Transocean risks junk grade as cash flow ebbs

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

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

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

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

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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Kenya’s Somali raid threatens to explode into regional conflict

Someone’s sending planeloads of weapons to Al Shabaab, and Kenya – which invaded Somalia to sort the Islamic militants out once and for all – is not happy. It’s blaming Eritrea, a potentially explosive accusation which could make an ostensibly domestic issue mushroom into something much more serious. By SIMON ALLISON.

The rumours started when first two planes, then a third, landed deep in Al Shabaab territory in Somalia, apparently bringing weapons to the Islamic militant group which Kenya (and the Somali government, although not necessarily in coordination) are trying to wipe out. The Kenyan government came right out and said what most people were already thinking, summoning the Eritrean ambassador to a distinctly unfriendly meeting. “I raised concerns about intelligence that we have and information available that there is a possibility that arms supplies are flowing from his country to Al Shabaab,” said Kenya’s foreign minister Moses Wetangula about the meeting.

Kenya, in other words, thinks Eritrea is arming Al Shabaab, which would position Eritrea firmly on the other side of Kenya’s increasingly protracted war against Al Shabaab. Eritrea strongly denies the allegations.

Although Eritrea doesn’t even share a border with Somalia, and should be more than occupied with its own problems, there is some history between Al Shabaab and the small Horn of Africa country. A United Nations report in July said that “new information … not only confirms many previous allegations of Eritrean military involvement, but also offers firm grounds to believe that Eritrea still retains active linkages to Somali armed groups,” Al Shabaab being foremost among these. The report claimed Eritrea was funnelling $80,000 a month to individuals in Nairobi with Al Shabaab links – not a huge sum at first glance, but sizeable in the context of the region. This begs the question: what does Eritrea have to gain by funding a Somali Islamic fundamentalist militia?

The answer lies neither in Somalia nor Eritrea, but in the country that looms large between them: Ethiopia. Ethiopia is Eritrea’s nemesis, having occupied Eritrea for decades until Eritrea achieved its modern independence with a hard-fought and vicious civil war. But Eritrea can’t relax, ever, because it has the one thing that land-locked Ethiopia wants more than anything else in this world: a port. And rapprochement is not the style of Eritrea’s slightly mad President Isaias Afwerki, whose militaristic foreign policy has left Eritrea in the international wilderness.

Instead, Afwerki has fomented instability in Somalia, hoping the chaos next door will keep Ethiopia and its military occupied. Ethiopia is deeply involved in the Somali conflict itself, and its troops make frequent cross-border raids to chase rebels who are agitating against the Ethiopian government in the ethnically Somali province of the Ogaden. As International Crisis Group’s Somalia expert Rashid Abdi explains: “Eritrea definitely has been supportive of Al Shabaab for a long time and this support is not ideological. It’s essentially meant to counter Ethiopia’s influence in Somalia.”

So while we don’t know if it really was Eritrea sending planeloads of weapons to Al Shabaab during the current conflict with Kenya, this nonetheless represents the first step in turning what is a domestic conflict into a larger, regional issue. In a way, it doesn’t really matter if Eritrea was involved or not, as long as Kenya thinks they were, they will be implicated.

Kenya has said it will pursue its claims against Eritrea, saying that it has a “series of options” to deal with them. It’s unclear what these options are, but it’s unlikely that any of them will ease tensions in the Horn of Africa. And whenever Eritrea gets involved in something, it’s not long before Ethiopia follows suit – on the opposite side, of course. So what started out as a Somali issue might just turn into something much, much bigger, not forgetting that Uganda and Burundi are already involved as they are the only countries to have contributed troops to the African Union mission in Somalia.

Kenya hoped its Somali incursion would be quick and easy. But its troops are getting bogged down in the mud and are struggling to even find the enemy. And on the diplomatic front, as the incursion starts looking more and more like an invasion, other countries are inevitably getting involved, making it even less likely that Kenya can extricate itself from Somalia quickly or easily. DM

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Lithuania: Cheniere Eyes LNG Exports by 2015

U.S.-based Cheniere Energy plans to export liquefied natural gas (LNG) by 2015 and hopes to take a stake in a floating LNG terminal in Lithuania.

The Baltic state, which joined the European Union and NATO in 2004, depends 100 percent on Russian gas supplies, and in a move to diversify it plans a floating terminal to handle 1.5-2.0 billion cubic metres of LNG per year.

“We expect to start (LNG export) operations by late 2015 … and we have a high degree of confidence that we can meet these timelines, and look forward to continuing negotiations with Klaipedos Nafta to supply Lithuania with LNG,” Helena Wisden, senior trading manager at Cheniere Energy said at a conference in Vilnius, Lithuania, on Thursday.

Lithuanian government-owned oil and gas company Klaipedos Nafta says it aims to lease a floating storage and regasification unit (FSRU) of at least 130,000 cubic metres of LNG under long-term contract or acquire it under a build-operate-transfer transaction.

Energy minister Arvydas Sekmokas said during the same conference that the government hoped to connect the LNG terminal to the grid in 2014.

Houston-based Cheniere Energy is planning to export U.S. LNG from its Sabine Pass terminal in Louisiana by 2015, and in October signed an $8 billion deal with Britain’s BG Group , a leading LNG trader, under which Cheniere Energy will supply BG Group with gas to ship across the globe.

Sabine Pass will have an initial capacity to export 9 million tonnes per year, and plans to sell the LNG for 115 percent of U.S. benchmark Henry Hub prices, plus a premium ($2.25 for BG Group).

Wisden said at current prices an average-sized LNG cargo was  worth $35 million.

Cheniere Energy said in May that it was considering taking a minority stake in Lithuania’s LNG terminal, which is being developed by Klaipedos Nafta.

U.S. TO BECOME NET GAS EXPORTER

Cheniere’s Wisden said that she expected the United States to become a net gas exporter by the middle of the decade, and that exports were the only way to sell the large amounts of gas produced in the country.

“Gas demand in the U.S. cannot keep up with production, and we see LNG exports as the only way to take all that gas,” Wisden said.

Wisden said that around 15 percent of global LNG supply was now traded on spot markets (or 200 million tonnes a year).

(reuters)

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Cal Dive Australia Selects Saab Seaeye Panther XT Plus ROV

To tackle the strong currents in Australia’s offshore oil & gas fields, leading contracting company, Cal Dive International (Australia) Pty Limited, selected Saab Seaeye’s powerful new Panther XT Plus ROV (Zone Rated and configured for operations in hazardous areas) when making that choice.

A Cal Dive spokesman said, ‘The Panther ticks all the boxes. It is small enough to work inside rig and platform jackets, yet powerful enough to open and close pipeline valves and operate in the strong currents of open water.’

Although intended primarily for inspection work on oil & gas platforms, sub-sea completions and associated pipelines, Cal Dive says, ‘It has the muscle to do whatever needs to be done.’

Cal Dive points to the fact the Panther XT Plus has ten powerful thrusters, has 50% more power and swims 30% faster than any other electric work ROV of its class.

Such thruster power means it can maintain position whilst working in the strong currents of Australian waters that would normally restrict the operations of other similar ROV’s.

The Panther’s configuration chosen by Cal Dive includes a Seaeye wide-angle low-light black & white camera and a Kongsberg compact colour zoom camera.

Also a Tritech Super SeaKing sonar with dual frequency sonar head, and a Tritech altimeter with auto altitude option.

Fitted to the ROV are two Schilling Orion manipulators: starboard side, a seven function position feedback manipulator with 3.8″ gripper, and port side, a four function rate manipulator with 7.8″ gripper.

For debris clearance, the Panther comes with a rotary disc cutter and a 38mm anvil cutter.

There is also a water jetting system, a cleaning brush assembly and manipulator-held cleaning brush tool.

A Cygnus ultrasonic thickness gauge comes with the ROV, together with a CP proximity probe to check anode protection.

In the case of an emergency the ROV is fitted with a battery operated emergency locator strobe.

The ROV system includes a stainless steel framed tether management cage with 150m of tether cable, and its own Seaeye mini camera.

Also supplied through Saab Seaeye’s West Australian distributor, Oceanvision, is a control container and a self-erecting launch and recovery A-frame with 1100 metre umbilical cable capacity, a certified bullet assembly and lock latch assembly with snubber rotator.

Reassuringly for Cal Dive the new Panther XT Plus has evolved from the proven Panther concept into a more powerful vehicle with an increased payload and re-designed frame that allows more space for additional equipment and a greater range of tools and sensors.

An added bonus when working to a tight deadline in hazardous conditions is that ten thrusters in hand offer a reassuringly high degree of redundancy, should one or more thrusters become fouled – allowing the operator to keep the ROV on task until recovery.

Cal Dive say that, although this is the first Saab Seaeye ROV for Cal Dive’s Australian operation, the ROV team has good previous experience with Saab Seaeye ROVs in other fields of operation.

Cal Dive International (Australia) Pty Limited is part of Houston-based Cal Dive International, established 30 years and a market leader in offshore construction, inspection, maintenance, repair and decommissioning of production and pipeline infrastructure.

Saab Seaeye is the world’s largest manufacturer of electric ROVs, and now includes Saab’s underwater systems which provides tethered, autonomous and hybrid underwater vehicle systems for the defence industry. This year marks Seaeye’s 25 years as a leading innovator in ROV design and manufacture.

Oceanvision is the Saab Seaeye distributor and service hub for Singapore, Malaysia, Brunei and Western Australia. Oceanvision also manufacture and design underwater camera systems for the general marine and the offshore drilling industry.

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