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Transocean: 2020 Notes Are Attractive As Near-Term Debt Restructuring Looks Unlikely

May 05, 2020 4:22 PM ETTransocean Ltd. (RIG) StockDO, NE, PACD, SDLPF, SDRL, VAL112 Comments


  • Discussing highlights from the company's Q1/2020 report and subsequent conference call.
  • Results largely in line with expectations but full-year contract drilling revenue outlook lowered by 10%.
  • Transocean continues to benefit from a number of high-margin, legacy contracts. Unlike competitors, the company is unlikely to restructure its debt in the near-term.
  • Company still faces a $1.5 billion debt wall in 2023 as well as the requirement to extend its $1.3 billion revolving credit facility at that time.
  • Speculative investors should consider taking a position in the company's 6.5% November 2020 unsecured notes.


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

Last week, leading offshore driller Transocean reported Q1/2020 results largely in line with expectations but on the conference call lowered its full-year contract drilling revenue outlook by 10% "due to contracts being deployed and contract adjustments recently negotiated with our customers" which is very much in line with general industry expectations stated by leading energy intelligence firm Rystad Energy last month.

Photo: 7th Generation Ultra-Deepwater Drillship "Deepwater Proteus" - Source: Company Website

Unlike industry peers, Transocean continues to benefit from a decent number of legacy, high-margin contracts. The cash flows derived from these contracts have helped the company serving its massive $9.25 billion debtload in recent quarters even after the ill-advised acquisition of competitor Ocean Rig in late 2018.

Particularly after the recent decision of competitor Diamond Offshore Drilling (OTCPK:DOFSQ) to restructure its debt obligations under bankruptcy protection and anticipated similar moves by peers Valaris (VAL), Noble Corporation (NE), Seadrill (SDRL) and Seadrill Partners (OTC:SDLPF) in the not-too-distant future, investors were eager to learn about Transocean's approach to deal with the renewed industry downturn. On the conference call, management was asked by an analyst about a potential threat from competitors emerging from bankruptcy with little or even no debt at all:

Kurt Hallead

(...) So Jeremy, it appears that a number of your competitors could be heading for Chapter 11 protection in the not too distant future. It sounds very clear to me based on the commentary from the press release and on the conference call here that Transocean is on very strong footing from a financial standpoint.

Just kind of curious, you know in your mindset, when you think about the competitive landscape going forward and that some of

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 (112)

PapaWhisky profile picture
Bloomberg is clearly not in on the bull case:

Bulldog67 profile picture

Thanks for posting. It clearly outlines the industry’s problems.
parisbiker profile picture
@Bulldog67 ...Jeremy Thigpen has 12 "choices":what month to file BK?
Henrik Alex profile picture

Did you take a look at the Valaris industry recovery assumptions?


Dayrates of $175k for high-spec drillships in 2023...

Would love to hear Jeremy's take on this?
@Henrik Alex How do you see the short term direction for RIG give the recent bump? Would you short at these levels or do you think it's too dangerous?
Henrik Alex profile picture
I am indeed looking for a trade on the short side but not tomorrow morning as I do expect Friday's momentum to carry over. But I would expect the stock to lose steam on Tuesday at the latest point and will short RIG and other offshore drillers once momentum abates and volume tapers off.

Valaris will be a great short next week as the company is about to file for bankruptcy within the next couple of weeks.
@Henrik Alex

VAL will restructure successfully because a liquidation would not garner a sufficient cash to make the creditors happy. Instead debt will be wiped out and DIP financing will ensure VAL exits BK ready to do business and make some money for the creditors in possession.

Problem is we need to see 50 floaters scrapped. Will the coming BKs (VAL, NE, SDRL, DO etc) result in the removal of sufficient floaters to bring balance back to the market?
Henrik Alex profile picture

Your crystal ball is as good as mine...
Darren McCammon profile picture
There's also a decent double digit arbitrage opportunity in the Nabors (NBR) convertible preferred (NBR.PA).
Currycook profile picture
Meant to say - Thanks. Good insightful article.
another profile picture
Who cares about drilling? What's the next vtiq?
As expected, RIG is scrapping the Transocean 712. Also, the DDII semi (cold-stacked in Romania) is being held for sale, either to be scrapped or sold to a third-party.


"On May 8, 2020, Transocean Ltd. (the “Company”) announced that it intends to dispose of the following two
rigs: the ultra-deepwater floater GSF Development Driller II and the midwater floater Transocean 712. These
rigs are classified as held for sale. The Company expects to dispose of the Transocean 712 in an
environmentally responsible way and is evaluating whether to sell the GSF Development Driller II to a third
party or to dispose of it in an environmentally responsible way. As a result of the Company’s decision on May
8, 2020, to dispose of these two rigs, the Company concluded that it expects its second quarter 2020 results to
include an estimated non-cash charge of approximately $420 million. As the Company continues to evaluate
the long-term competitiveness of its fleet, additional rigs may be identified as candidates for disposal"
Bulldog67 profile picture

Thanks for posting. There goes another $420 MM of shareholder equity down the drain, further leveraging the B/S. Yes, it is a non-cash charge, but clearly shows that OSD fleets are overvalued on their books.

Anyone RIG bull still arguing that it is cheap based on market-to-book value? LOL!

After these two rigs go bye-bye, that leaves the following as serious candidates for retirement:

OR Apollo - stacked since May 2016
DW Athena — stacked since March 2017
DW Mylos - stacked since Sept. 2016
DW Olympia - stacked since April 2016
DW Champion - stacked since Feb. 2016
Discoverer Americas - stacked since April 2016

These are more modern rigs that will likely never work again. However, my guess is that RIG keeps them stacked because the impairments would be too large. Too much equity would be wiped away with these retirements, and the resulting debt/capital ratios would likely trigger bond covenants.

Transocean is mostly likely going to have to reorg - probably the last of the OSD’s to do so, but still heading that way!
Henrik Alex profile picture

According to my calculations, RIG could afford another $5 billion in impairment charges before breaching the 60% debt-to-capitalization covenant. Scrapping of some of the former Ocean Rig drillships won't cause outsized impairment charges as the purchase price for the entire company was just $2.7 billion and included net cash at the ORIG level of $370 million as well as a $130 million payment to George Economou.
20s finally traded @ 83-83.25
I can’t get the 2020s but can get the 2027s. Any reason not to do that?
Henrik Alex profile picture
Did you actually read the article???
Bulldog67 profile picture

Yes, there is a reason. The BK probability is greater that RIG goes BK by hitting their debt wall in 22-23. So 2027 is a big bet - much bigger than buying the shorter bonds.

BTW, both my wife and daughter graduated from W&M! Go Tribe!
downlimit profile picture
the cc sounded like a management team that thinks about competing and managing assets. liked the thinking of rig deployment over time, cash, revolver management, and a look at the barriers to entry and moat of international rig placement once in.

what is the thinking on the equity ?
Bulldog67 profile picture

This management team since early 2015 has been the most optimistic (and wrong) of all the OSD management teams. So drink their kool aide at your own risk!
rdsrich profile picture
Amazing Alex, I have this bond (in the 90s) but added more in the 30s, I totally agree, they have so much long term debt they should be able to stay afloat through 2022, unless oil goes to zero again (jajaja)...I listened to the CC and they are pretty confident, although its the unsecured and at the bottom of the debt restructure payback, if they go under, there will be tons and tons of bond holders with heavy bags, 2022 seems near term enough, people own way out into 2030 I think. Thanks for the article
rdsrich profile picture
OOOPS my bad, I read the numbers wrong, I own the OCT 2022 bonds, not the Nov 2020 bond. I am third in line for bond debt, but I am sure they will hit against their revolving LOC which they haven't yet> They have about $1BB LOC they can use.
PapaWhisky profile picture
The November 2020 is recovering nicely.

per FINRA it hit a low of $58 last week.

I got in at $77. Fidelity offering now at $82.

You could easily make most of your money here well before November and not have to wait.

Pro Tip: It won't trade above par.

Pro-pro tip: I am not a pro.
PapaWhisky profile picture

So they're not actually offering .. that was a list of recent trades. They have none in inventory.
There continue to be no institutional size trades in either the 20s or 21s so i continue to think that the next “real” trade in these bonds will be 5-10 points higher. As to whether the 20s could trade above par...well you may be surprised what can happen if there is a short in the bonds that needs to cover.
PapaWhisky profile picture

Do we short bonds?

Don't tell me we short bonds, too.

We really short bonds ?
Aventador profile picture
Jeremy Thigpen,
"Now, once our competitors come out of restructuring and have the opportunity to demonstrate that they can still safely, reliably, efficiently operate, they will have a lower cost base, we recognize that. But I guess as they won’t come to restructuring without any debt and probably not a lot of cash and so they are going to need to as per day rate that help them generate enough cash to continue to invest in their business and service their maturity, which are likely to be pushed out, but they are still going to have them. And so we don't – we're not at this stage overly concerned about it, because what we've seen play out in the past didn't support that it gave any of those restructuring competitors a competitive advantages."

Jeremy, Have you been reading my posts?:-)..lol, Well now here is the RIG CEO having to address just that. I love these points,

" they will have a lower cost base, we recognize that." __You are Dam right they will and you know full well what that means.

"we're not at this stage overly concerned about it," __overly concerned?......so you are concerned clearly and your remarks document it. Well it hasn't happened you but mark my words you will be concerned, very concerned as they will do everything you do for less and more importantly profitable.

I love it when a CEO has to resort to words like "I guess" and believes his competitive advantage is being as he calls it a safely, reliably, efficient operator. Yea sure Deepwater Horizon was super safe and reliable. What other drillers has done that?

The takeaway here is this time "should" be very different for restricting but no guarantees. Debt should be cut to the bone. I will say one thing never crossed my mind in my thesis here over the years and that's a flat out Chapt 7. I will acknowledge if VAL was to Chapt 7 that is beneficial to RIG. If a few more players do as well it just gets better for them for the time being. It doesn't stop some low cost new entity that is capitalized to purchase assets for penny on the dollar and start anew. The space would be full of gear and knowledgeable management teams waiting for an opportunity.
Whonoz profile picture
Perhaps but where exactly are these knowledgeable management teams going to come from? Certainly not the current group I hope!
Bulldog67 profile picture

Re-cycled management for re-cycled rigs! Why not? My guess is it will be current management, because who else can they find that know the industry well enough to run an OSD?
Whonoz profile picture

Oh, I'm sure it will be many from the same batch. A lot are going to be retiring soon but I wouldn't expect anything else to change as the newer members takes over. This is an industry that has incubated a new generation of dinosaurs. The more things change, the more they stay the same... just my opinion.

That being said, as you know very well, when things are going good, these are stocks that a lot of money can be made on. As I can attest, when things are going bad...these are stocks that a lot of money can be lost on. :( *joking...ish

For now, I have pulled my remaining investment cash out to wait on something I see that offers a glimmer of hope. I think I will be on standby for a while. I'm still watching my long positions in this group dry up to nothing. I may go ahead and take the big loss this week...it will be a bitter pill to swallow indeed.
Whonoz profile picture
Good article, I share your opinion about them eventually restructuring. I don't see how they can avoid it unless activity and pricing picks up much sooner than expected.
Charlie's Munger profile picture
Interesting, thanks for post.
Hey gang - remember me from 2016 when I was heavily involved with RIGP - I haven't looked seriously at RIG for over 3 years until I noticed the common stock was $1
Bulldog67 profile picture

Welcome back! Hint: don’t buy RIG, because it is overvalued at $1.20!
kingRIG2.0 profile picture
Bulldog are you shorting rig at $1.20?
Hi Bulldog - I remember you very well. I will take your advice & avoid for now. Take care my friend!
Good article. Looking at the individual trade prints for the 20/21s I don’t see any institutional size trades for either of the bonds post earnings. The only “reasonable” size trade is 200k notional of the 20s @ 80. This leads me to believe that there are no real sellers at these levels and the next real print on these bonds is likely to be at least 5-10 points higher. I expect the company focus its buybacks on the 21s given the discount to par and the higher likelihood of locating sellers in size as the 20s should be money good.
Great article. I have a few of the 2020 bonds and have been worried that I was missing something when they were priced so cheap. I think that I will hold on to them.

I've had a lot of Transocean bonds over the last several years, and fortunately the 2020 are the last of them. Sold out of their common long ago.

I worked for these guys long ago on a jack up rig out in the Gulf when they were Global Marine. Well run company, but I think the future is bleak for offshore drilling.
Bulldog67 profile picture

I owned a lot of stock and options in Global Santa Fe (after Santa Fe International bought Global Marine). Transocean made me a very happy investor when they bought out GSF in summer 2007!

I agree with your current assessment of the industry and of RIG.
Stop The Printer profile picture
How does one purchase bonds on Fidelity? Or even look at them?

I’m trying to better understand bonds and what you’re really buying with them. But searching for RIG.HG doesn’t pull anything up?
PapaWhisky profile picture

Make sure you change Transaction Type to 'Fixed Income' and enter the CUSIP. For the November 2020 it's 893830AY5
Stop The Printer profile picture
Thanks PW!

Much appreciated for a legitimate answer.
Doesn't look like you can buy them through Fidelity, at least the November 2020 it's 893830AY5 :(
11146471 profile picture
Henrik, well said! That's what I call a balanced article.
Klem Kadiddlehopper profile picture
I enjoyed your article. If they start nibbling at those RIG.HG December 2021 bonds at current prices (46), that would be very significant. Current amount outstanding on those is shown as $265 million out of the $1.2B in the original offering. If they cut that debt down at a big discount, they'd have spare cash to extend their runway coming out of 2021.
PapaWhisky profile picture
@Klem Kadiddlehopper

In fact, the December 2021 was their largest purchase.

Per their 10Q they bought

November 2020: $8 million
December 2021: $38 million
October 2022: $3 million
May 2023: $6 million

So $55 million in near dated debt at a cost of $46 million.

But actually it was more than that as some purchases did not settle until April 2.

From their Conf Call:

As part of our long-term objective to optimize our balance sheet, we repurchased approximately $76 million of near-dated debt in the open market during the quarter at a cost of $55 million. "
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