Transocean: Approaching New 52-Week Highs After Raising $525 Million In Secured Debt – Buy

Summary:

• Company raised $515 million in net proceeds from the issuance of new 8.375% Senior Secured Notes against the Deepwater Titan contract.
• Offering has apparently been met with strong demand as proceeds eclipsed the high-end of management’s projections.
• Backlog continues to increase with almost $500 million in customer option exercises and new contract awards announced last week.
• Company teamed up with largest shareholder Perestroika A.S. and private equity to buy the newbuild high-specification drillship “West Aquila” from DSME shipyard.
• Stars continue to align for Transocean with the company no longer at risk of covenant violations and strong industry conditions likely to persist for the foreseeable future. While shares might be ripe for a breather after the 125% run from September lows, investors should consider adding on any major weakness.

Note: I have covered Transocean (NYSE:RIG) previously, so investors should view this as an update to my earlier articles on the company.

Shares of leading offshore driller Transocean have been on a tear recently with the stock up an impressive 40% over the past month, vastly outperforming peers like Valaris (VAL), Noble Corp. (NE), Seadrill (SDRL) and Diamond Offshore Drilling (DO) as investors gain more confidence in the company’s ability to get a handle on its long-standing debt and liquidity issues.

That said, shares have been very volatile over the past year despite a generally supportive oil price environment and vastly improved industry conditions as Transocean’s shaky financials have resulted in further dilution for common equityholders.

Particularly the onerous terms of last year’s credit facility extension required Transocean to sell additional shares into the open market and recently resulted in a surprise convertible debt issuance at less-than-stellar terms including a sizeable amount of warrant sweeteners. With both the new exchangeable bonds and warrants now deeply in the money, dilution from this rather small transaction calculates to almost 15%.

In addition, over the past 18 months, the company has sold 97.1 million shares into the open market for net proceeds of $422 million (assuming no additional share issuances in Q4).

But according to statements made in the most recent quarterly report on form 10-Q, the company still had to obtain additional liquidity of at least $200 million until the end of Q3/2023 to remain in compliance with the $500 million minimum liquidity requirement governing the company’s secured credit facility.

A failure by us to avoid such a default would eliminate our access to incremental borrowing under the Secured Credit Facility and, since we expect to have drawn on the Secured Credit Facility, give our lenders the right to declare such borrowings immediately due and payable. Although not assured, we believe it is probable that we will be able to obtain such secured financing for Deepwater Titan in the required timeframe.

Indeed and as promised by management on the Q3 conference call, Transocean wasted no time and just two weeks after taking delivery of the Deepwater Titan, the company managed to issue $525 million in new 8.375% Secured Notes on Monday for net proceeds of $515 million, above the high-end of management’s projections of between $450 and $500 million.

Please note that the rig has not yet commenced its 5-year maiden contract with Chevron in the Gulf of Mexico and as of this point remains berthed at Sembcorp Marine shipyard in Singapore but with contract commencement scheduled for Q2/2023, there’s still plenty of time for the drillship to complete preparations.

While some of the proceeds will be restricted to fund a so-called “debt service reserve“, the vast majority of the newly raised cash will be available to the company.

Last week, Transocean announced almost $500 million in backlog additions as customers exercised options for the semi-submersible rigs Transocean Norge, Paul B. Loyd, Jr. and Development Driller III. In addition, the drillship Deepwater Invictus was awarded a short-term contract in the U.S. Gulf Of Mexico at a dayrate of $430,000. Lastly, the harsh environment semi-submersible rig Transocean Barents was awarded a short-term contract in the U.K. North Sea at a dayrate of $309,000.

On the flip side, the fate of the company’s so-called CAT-D rigs remains unclear at this point after Equinor’s (EQNR) surprise decision to release the Transocean Equinox and Transocean Endurance following their initial contract terms. While Transocean Equinox is already sitting idle, Transocean Endurance is currently scheduled to run off contract in June, potentially followed by Transocean Encourage in November and Transocean Enabler in March 2024.

Keep in mind that these rigs have been purpose-built to the specifications of Equinor and are still working at rates substantially above current market levels. That said, Equinor hasn’t made a decision regarding the Transocean Encourage and Transocean Enabler yet and with drilling activity offshore Norway expected to improve going into 2024, these rigs might very well secure new work without being required to leave their core market.

Please note also that in contrast to management’s expectations stated on the Q4/2021 conference call, Transocean hasn’t reactivated any of its cold-stacked rigs yet likely due to a lack of sufficient contract opportunities and the company’s liquidity constraints.

That said, Transocean recently managed to get its hands on a newbuild high-specification drillship by teaming up with largest shareholder Perestroika A.S. and private equity firm Lime Rock Management:

Transocean today announced that one of its subsidiaries, together with Perestroika A.S. and funds managed by Lime Rock Management L.P., have formed a joint venture, Liquila Ventures Ltd. (“Liquila Ventures”).

Liquila Ventures agreed with Daewoo Shipbuilding & Marine Engineering Co., Ltd. (“DSME”), to purchase Hull 3623, the ultra-deepwater newbuild drillship formerly known as West Aquila, for approximately $200 million.

Hull 3623 is a high specification, 1400 short-ton hookload ultra-deepwater drillship. This seventh-generation dual-activity drillship will have a large deck space, high load capacities, and will be dual-stack ready.

Transocean has made a $15 million noncontrolling investment in Liquila Ventures and maintains the exclusive right to market and manage the operations of the rig, which is expected to be delivered from DSME in the third quarter of 2023.

With stranded high-specification assets still available at reasonable prices and most of the company’s idle rigs having been cold-stacked for many years already, I don’t see Transocean engaging in reactivations anytime soon regardless of the company’s improved liquidity profile.

Bottom Line

With Transocean now officially no longer at risk of near-term covenant violations and Monday’s secured debt offering apparently having been met with strong demand, investors pushed the stock price above $5 for the first time since June 2022.

In addition, with profitable backlog increasing and expectations for industry conditions to improve further over the course of this year, additional upside looks likely even with the company looking expensive from a fundamental perspective relative to peers.

While shares might be ripe for a breather after the 125% run from September lows, investors should consider adding on any major weakness.

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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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