S&P Places Transocean (RIG) on CreditWatch Negative Following Reassessment

Standard & Poor's Ratings Services said today it placed its ratings on Transocean Inc. (NYSE: RIG) on CreditWatch with negative implications, including Transocean's 'BBB-' long-term corporate credit rating and 'BBB-' issue-level ratings on the company's senior debt.

The negative CreditWatch placement follows our reassessment of the challenges that Transocean faces. We expect dayrates and fleet utilization levels to continue to decline, driven by an oversupply of offshore drilling rigs and weak demand, exacerbated dramatically by lower oil prices. Weak dayrates and difficulty recontracting rigs translates into lower internal cash flow generation at a time when Transocean has high committed capital spending for new rigs and a sizable dividend, resulting in negative cash flow over the next two years. Although the company has the largest fleet in the industry, a number of its deepwater and midwater rigs may be more difficult to market than higher-specification assets in challenging industry conditions.

"We forecast that Transocean's credit measures will weaken below our expectations for the rating over the next two years without meaningful near-term steps to improve them," said Standard & Poor's credit analyst Ben Tsocanos.

Potential steps could include a significant reduction in the company's dividend and issuing equity through its Transocean Partners LLC subsidiary to fund asset dropdowns. A key consideration in reviewing the CreditWatch will be whether Transocean can sustain funds from operations/debt of above 20%, which we view as appropriate for the rating.

Ultimately, Transocean's investment in new ships will improve its competiveness, and the company has moved aggressively to retire less marketable equipment. The company has also made progress in reducing operating costs, has considerable liquidity, and its financial exposure to the Macondo disaster appears greatly reduced.

Our CreditWatch review will assess Transocean's strategies and ability to maintain adequate credit measures for the rating under evolving market conditions. We anticipate that if we lower the ratings, it would not be by more than one notch.

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