Fitch Revises Transocean Inc.'s Outlook to Negative; Affirms IDR at 'BBB-'

Fitch Ratings has affirmed Transocean Inc. (Transocean; NYSE: RIG) and its affiliate's long-term Issuer Default Rating (IDR) and senior unsecured ratings at 'BBB-'. The Rating Outlook has been revised to Negative from Stable.

The Negative Outlook reflects the possibility that a prolonged oil price drop will compound the effects of the offshore rig oversupply cycle resulting in weaker than previously expected market dayrates and an acceleration of the fleet rationalization process. The Outlook also considers the prospect that Fitch's inflection point estimate could be pushed back beyond 2016 and dayrate improvement expectations moderated resulting in a weaker leverage profile.

Approximately $9.7 billion of debt, excluding the outstanding Eksportfinans loans and considering the November 2014 early debt retirement, is affected by today's rating action. A full list of rating actions follows at the end of this release.

KEY RATING DRIVERS

Transocean's ratings are supported by its market position as the largest global offshore driller, strong backlog ($21.8 billion as of Oct. 15, 2014, for 2015 and beyond), favorable rig fleet high-grading and margin improvement efforts, and heightened financial flexibility, including that afforded by cash-generating asset sales (dropdowns) to Transocean Partners LLC (NYSE: RIGP) and potential downward adjustment of the dividend. These considerations are offset by the company's need to generate and conserve liquidity given its negative free cash flow (FCF) profile in order to minimize the use of debt funding. However, Fitch believes the company's current and projected through-the-cycle leverage profile (Fitch calculated 2.6x latest 12 months [LTM] debt/EBITDA as of Sept. 30, 2014; Fitch base case forecasts, excluding debt assumed at RIGP and non-controlling cash flows, debt/EBITDA of 3.6x in 2015) and financial flexibility are, at this time, consistent with a 'BBB-' rating.

OIL PRICE DROP PRESSURES OFFSHORE MARKET FURTHER

Offshore drillers have been facing softening market conditions due to lower demand and a significant newbuild backlog. The over 50% drop in oil prices could compound the effects of the oversupply cycle resulting in weaker than previously expected market dayrates and an acceleration of the fleet rationalization process. Fitch continues to believe that medium-term demand will rebound and absorb high quality assets to offset declines in existing offshore reserve bases. However, drillers will likely have to make some tough decisions regarding their existing fleets to help rebalance the market and may have to suffer an extended period of weaker dayrates.

Fitch still views 2016 as the company's inflection point with a large proportion of its legacy backlog having rolled off, scrapping activity at or near completion (12 announced as of January 2015), and the majority of competitive newbuilds reaching the market. However, Fitch's inflection point estimate could be pushed back and dayrate improvement expectations moderated to the extent the market's fleet rationalization process is prolonged and/or depressed oil price/demand environment is sustained. Transocean's scheduled delivery of seven drillships (five contracted) and five high-specification jackups (uncontracted) in 2016 and 2017 should help provide some support to financial results.

FORECASTED CASH FLOWS PRESSURED, BUT SUFFICIENT FINANCIAL FLEXIBILITY

Fitch's base case forecasts Transocean, excluding non-controlling RIGP cash flows, will be $1.1 billion FCF negative in 2015. These FCF estimates consider dividend payments consistent with the current $3.00 per share. However, Fitch anticipates that Transocean will proactively leverage its available financial flexibility to conserve and generate liquidity during the oversupply cycle given the current oil pricing environment. This could lead to improvements in Fitch's 2015 FCF estimate.

Fitch's base case results in debt/EBITDA, excluding debt assumed at RIGP and non-controlling cash flows, of 3.6x in 2015 with leverage metrics pressured further in 2016. This leverage profile is generally consistent with those experienced by Transocean during previous downcycles. Fitch, at this time, continues to believe that Transocean has sufficient financial flexibility resulting from RIGP dropdowns, assets sales, the deferral of capital spending, and, potentially, a cut or suspension of the dividend to minimize the use of debt to fund FCF shortfalls.

LIQUIDITY POSITION

Transocean had cash and equivalents of approximately $2.9 billion as of Sept. 30, 2014. Additionally, the company had $429 million in restricted cash investments associated with the required cash collateralization of the outstanding Eksportfinans loans ($429 million) and other contingent obligations ($9 million). Supplemental liquidity is provided by the company's $3 billion senior unsecured credit facility due June 2019, including a $1 billion sublimit for the issuance of letters of credit. No revolver balances were outstanding as of Oct. 28, 2014.

HEIGHTENED MATURITIES PROFILE

Transocean has annual senior notes maturities equal to $0.9 billion, $1 billion, $750 million, and $1.3 billion between 2015 and 2018. These represent the company's 4.95% senior notes due November 2015, 5.05% senior notes due December 2016, 2.5% senior notes due October 2017, 6% senior notes due March 2018, and 7.375% senior notes due April 2018. This excludes Eksportfinans principal amortization that is cash collateralized. Transocean, as defined in its bank credit agreement, is subject to a maximum debt to tangible capitalization ratio of 0.6 to 1.0 (0.4 as of Sept. 30, 2014). Other covenants consist of lien limitations and transaction restrictions.

MANAGEABLE OTHER LIABILITIES

Transocean maintains several defined benefit pension plans, both funded and unfunded, in the U.S. and abroad. As of Sept. 30, 2014, the company's funded status was negative $315 million. Fitch considers the level of pension obligations to be manageable and notes that the recent U.S. benefits freeze helps to alleviate any future pension-related credit risks.

Other contingent obligations are principally comprised of purchase commitments totalling approximately $5.2 billion on a multi-year, undiscounted basis as of Sept. 30, 2014. Fitch does not consider the obligations, on a stand-alone basis, to be credit concerns, which are generally accounted for in operating and capital costs.

RATING SENSITIVITIES

Positive: Future developments that may, individually or collectively, lead to a positive rating action include:

--Improvements in day and utilization rates across the company's core fleet suggesting strengthening market conditions;

--Further progress in implementing the company's asset strategy to focus on the high-specification and ultra-deepwater markets;

--Mid-cycle debt/EBITDA of 2.0x-2.5x on a sustained basis.

Positive rating actions are unlikely over the medium term given the weak offshore market and negative FCF profile.

Negative: Future developments that may, individually or collectively, lead to a negative rating action include:

--Lower than expected rig utilization and day rates, as well as margins, indicating further deterioration in market conditions and/or asset quality and mix;

--Acquisitions and/or a continuation of the dividend at a level inconsistent with the capital structure and expected cash flow profile;

--An inability to access Transocean Partners (RIGP) capital at attractive valuations to help fund FCF shortfalls and debt payments;

--Through-the-cycle debt/EBITDA of 3.5x-4.0x on a sustained basis.

Negative rating actions will be closely linked to management's ability to generate and conserve liquidity given its negative FCF profile in order to minimize the use of debt funding through the cycle. Fitch, at this time, continues to believe that Transocean has sufficient financial flexibility, but recognizes that a prolonged downcycle could challenge the company's ability to adequately balance its asset and financial profiles consistent with an investment-grade rating.

Fitch has affirmed Transocean and its affiliate's ratings as follows:

Transocean Inc.

--Long-term IDR at 'BBB-';

--Senior unsecured notes/debentures at 'BBB-';

--Senior unsecured bank facility at 'BBB-'.

Global Santa Fe Inc.

--Long-term IDR at 'BBB-';

--Senior unsecured notes at 'BBB-'.

The Rating Outlook has been revised to Negative from Stable.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Relevant Research:

--'Corporate Rating Methodology Including Short-Term Ratings and Parent and Subsidiary Linkage' (May 28, 2014);

--'2015 Outlook: Global Oil and Gas (U.S. Shale Balances Crude Market' (Dec. 15, 2014);

--'Fitch Revises Base Case Crude Price Deck to Match Stress Case for 2015' (Jan. 22, 2015);

-- 'Transocean Impairment More than It Seems (Impairment Provides Economic Value Indication and Rationalization Signal)' (Nov. 24, 2014);

--'Fitch: Driller MLPs May Heighten Asset and Cash Flow Risks' (April 14, 2014);

--'Fitch: Drilling Downturn May Spur Deals; MLPs Add Flexibility' (Aug. 27, 2014);

--'Fitch: Offshore Drillers Face Softening Market' (May 22, 2014);

--'Non-Traditional MLP Assets (Changing Mix, Changing Risks)' (May 6, 2014).

Applicable Criteria and Related Research:

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

2015 Outlook: Global Oil and Gas (U.S. Shale Balances Crude Market)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=834688

Transocean Impairment More than It Seems (Impairment Provides Economic Value Indication and Rationalization Signal)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=821851

Non-Traditional MLP Assets (Changing Mix, Changing Risk)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=747370

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=979151

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.