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Transocean Passes Debt Market Acid Test With Flying Colors, Discloses New Contract Awards

Jan. 09, 2020 7:18 AM ETTransocean Ltd. (RIG)VAL, SDRL, SDLPF, DO, NE, BORR, PACD73 Comments


  • Discussing recent recovery rally in offshore drilling stocks and related debt securities.
  • Transocean successfully places $750 million in new 2027 8% senior unsecured notes. Expect majority of proceeds to be used for further redemptions of the company's 2023 9% senior unsecured notes.
  • Company provides update on new contract awards, secured approximately $353 million in backlog over the past three months.
  • Overall dayrate picture continues to improve with no sub-$200,000 dayrate contracts signed outside of option exercises anymore.
  • General picture hasn't really changed. The industry desperately needs a return of real pricing power to proactively deal with outsized debt maturities kicking in around 2022/2023.


I have covered Transocean (NYSE:NYSE:RIG) previously, so investors should view this as an update to my earlier articles on the company.

A little over two months ago, I considered leading offshore drilling services provider Transocean's shares "an interesting trading opportunity" after management not only reiterated its usual upbeat industry view on the company's Q3/2019 conference call but actually offered some encouraging data points to underscore its assessment.

In addition, I expected investors to become somewhat more constructive on the offshore drilling industry going into 2020 given increased customer demand and anticipated higher utilization levels which should bode well for further dayrate increases.

Bildergebnis für deepwater inspiration"Photo: 6th Generation Ultra-Deepwater Drillship "Discoverer Inspiration" - Source: Company Website

Since then, the stock has increased by almost 50% at the peak of the recent recovery rally which was fueled not only by the anticipated shift in investor sentiment but also by rising oil prices amidst increased geopolitical tensions. Even after this week's major setback, the shares are still up by more than 70% from recent 52-week-lows.

That said, many of the company's peers have done even better in recent weeks with some of the most distressed players taking the lead:

Sources: Bloomberg, Yahoo Finance, Author's own work

At least equally important, bond prices have also recovered across the board. For example, fellow contributor Left Brain Investment Research highlighted Transocean's 2027 7.45% senior unsecured notes as a potential bargain in an article just seven weeks ago. Since then, the bonds have recovered by almost 20%, quite a movement for a fixed-interest security within just a couple of weeks. And while some of the company's longer-dated bonds are still trading at somewhat distressed levels, they have rallied even stronger from recent lows.

Apparently, the recent, material improvements in the debt markets did not go unnoticed by Transocean's management as

This article was written by

Henrik Alex profile picture

I am mostly a trader engaging in both long and short bets intraday and occasionally over the short- to medium term. My historical focus has been mostly on tech stocks but over the past couple of years I have also started broad coverage of the offshore drilling and supply industry as well as the shipping industry in general (tankers, containers, drybulk). In addition, I am having a close eye on the still nascent fuel cell industry.

I am located in Germany and have worked quite some time as an auditor for PricewaterhouseCoopers before becoming a daytrader almost 20 years ago. During this time, I managed to successfully maneuver the burst of the dotcom bubble and the aftermath of the world trade center attacks as well as the subprime crisis.

Despite not being a native speaker, I always try to deliver high quality research to followers and the entire Seeking Alpha community.

Analyst’s 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (73)

Michigan Value Investor profile picture
@Henrik Alex - any thoughts on the recent quarter at Rig? Would love to read an article on this from you.
Henrik Alex profile picture
@Michigan Value Investor

The quarter was pretty much in line with expectations as OSD earnings are rather predictable.

Management continued wearing their rose-colored glasses when talking about the industry recovery, even guiding for positive free cash flow and significant debt reduction starting in 2022 (despite having a good chunk of the fleet working in the spot market).

Hinted to another 20k PSI contract this year but the initial effect would be even higher cash usage for the additional capex required.
Henrik Alex profile picture
I would like to add that even the potential start of two 20k PSI contracts in late 2021 would not offset the end of 2 ultra-high margin legacy contracts around that time.
Henrik Alex profile picture
Stock has pulled back another 20% since the article was published. As stated many times before, absent material fundamental news, OSD stocks are almost solely correlated to oil prices which makes them great trading vehicles but an unsuitable investment.
WhyNotBuy profile picture
I added 5000 shares of RIG this month as a long term accumulation. It is a fire sale and upon recovery, this investment will be a easy ten bagger. Accumulate brothers. Be wise long term - think macro minded. IMHO
Michigan Value Investor profile picture
It's amazing how true that statement is! Though I would argue that passing the acid test and issuing new debt is fundamental news, and the fact that they are calling the 2023 notes is fundamental news as well. But it's been swamped by the movement in the short term price of oil, just as you say. Equally fascinating, the long term price of oil has only wobbled the whole time, from $51 to $52 on December 2023 WTI, for example. No oil major makes an offshore FID based on the current oil price, only on their expectations of the future price, which at least as far as the futures market is concerned hasn't changed much. I have no position in any of the drillers but it is fascinating to watch the market pricing them like it does. Great article, very useful and interesting!
Michigan Value Investor profile picture
To calrify, the statement I was referring to as "amazing how true" was @Henrik Alex when he said: "absent material fundamental news, OSD stocks are almost solely correlated to oil prices"
@ Henrik Alex
Company is fully redeeming the 9% 2023 notes. Good call.
PapaWhisky profile picture

Where do you see this ?
Henrik Alex profile picture
Look at their latest SEC-Filing...
canyonwlf7 profile picture
Chevron and Exxon Mobil have written off billions in U.S. natural gas assets in recent years, shifting their shale focus primarily to the oil-rich Permian basin in Texas and New Mexico. Both have also renewed their appetite for offshore projects.

Chevron recently approved a large offshore project in the Gulf of Mexico and Exxon has been investing heavily in a huge oil find in the waters off the coast of Guyana, where oil began flowing in December!
PapaWhisky profile picture

Have you got some kind of Chrome script that lets you write the same comment to a dozen threads ?
canyonwlf7 profile picture
If 59 doesn’t hold, not f, lol
canyonwlf7 profile picture
f 59 doesn’t hold, I’ll return to my mantra of 55-60 forever, and of course oil loves returning to 57.50, however I believe the shale depletion story is real and that along with another large reduction in rigs last week it is bullish if oil can stay above 59, gl friends
Invader from Earth profile picture
The oil price trends still make offshore drilling operations in a cash burn situation and a poor investment as compared to other energy investment opportunities. Remarkably, Brent is priced at $70, but they run the highest costs to drill. I would look elsewhere. $BE $TELL $ET $D
Michigan Value Investor profile picture
@Henrik Alex - great article. Is there anything limiting RIG's ability to issue new senior secured debt that would incrementally subordinate the new bond issue?
Henrik Alex profile picture
Indeed. They need rigs with high-margin contracts for collateral which they don't have at this point. Once the newbuild 20k PSI rig has commenced its contract, they will be able to raise approximately $400 million in additional secured debt but this would still be almost two years in the future.
Left Brain Wealth Management profile picture
@Henrik Alex Thanks for this article. Thanks also for referencing the strong price gains for the $RIG bonds since we wrote them up seven weeks ago. Readers should please feel free to follow us on Seeking Alpha, or check out our website for more attractive investment opportunities.
Also, that Transocean article is available here:
Left Brain
PapaWhisky profile picture
@Henrik Alex

If I'm reading right the existing 2027 bonds (7.45%) are trading around 10.5%.

Any idea why this 2027 issue priced at 8% ?
Henrik Alex profile picture
To my knowledge this is an old bond issued in 1997 by a predecessor (likely Sedco or R&B Falcon) with no guarantees provided by today's holding company and operating subsidiaries thus ranking lower in the company's capital structure.
PapaWhisky profile picture
@Henrik Alex

After some research ...

It seems it was issued by Sonat who bought Transocean ASA is '96.

Also in RIG's 10k, whereas most of their bonds are described as 'senior secured notes' or 'senior notes', these 2027 bonds are just described as 'notes'.

It's trading at $85 now. Might be worth a flyer. If conditions continue to brighten this thing might drift to par in a reasonable time frame. And 8.7% while we wait.
Henrik Alex profile picture
Thanks for the additional color.
Great piece AH - Thanks.
pateng2 profile picture
The costs to operate the Deepwater Nautilus Is about half of the drill ships it does not have any propulsion an less personnel to run it. It does not call for a full maritime crew in which saves 10 to 15k a day.
If you are looking to contract any of Transocean's hot 6th or 7thG drillships, or semi-subs, to start work in 2020 you will be told ... Sorry, we no longer have anything available. All of ours are already contracted. Our last 5 that were available in 2020 were just taken, as announced in our press release dated yesterday, January 8th.
But if you can live with a 30 year old, hot, harsh environment semi-sub, and are willing to pay to mobilize it from the UK North Sea and pay harsh-environment day-rates, we can talk about doing something in 4Q..
The market has tightened that much.
PapaWhisky profile picture
@Greenwich Energy

There's not too many operators looking to pick up a 6/7 Gen drillship on 11 months (or less) notice.

These projects take a little bit more planning than that.
They may have options attached, rendering them unavailable beyond 2020
Interest rate may look good, day rates may look good, but no way are most of Transoceans assets earning their cost of capital!
WhyNotBuy profile picture
Their debt is being inflated away always - NOT earning cost of Capital is temporary. IMHO
WhyNotBuy profile picture
Accumulate as always. Wait. Be like a spider ever so patient. IMHO
WhyNotBuy profile picture
NE 2020 debt now at par and all OSD debt moving that way. The telling....IMHO
WhyNotBuy profile picture
So much drama here boys. Simply accumulate and note all debt is moving towards par. Simple Simon Logic boys so aim for 350,000 shares of OSD by 2021. IMHO
Transocean Ltd. announced today that Transocean Inc., its wholly-owned subsidiary (collectively with Transocean Ltd., “Transocean”), has commenced an offering of U.S. $750 million aggregate principal amount of senior unsecured notes due 2027 (the “Notes”) to eligible purchasers pursuant to Rule 144A/Regulation S. The Notes will be fully and unconditionally guaranteed by Transocean Ltd. and certain of Transocean Inc.’s subsidiaries.
They're offering these unsecured notes due in 2027? They did not say anyone was foolish enough to take them. An unsecured note being "fully and unconditionally guaranteed" by Transocean and their subsidiaries is like being guaranteed by air.
PapaWhisky profile picture

You really have no idea how any of this works, do you?
Henrik Alex profile picture

You apparently haven't even read the article or perhaps not even the headline. The company sold the notes to institutional investors. Coupon was priced at 8%. The guarantee provided by the company's operating subsidiaries effectively moves the bond higher in the company's capital structure relative to unsecured bonds without guarantee.
Henry Miles profile picture
In the rapid evolution toward renewable energy, the farther down one has to drill, especially at sea, the less likely the company is going to 'make the grade'. Now then, if Transocean, or any of the others, made a strategic move toward carbon capture, that would get my attention.
PapaWhisky profile picture
@Henry Miles

It would get my attention too. It would get me clicking my sell button.
Henrik Alex profile picture
Henry, Transocean is an offshore drilling services provider - nothing more and nothing less. They are not involved in oil or gas production like their customers.
PapaWhisky profile picture
Imagine Hertz or Avis getting involved in carbon capture.

The mind reels ...
rodolfoavalos1 profile picture
Great article!
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