Wednesday, September 22, 2010

Moody's and GimmeCredit on Transocean including Mocondo Liability (RIG)

I don't like copying out whole articles, good writing deserves a visit.
In this case the writing is so tight I couldn't figure out where to make the jump. I'll link to the homepage so you can check it out if you wish.
From the Houston Chronicle's FuelFix:

Thumbs up or Thumbs down?
Mixed reports on Transocean

Credit rating firms GimmeCredit and Moody’s both issued updates on drilling rig operator Transocean today, but the tones of their assessments were quite different.
GimmeCredit says timing of $2 billion in new unsecured notes Transocean issued last week was “shrewd and opportunistic.”

Yes, there are a lot of possible financial liabilities the company might face from the Deepwater Horizon accident. But given Transocean’s $2.9 billion of cash on hand, $2 billion on a revolving credit facility, no looming liquidity needs and some $27.6 billion in new business on tap, GimmeCredit is upbeat on the outlook for the company.
“We’d bet that nearly all of these contingencies will take years to play out, making it highly desirable that the cash cushion be sustained,” GimmeCredit writes. With a strong outlook for the drilling market’s rebound, “There’s still more upside, as the moratorium ends and RIG’s strengths play out.”

Moody’s Investors Service, which dropped its ratingon Tranocean last month due to the Gulf oil spill, notes that the company’s exposure to potential damages from the disaster will likely be limited to $6 billion. That much the firm should be able to handle. “… but any damaged beyond that could force the company to consider other ways to raise capital, including asset sales.”

Moody’s estimates for spill costs (to all parties, not just Transocean) includes $6.1 billion for spill cleanup, between $4.5 billion and $30.2 billion for fines under the Clean Water Act and about $220 million for wrongful death lawsuits (based on an estimated $20 million settlement for each of the 11 workers killed in the blast).

Is Transocean prepared to handle a share of the payouts? Moody’s thinks the indemnification contract between BP and Transocean appears to keep the rig operator off the hook for any damages. However:
“If BP attempts to challenge the indemnification in court, it could conceivably win an interim judgment or fine for which Transocean could be responsible, possibly within the next 12-18 months — particularly if we see pressure from the U.S. government.”
The company has a $1 billion liability insurance policy, strong cash flow and has done well paying off past debt. But its credit facility has Material Adverse Effect that could prevent the company from tapping into it in some instances.

“Transocean should be able to manage the liabilities that emerge from Macondo — provided those liabilities remain within the limits that we expect, and do not exceed about $6 billion. But this cannot be taken for granted. The company’s role in the accident is unclear at the moment, and much depends on what investigations find and what the courts decide in future legal actions, which could conceivably exceed our worst-case expectatio