Daily Archives: November 10, 2011

Transocean risks junk grade as cash flow ebbs

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The Deepwater Nautilus was used to drill Shell’s Appomattox discovery in the Gulf of Mexico. (Houston Chronicle file photo)

Transocean Ltd. is at the greatest risk of being cut to junk-bond status in almost a year as its cash flow is squeezed by tougher safety rules and a glut of drilling rigs.

Credit-default swaps on its debt implied a Ba1 rating on Nov. 7, a step below the current level, the first time since December that the Vernier, Switzerland-based company’s swaps suggested traders were anticipating a cut to junk, according to Moody’s Corp. Moody’s Investors Service yesterday put the world’s largest offshore driller on review for downgrade.

Last month’s $1.4 billion acquisition of Aker Drilling ASA eroded Transocean’s cash position as the company prepares for a February trial over claims and penalties stemming from the Deepwater Horizon disaster in the Gulf of Mexico in 2010. Manufacturing bottlenecks that boosted operating costs 28 percent and led to the biggest third-quarter loss in at least 10 years will persist into 2012, Chief Executive Officer Steven Newman said during a Nov. 3 conference call.

“It’s almost like a perfect storm, you get weaker earnings, plus an acquisition that increases leverage, plus potential for litigation risk, and you’re at the lowest possible triple B minus rating,” said Marc Gross, a money manager at RS Investments in New York, where he oversees $3 billion in fixed- income funds. “It seems obvious to me that in six months this is going to be a high-yield credit.”

Swaps Soar

The cost to protect against a default on Transocean debt has soared 82.3 basis points to 292.3 basis points, the highest since September 2010, in the week after the company posted a $71 million third-quarter loss, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. That compares with the average 173.9 basis points on U.S. oil and gas drillers overall. The swaps are implying a Ba1 rating as of Nov. 9, Moody’s Corp. data show.

Default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

“Industry conditions were already weak and then they decide to do the Aker deal, which takes down their liquidity,” said Sean Sexton, a managing director at Fitch Ratings in Chicago who rates Transocean debt BBB-, the firm’s lowest investment-grade rating. “On top of that, we still don’t know what, if anything, they’re going to owe” for last year’s catastrophe in the Gulf of Mexico.

‘Evaluating Alternatives’

“We consider it important to retain investment-grade status for our debt,” Guy Cantwell, a spokesman for Transocean, said in a telephone interview yesterday from Houston. Neither Newman nor Chief Financial Officer Ricardo Rosa was available for interviews, he said.

The average yield on the lowest-rated investment-grade bonds is 4.4 percent, while the highest-rated junk debt is 6.9 percent, according to Bank of America Merrill Lynch index data. Junk, or high-yield, high-risk debt, is usually rated below Baa3 by Moody’s and lower than BBB- by S&P.

Rosa said on the Nov. 3 call to discuss third-quarter results with analysts and investors that Transocean is “evaluating alternatives” to cover $1.7 billion in convertible notes expected to be redeemed under a put option during the current quarter. The company renewed a $2 billion, five-year revolving credit line last week, Rosa said.

Cash Cushion

Transocean’s cash and near-cash equivalents will be “significant” even after it transfers $1.2 billion from its $3.3 billion cash reserve this quarter to finish the acquisition of Aker, Rosa said. The company has a goal of maintaining a cushion of a few billion dollars of cash and near-cash equivalents, he said.

“So we’re not in a situation where this is causing us undue concern,” Rosa said. “We have options available and we’re evaluating them at present.”

The last time credit-default swaps on Transocean debt implied junk status was in December, when the U.S. government sued the company and four others associated with the April 2010 leak at BP Plc’s Macondo well for allegedly violating the Clean Water Act and the Oil Pollution Act. Transocean owned the rig involved in the worst U.S. maritime oil spill and employed nine of the 11 workers who perished. Fitch’s Sexton said the unprecedented nature of the catastrophe makes it impossible to estimate the size of Transocean’s potential liability.

Gulf Suits

The company also has been sued by London-based BP, which was leasing Transocean’s Deepwater Horizon rig, to recover part of more than $40 billion in estimated claims, penalties and cleanup costs. On Nov. 1, Transocean asked a U.S. judge to enforce a blanket indemnity against such claims contained in the contract with BP.

“Until the Macondo court case is resolved, which could last until sometime in 2013, the senior note rating will be clouded by the uncertainty of the ultimate outcome and the possibility that RIG become exposed to significant liabilities associated with the accident and clean-up,” Moody’s said yesterday in a note written by Stuart Miller, senior analyst, and Steven Wood, managing director of corporate finance. RIG is Transocean’s ticker symbol on the New York Stock Exchange.

Standard & Poor’s last month added Transocean to its list of potential fallen angels, or companies that are at risk of losing their investment-grade status, after analysts said on Oct. 5 that the acquisition of Stavanger, Norway-based Aker “will result in a weaker financial profile at a time of soft operating performance.”

Negative Outlooks

Transocean is ranked Baa3 or BBB- with “negative” outlooks by Moody’s and S&P, the lowest investment-grade, according to data compiled by Bloomberg.

Credit-default swaps on Transocean bonds soared by the most since July 2010 after it reported third-quarter results on Nov. 3, according to CMA.

That compares with swaps of 150 basis points on Ensco International Inc., 119.8 on Noble Corp. and 95 for Diamond Offshore Drilling Inc. as of Nov. 8, the data show.

While Transocean’s $1 billion of 6 percent bonds maturing in March 2018 are still trading above par, they have tumbled to 104.8 cents on the dollar as of Nov. 7 from 116.2 cents on Aug. 10, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The debt yields 4.1 percent.

Gross of RS Investments said that as owner of the world’s largest fleet of offshore drilling rigs, Transocean will “trade well” in high-yield, but the risk lies with the size of the Macondo settlement.

Backlog Shrinks

The company’s backlog of unfilled orders — a gauge of probable future cash flow — shrank to $23.5 billion as of Oct. 17 from $40 billion at the end of 2008, public filings showed. During the next two years, drillers around the world will finish construction on 45 new floating rigs, half of which have yet to be leased, S&P analysts Lawrence Wilkinson and Patrick Jeffrey said in an Oct. 5 note.

That influx of new vessels amid a post-Macondo slowdown in drilling-permit approvals in the U.S. sector of the Gulf of Mexico will “put pressure” on the daily rental rates Transocean will be able to command for its rigs, the S&P analysts said.

The civil trial in the U.S. District Court in New Orleans over thousands of claims by individuals and BP related to last year’s spill in the Gulf of Mexico probably will distract Transocean’s senior management from focusing on improving operating efficiency and rebuilding the backlog, the Moody’s analysts said in yesterday’s note.

Transocean shares fell 39 cents, or 0.8 percent, to $49.90 at 11:26 a.m. in New York.

“They’re in the twilight zone, the gray area between investment-grade and high-yield,” Gross said. “A lot of IG guys might want to just avoid them now if they really think they’re going to high yield whereas high yield guys are going to sit on the sidelines and say it’s not really high yield yet.”

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API: White House decision on Keystone XL puts politics above jobs

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Sabrina Fang | 202.682.8114 | fangs@api.org

WASHINGTON, November 10, 2011 – The American Petroleum Institute blasted the White House for delaying the approval of the Keystone XL pipeline, putting an indefinite hold on the creation of 20,000 new jobs next year:

“This decision is deeply disappointing and troubling.  Whether it will help the president retain his job is unclear, but it will cost thousands of shovel-ready opportunities for American workers,” said API President and CEO Jack Gerard. “There is no real issue about the environment that requires further investigation, as the president’s own State Department has recently concluded after extensive project reviews that go back more than three years.  This is about politics and keeping a radical constituency opposed to any and all oil and gas development in the president’s camp in November 2012.

“Besides creating thousands of jobs almost immediately for Americans, this project would also have helped strengthen our energy partnership with Canada and helped reduce America’s reliance on oil from less stable sources,” he said.

A recent poll found that nearly 80 percent of Americans favor more oil from Canada, already our number one supplier of foreign oil, according to API.

The Keystone XL pipeline has the support of organized labor, business, mayors and veterans groups from across the country as well as many members of Congress from both sides of the aisle.

API represents more than 480 oil and natural gas companies, leaders of a technology-driven industry that supplies most of America’s energy, supports 9.2 million U.S. jobs and 7.7 percent of the U.S. economy, delivers more than $86 million a day in revenue to our government, and, since 2000, has invested more than $2 trillion in U.S. capital projects to advance all forms of energy, including alternatives.

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Willbros Secures Oman LNG Contract

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Willbros Group, Inc. announced today that a unit of its Upstream segment, The Oman Construction Company, L.L.C. (TOCO), has been selected to provide general maintenance services for the Oman LNG Qalhat site complex in Sur, Oman.

The five year contract includes an option for three additional years and includes mechanical, electrical, instrumentation, civil, scaffolding, insulation and painting services.

Oman LNG currently operates a three train plant, with a nameplate capacity of 10.4 million metric tonnes per annum (mtpa).

Randy Harl, President and CEO of Willbros commented, “We are pleased to continue this assignment, which TOCO has performed for over 10 years, and are privileged to again be selected. This is a testimony to the quality of our team in Oman and the strong relationship, built on solid performance, we have developed with our client. We look forward to working with Oman LNG for many more years.”

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Australia: Tap Announces Spud of Hannah-1 Well

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Tap Oil Limited (“Tap”) provides the following information on the Hannah-1 commitment well, offshore Carnarvon Basin, Western Australia.  The Hannah-1 well is located in permit TP/8, approximately 18km east of Barrow Island. The well will be drilled in water depth of 16m by the jack-up rig Ensco 104.

The well will test a stratigraphic oil play in the lower Cretaceous Barrow Group. The primary target is expected to be intersected at approximately 1,200m. Hannah-1 is expected, on a trouble free basis, to take 10 days to reach a final total depth of 1,368m.

Progress

The Hannah-1 well commenced at 05:30 today AWST, 10 November 2011.

Forward Plan

The Hannah-1 well will be drilled in 311mm (12¼”) hole to 625m where casing will be set before resuming drilling to final total depth.

TP/8 Joint Venture Participants

Apache Northwest Pty Ltd 68.5000%

Kufpec Australia Pty Ltd 19.2771%

Tap (Harriet) Pty Ltd 12.2229%

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Greece Investigates Shale Gas

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The Ministry for the Environment, Energy and Climate Change announced a special preparatory research project to be awarded to the Greek state-owned Institute for Geology and Mineral Exploration (IGME), in order to explore potential shale gas reserves in the territory. More specifically, the Deputy Minister Ioannis Maniatis revealed in a press conference that after a series of preliminary examinations by a scientific committee on the issue, the decision was taken based on similar initiatives by other European countries.

Moreover, the Greek Ministry released a report examining best practices in other countries and concluding that the present day technology can be of use regarding the potential Greek reserves. Special note was highlighted in the examples of Poland, France and Bulgaria. Moreover it was made known that in the near future Greece may join the Shale Gas Resource initiative.

Furthermore Maniatis noted to the press “The research regarding shale gas is an integral part of the national strategy for energy that focuses on the use of gas either of a conventional or unconventional nature”. Moreover he added that ” The prospects for shale gas worldwide are impressive, since in the year 2000 just 1% of the global production of natural gas came from that source, whilst nowadays that figure has multiplied, and for that reason and for the purpose of Greek energy security the Ministry will proceed if adequate reserves exist in Greece, keeping in mind the present optimistic data”.

IGME, responsible for state-directed geological research in the country and the outlook for the shale gas, will survey for a three-month period beginning in early 2012, before any initial findings are announced.  Further, it is possible that the research will be funded by EU structural capital and will also involve the cooperation its Bulgarian counterparts who are already researching in their own country.

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