S&P Raises Transocean Offshore Ratings

Standard & Poor's raised its ratings for Transocean Offshore Inc., renamed Transocean Sedco Forex Inc. (See chart page 2, related story page 8) At the same time, Standard & Poor's assigned to the company an 'A-1' short-term corporate credit rating, an 'A-1' rating for its $500 million commercial paper program, and a single-'A' rating for its $400 million term loan maturing December 2004. The company's ratings are removed from CreditWatch with positive implications, where they were placed on July 12, 1999, upon the announcement that un-rated Schlumberger Ltd. would spin off its marine drilling unit and combine it with Transocean. That merger was completed on Dec. 31, 1999. The outlook is stable. The ratings for Houston, Texas-based Transocean Sedco Forex reflect the company's strong business position as one of the world's largest and most technically advanced oil and natural gas offshore contract drillers, with a large, well-positioned premium rig fleet; relatively clear revenue visibility; and a strong balance sheet. These strengths are somewhat offset by the financial risks inherent in the contract drilling industry, which relies on highly cyclical capital spending patterns of exploration and production (E&P) companies. The merger creates a company with a world-class fleet of 75 drilling rigs (47 semisubmersibles, seven deepwater drillships, 17 jackups and four tender rigs) that operate in all major international petroleum E&P regions. Particularly, a large fleet of high-specification deepwater and harsh environment rigs (Transocean Sedco Forex controls roughly one-third of the world's floating offshore rig supply and 30% of rigs capable of drilling in more than 3,000 feet of water) conveys an exceptionally strong business position in a drilling segment characterized by long-term, premium rate contracts and stronger than average rig utilization. A global alliance with oilfield services heavyweight Schlumberger further enhances the company's overall business position. Mid-1998 to mid-1999 was a period of extremely low oil prices that prompted most E&P companies to severely reduce planned outlays for drilling services. Predictably, Transocean was less severely impacted than many drillers as its premium fleet largely continued working under competitively priced contracts with top operators. However, as certain contracts expire the company faces repricing risk which could weaken profitability. Despite recent commodity price strengthening, drilling is experiencing a characteristic recovery lag, and rig utilization and day rates are not expected to materially rebound until mid-2000 or later. Still, with about $1.1 billion in contracted backlog, revenue visibility for Transocean's more sophisticated equipment remains strong. In addition, Sedco Forex's fleet gives the company greater exposure to more volatile, but currently the most rapidly improving, shorter-term drilling markets. Still, Standard & Poor's expects profitability and cash flow protection measures to remain somewhat low for the rating category until market conditions fully recover, with earnings before interest, taxes, depreciation, and amortization interest coverage averaging above 9 times (x). The company is on time to complete its fully contracted new-build program (three drillships initiated by Transocean; three semisubmersible and one jack-up rig initiated by Sedco Forex) by the third quarter of 2000. Ample cash flow from an expanded fleet should adequately meet low fixed charges, fund remaining construction costs, and achieve modest deleveraging from an already low 25% total debt to total book capital. While Transocean assumed Sedco Forex debt in the merger, the net post-merger effect was a slight deleveraging for Transocean.