Fitch Rates Transocean Inc.'s Senior Note Issuance 'BBB-'

Fitch Ratings has assigned a 'BBB-' to Transocean Inc.'s (NYSE:RIG) proposed senior note issuance. The notes will be used to help fund part of the construction cost of four new drillships. Transocean disclosed a number of new developments along with the proposed issuance.

Potential Newbuild Drillships

Transocean Ltd. is currently in discussions with a potential customer for the construction of four dynamically-positioned, ultra-deepwater drillships. Transocean has not yet entered into any binding agreements with respect to the newbuilds and may also choose to enter into alternative financing arrangements, such as a joint venture with the customer.

RIG expects that each newbuild would be contracted for a term of 10 years commencing in 2015 and 2016, adding estimated total backlog of $7.6 billion (implying a day rate of approximately $520,000 per rig by Fitch's calculation). The capital investment for these four newbuilds is estimated at $3.0 billion, excluding capitalized interest.

In Fitch's opinion the newbuild announcement is neutral to the credit profile. The positive impact of significant long-term increases to the revenue backlog is roughly offset by the required capex and reduced free cash flow over the construction period.

Sale of Jackup Fleet

On Sept. 9, 2012, Transocean entered into definitive agreements to sell 37 standard jackups and one swamp barge. Of the 38 drilling units, 31 are operating, five are stacked and two are being reactivated. The aggregate sales price is approximately $1.05 billion, including seller financing of $195 million. The transactions are expected to close in the fourth quarter of 2012, subject to certain conditions. RIG has committed to reclassify its seven remaining stacked standard jackups as assets held for sale.

In Fitch's opinion the sale of the standard jackup fleet is positive for the credit profile. The transaction should help to provide additional liquidity in the near term and support the strategy of high grading the asset portfolio. According to company disclosures and Fitch calculations, Transocean's standard jackup segment generated $177 and $501 million in gross profit (segment drilling revenues minus segment in service costs), approximately 7% and 10% of total gross profit, for the six months ended June 30, 2012 and the full year 2011 respectively. Transocean also incurred $109 and $152 million in out of service, stacked, and idle costs for its standard jackup fleet for the six months ended June 30, 2012 and the full year 2011 respectively. Although some of these costs will continue in discontinued operations until the remaining seven stacked jackups can be liquidated.

Macondo Well Update

Transocean disclosed updated commentary on settlement discussions related to the Macondo well incident. It has had discussions with the U.S. Department of Justice seeking to resolve certain civil and criminal claims of the United States related to the Macondo incident for $1.5 billion over a period of years. The parties have been unable to come to an agreement on a settlement. If the Company was to enter into a settlement including such payment terms, the Company would not expect that any incremental charge to earnings related to any such settlement would be required over the Company's previously announced $2.0 billion reserve for Macondo-related claims. There have been no settlement discussions with either the Plaintiff's Steering Committee (PSC) or BP since February 2012. The settlement amounts proposed by both BP and the PSC were each far in excess of the amount contemplated by the Company's current settlement discussions with the Department of Justice.

As Fitch has previously stated, a materially larger judgment or settlement than the $2.0 billion in total loss contingencies currently accrued for Macondo related damages could potentially change the ratings.

Brazil Frade Field Update

On August 28, 2012, the federal court in Rio de Janeiro affirmed a preliminary injunction against the Company and Chevron. While the terms of the preliminary injunction have been published by the court, the federal court in Rio de Janeiro has not yet served the Company with the injunction itself. The terms of the preliminary injunction require the Company to cease conducting extraction or transportation activities in Brazil within 30 calendar days from the date of service.

Fitch believes negative developments in Brazil are not yet a material credit concern, but that they do represent tail risk and could become significant if unfavorable judgments continue. Enforcement of the injunction over an extended period or a change in the long term outlook for business prospects in Brazil could negatively impact ratings. For both the year ended December 31, 2011 and the six months ended June 30, 2012, the Company's operations in Brazil accounted for 11 percent of the Company's consolidated operating revenues. Notably public comments by customers in Brazil, Petrobras and Chevron, are a modest positive.

Potential Secured Credit Facility

Transocean also announced it is in negotiation for a new secured credit facility of $500 to $1,000 million with collateral for this facility provided by two or three of the Company's Ultra-Deepwater drillships. In addition, Transocean has committed to repay the $150 million of borrowings outstanding under the secured Aker Revolving Credit and Term Loan Facility and cancel the $500 million secured Aker Revolving Credit and Term Loan Facility Agreement, which is secured by the two semisubmersibles from the Aker acquisition.

New CFO Announcement

Esa Ikaheimonen will succeed Gregory L. Cauthen as Executive Vice President and Chief Financial Officer on November 15, 2012. From 2010 to 2012, Mr. Ikaheimonen served as Senior Vice President and Chief Financial Officer of Seadrill Ltd. Prior to 2009, Mr. Ikaheimonen was employed by Royal Dutch Shell for almost 20 years. Mr. Cauthen served as Transocean's CFO for eight years prior to his retirement in 2009. He returned in January 2012 to serve as CFO on an interim basis.

The orderly transition to a qualified non-interim candidate is in line with Fitch's expectations for corporate governance, and the execution of a transition is a modest credit positive.

Ratings Overview

The assigned ratings reflect the company's solid and sizable asset base, cash flow profile supported by a robust contract backlog and somewhat levered balance sheet. Transocean has by far the largest offshore drilling fleet in the world and has many of the premier deepwater drilling rigs in the industry. At September 10, 2012, Transocean operated a fleet of 115 mobile offshore drilling units including 48 high-specification floaters. Included in the 115 drilling units, the company has 32 standard jackups and one swamp barge classified as discontinued operations. An additional 12 standard jackups have been classified as held for sale. As of July 18, 2012, contract backlog was approximately $22.9 billion and has been rising recently reflecting more robust industry conditions.

As of June 30, 2012, balance sheet debt stood at approximately $12.8 billion with Fitch adjusted latest-twelve-month (LTM) EBITDA of $3.1 billion resulting in debt/EBITDA of 4.15X. Cash and cash equivalents of $4.0 billion and restricted cash investments of $857 million bring net debt down to approximately $8.0 billion. Given the trend in year to date results, Fitch expects improvements in EBITDA to continue in the near and intermediate term. This would likely result in leverage below 3.5X calculated relative to current debt levels. Despite the proposed issuance, Fitch does not expect total debt levels to remain above June 30, 2012 levels for an extended period as result of $1.7 billion in convertible notes putable in December 2012.

Total current liquidity is $5.9 billion as of June 30, 2012 consisting of nearly $4 billion of cash and cash equivalents and almost $2 billion of capacity on its unsecured revolver due 2016. Given the announcement of a potential contract and intent to build four new high specification drillships, Fitch would now expect free cash flow to be reduced but still modestly positive over the next few years. Further bolstering near-term liquidity would be expected proceeds from the sale of 37 of the company's jackup rigs to Shelf Drilling International Holdings, Ltd. for approximately $1.05 billion. Additional liquidity could also be provided from a potential secured credit facility that may be put into place totaling $500 million to $1 billion. Convenants on the revolver include a maximum debt/tangible capitalization ratio of 0.6X, and as of June 30, 2012 this ratio was 0.5X.

Maturities over the next twelve months as of June 30, 2012 are approximately $2.8 billion and include the $1.7 billion in putable convertible notes late this year and two issuances of notes due in the first quarter of 2013 totaling approximately $750 million. The next significant maturity is the $1.1 billion of the 4.95% senior due 2015.

The Negative Outlook reflects the uncertainties surrounding Transocean's remaining potential liability exposure related to the Macondo accident and oil spill in the U.S. Gulf of Mexico in 2010 combined with still relatively weak operating cash flow and resulting high leverage metrics for the rating. Additionally, current litigation related to a potential work stoppage following a minor spill in Brazil is a concern. As of June 30, 2012, RIG has increased its total loss contingencies accrued for Macondo related damages to $2.0 billion. A much larger judgment or settlement than the amount currently reserved for could have a material impact on the credit profile.

Other concerns include:

--The possibility of continued higher operating costs and increased downtime as a result of new regulations in the U.S. Gulf of Mexico;

--Pressure to reward shareholders before reducing leverage;

--The potential for a significant deterioration in oil prices leading to a decrease in the demand for drilling rigs; and

--The potential for additional newbuilds and the associated capex involved which could cause debt levels to increase beyond current levels.

WHAT COULD TRIGGER A RATING ACTION

Negative:

--A large, adverse liability or settlement outcome well beyond what already has been reserved relating to the Macondo incident.

--A significant change in the situation in Brazil leading to work stoppages that last long enough to have a material impact on revenue and FCF.

--A large share repurchase program, reinstatement of the dividend, or a new large newbuild program that leads to significantly higher debt levels.

--A significant regression in operations that leads Fitch to believe the downtime issues are an intractable 'new normal' in the deepwater industry rather than a temporary issue.

--A material and extended drop in oil prices that drives new dayrates and contracting significantly lower.

Positive:

--Resolution and/or much better visibility of Macondo/Brazil related issues.

--Continued operational improvement, much stronger industry conditions and resulting cash flow or substantial debt reduction.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (Aug. 8, 2012);

--'Short-term Ratings Criteria for Non-Financial Corporates' (Aug. 9 2012);

-- 'Updating Fitch's Oil & Gas Price Deck' (Aug. 15, 2012).

Applicable Criteria and Related Research:

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460

Short-Term Ratings Criteria for Non-Financial Corporates

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685553

Fitch Oil & Gas Price Deck -- 2010 Update

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564360

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