Saddled with massive debt and closed off from obtaining fresh capital, offshore driller Transocean Ltd. faces substantial financial risk and additional rating downgrades, analysts said.
"For highly levered upstream names such as Transocean, the ability to refinance sizable debt tranches looks increasingly difficult," Bernstein analyst Nicholas Green said March 25.
Green said Transocean's $8.1 billion of net debt against a market capitalization of $3.7 billion "is a timebomb." The driller's gearing — a ratio of its debt to equity — will be at 68% by 2021, signaling an elevated risk of business failure, he said.
Over the next two years, $1.2 billion of Transocean's debt will mature, including $581 million in 2020, and $633 million in 2021. The company also planned to spend $1.9 billion over the same period, but under current market conditions is likely to defer at least half of the capex related to new build, Green said.
With $1.8 billion in cash and $1.3 billion of a revolving credit facility available, a near-term liquidity crisis is unlikely, Green said. The company will need to draw heavily on its cash balance and revolving credit facilities to meet its maturing debt, or refinance it in the bond market, Green said.
Refinancing debt will become increasingly difficult if the offshore market fails to rebound and the decarbonization agenda continues, Green said. "Lenders will eventually become more discerning and seek to cut their losses," he said. Raising equity through asset sales would then be the most reliable and advisable means for Transocean to cut its debt, Green said.
Those opportunities, however, are shrinking as the value of Transocean's assets depends on the size and scope of the offshore market recovery and the ability of offshore drillers to recognize day-rate improvement.
Moody's analysts March 23 acknowledged there were signs of offshore market improvement in 2019, but the improvements failed to increase Transocean's contract backlog in relation to its debt burden. The commodity price collapse in the first quarter added to the challenge for Transocean to improve its cash flow outlook as offshore fundamentals are unlikely to improve in the near term, Moody's said.
Day rates have improved for some rig types and in some geographic markets, but the recovery has been slower than anticipated, Moody's said.
"It is time for oil companies to face this reality. The risk-reward of offshore drilling is fatally flawed: oil companies pay insufficient day-rates to cover the cost of running and maintaining a world-class rig fleet," Green said.
Transocean has another $1.8 billion of notes due by year-end 2022 and $2.3 billion in 2023, and if the company fails to refinance the debt it "will face a genuine liquidity crisis," Green said.
The analyst urged Transocean to use the current market crisis to address these issues with its customers.
"If [the] oil price rips to new highs, [Transocean] could be a 5-bagger," winning four times the original investment rate, Green said. However, Bernstein rates the world's largest offshore drilling contractor at underperform as Moody's downgrade of Transocean to Caa1 from B3 signals "very high credit risk" — and "the risks of equity dilution are too extensive to hold this name," Green said.