Energy

As Transocean Hits All-Time Highs, Fitch Cuts Rating (RIG)

Maybe the ratings agencies are finally doing their job by monitoring leverage, and maybe the ratings companies are overly alert since they fell asleep at the wheel during the entire CDO meltdown on Wall Street.  Today FITCH RATINGS has downgraded Transocean, Inc.’s (NYSE:RIG) debt ratings to ‘BBB’ from ‘BBB+’. The Rating Outlook is Stable and this is still barely investment grade.

This downgrade was triggered with the completion of the GlobalSantaFe merger closing, and the previously announced intent to distribute $15 Billion cash to shareholders upon closing the merger.

FITCH’s downgrade also reflects Transocean’s intent to devote free cash flow during the next two years toward debt repayment, the significant visibility that the company has with regard to free cash flow levels as a result of its substantial contract backlog and the increased diversification and size of the company’s fleet of offshore drilling rigs. Initial borrowings to fund the $15 billion cash dividend to shareholders will be funded by borrowings on a 364-day bridge facility, and Fitch anticipates Transocean will move quickly to reduce borrowings under the bridge facility by using a combination of capital markets issuances and bank term debt.  As a result of Transocean’s commitment to devote free cash flows to repay debt, the company is expected to reduce debt levels from the current approximately $17 billion to approximately $10 billion by year-end 2009.  Fitch will also continue to monitor the strength of the company’s contract backlog.

Transocean shares are still up 5% on the day at $135.98, although they traded as high as $137.59 before FITCH made its debt rating cut.  Since this was planned upon the merger closing it could have probably been somewhat expected.  The high before today was $131.51.

Other pending or speculated oil and gas and energy mergers are covered in our Special Situation Investing Newsletter, and we also give previews or other data to our open email distribution list.

Jon C. Ogg
November 27, 2007

Jon Ogg produces the 24/7 Wall St. Special Situation Investing Newsletter; he does not own securities in the companies he covers.

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