Transocean Limited (NYSE: RIG), the owner of the Deepwater Horizon drilling rig that exploded in the Gulf of Mexico last year causing the massive BP (NYSE:BP) oil spill, is under review for a possible credit downgrade by Moody’s Investors Service because of troubling debt levels.  Citing “weakening financial performance,” Moody’s recently announced that it was considering downgrading the company’s unsecured notes from Baa3, the lowest investment-grade rating (on the fringe of “junk” status). The agency says high debt levels and questions about the company’s liquidity are casting doubt on its ability to foot the bill for costs associated with the Gulf disaster. Although the firm says its contract with BP shields it from penalties and damages, the British oil producer has sued Transocean to recover a portion of the $40-plus billion in fines, claims and cleanup costs.
In Murky Financial Waters
Adding fuel to the fire, Standard & Poor’s and Fitch Ratings have also downgraded Transocean a notch to BBB- on concerns that the company’s recent acquisition of Norway’s Aker Drilling ASA for $1.4 billion in cash and the assumption of $1 billion of debt, has increased its leverage to troubling levels.
Weathering the storm
On the bright side, the contract-drilling service provider has secured a new $2 billion, 5-year revolving credit line with JPMorgan Chase and other banks, though the specific interest rates will depend on Transocean’s debt rating. Contract drilling accounts for almost all of Transocean business (95%). And although there has been a decline in offshore oil drilling, thus Transocean rig utilization, in recent years, Trefis expects a 65% increase in activity this year, ultimately rising to 70% in 2012 as the sector recovers with the global economy and increased exploration for oil and gas.
Even with short-term issues due to rig downtime, a string of poor quarterly results and debt tied to its cash outlay for Akers, we believe there is a more attractive long-term picture. That said, we maintain a $71 price estimate on Transocean stock, a healthy premium to the current market price.
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