeptical about the purchase of Ocean Rig, but this is beyond the scope of this article. Here, we'll look at Transocean mostly as a supplier of data. Here are the company's debt deals for the past few years:

Source: Author's work using Transocean's press releases and 8-K reports. "Date" is the date of press release regarding the pricing of debt. M = million, B = billion.

As we can see, the situation was gradually improving for Transocean, which started with an ill-timed $1.25 billion financing exercise back in July 2016, but has been getting improved rates ever since. As the company has a number of modern drillships on long-term contracts with high dayrates, Transocean had no difficulties using them as collateral to raise money. However, a series of rate hikes by the Fed as well as the recent oil price decline put pressure on the company's ability to score rates for its secured notes close to 6.00% and pushed them closer to the 7.00% level.

As Transocean is the industry leader by backlog, and none of the other drillers has modern drillships on such long-term contracts, their refinancing perspectives are weaker. Getting a rate of 6.875% for a modern drillship which has a stellar contract (Deepwater Poseidon is on contract with Shell (NYSE:RDS.A) (NYSE:RDS.B) until February 2028 at a dayrate of $477,000) is a sign that the market remains very cautious towards the offshore drilling industry. Let's now look whether major drillers will be impacted by continued tough conditions on the lending market.

Diamond Offshore (DO)

Source: Diamond Offshore 3Q 2018 10-Q report

Diamond Offshore has been treading very carefully during this downturn, and its balance sheet remains strong. With the first maturity in 2023, the company does not need to think about the state of the bond market for drillers right now.

Ensco (ESV)

Source: Ensco 3Q 2018 10Q report

Ensco is in a different situation in comparison with Diamond Offshore: the company has plenty of debt, although the material maturities do not start before 2024. The proposed merger with Rowan (RDC) should improve the company's short-term liquidity situation. As of now, I don't see Ensco going out to the debt market, assuming Rowan merger goes through.

Noble Corp. (NE)

Source: Noble Corp. 3Q 2018 10-Q report

Noble Corp.'s situation is similar to Ensco: during the previous refinancing effort, the company pushed major maturities to 2024-2026. However, with $326 million of cash at the end of Q3 2018, operating cash flow of just $43 million for the first nine months of 2018 and almost $300 million of debt interest that has to be dealt with, the financial situation of Noble Corp. remains rather challenging. That said, the company has a credit facility that matures in January 2023, so I'd bet that it will rely on it rather than tap the debt market if it will be necessary.

Rowan

Source: Rowan 3Q 2018 10-Q report

Rowan, which had more than $1 billion of cash at the end of the third quarter, does not need to worry about debt repayments until 2022. Being more secure on the financial side than Ensco, Rowan did not negotiate tough enough when the merger was originally proposed, but apparently dissent among Rowan shareholders made Ensco up its bid. It remains to be seen whether the merger will go through (I think it will still be approved), but in case it does not, Rowan will be just fine without Ensco.

Transocean

Source: Transocean 3Q 2018 10-Q report

The following changes happened in Q4 2018 and Q1 2019: Transocean sold $750 million of senior unsecured notes due 2025, sold $550 million of senior secured notes due 2027, and had cash tender offers with the following early results:

With a debt schedule that looks like a lengthy ancient manuscript, Transocean will likely remain active on the debt front for the time being, trying to navigate through the challenges of today's market and push maturities further into the future.

Seadrill (SDRL)/Seadrill Partners (SDLP)

As I recently wrote, Seadrill Partners is likely in the process of starting negotiations with its lenders regarding the $2.9 billion of debt that it carries on the books. As fellow contributor Henrik Alex has vividly depicted, Seadrill, which itself is heavily indebted despite going through bankruptcy, will also be affected by Seadrill Partners' troubles. This duo is the most affected by the current lending environment for drillers.

Conclusion

As evident from the latest Transocean bond issue, the debt market remains rather hostile to drillers. Fortunately, most drillers did their homework in previous years and managed to push most maturities to 2024+. Seadrill Partners, and, therefore, Seadrill, which has a very substantial economic interest in both Seadrill Partners and its rigs, are the most affected by higher interest rates.

While I believe that the Fed is done with raising rates for now, the lending environment for drillers would improve only if Brent oil settles back above $70 and we start seeing even minimal upside pressure on dayrates outside the North Sea segment. Fundamentally, I continue to favor drillers with a stronger balance sheet - Diamond Offshore and Rowan (although its strength may come under question if it merges with Ensco). From a shorter-term point of view, major drillers except for Seadrill/Seadrill Partners will continue to trade as a group based mostly on oil price fluctuations.

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.

Additional disclosure: I may trade any of the above-mentioned stocks.