NEW YORK--(BUSINESS WIRE)--Transocean's recent impairment provides a signal to the oversupplied offshore driller market that industry-wide rationalization is needed to improve market balance and, ultimately, realize a cyclical improvement, according to Fitch Ratings.
Transocean surprised the market on Nov. 7 by delaying its Q3 earnings after recognizing a $2.0 billion impairment to goodwill and certain deepwater assets driven by lower economic fleet value expectations. While this was a material and somewhat surprising impairment, the company has been down this road before. Transocean recognized a significantly larger, $5.2 billion impairment to goodwill and its standard jackup fleet in 2011. This impairment was over twice as large as the current charge on a book value basis and 2.5x as large on an absolute basis.
A key difference between the 2011 and recent impairments, in addition to size, is timing. Transocean's 2011 impairment was preceded by a few years of weakening utilization rates and seems to have been a lagging indicator of changing market conditions. The recent impairment comes ahead of material declines in current utilization rates and considerable contract maturities and, as a consequence, appears to be a more proactive response to softening market conditions.
Fitch views the timing of this month's impairment as a signal to the oversupplied market that, consistent with our view, industry-wide rationalization is needed ahead of scheduled newbuild deliveries to improve market balance and, ultimately, realize a cyclical improvement. Transocean has illustrated that rationalization can strengthen its cash flow and asset profile. This is evidenced by the stabilization of EBITDA and improvements in utilization and day rates following its 2011 impairment.
Fitch anticipates the cyclical inflection point to be 2016, which coincides with the delivery of the majority of competitive newbuilds and roll off of a large proportion of legacy backlogs. However, a prolonged aversion by the market to fleet attrition and/or a sustained period of depressed demand could push back the inflection point.
There are no direct implications to Transocean's credit as a function of the recent $2 billion non-cash impairment. Fitch believes that the company has enough financial flexibility providing sufficient headroom at the 'BBB-' rating to support a Stable Outlook. Further, Fitch considers the company's stated commitment to investment-grade to be supported by the lower cost of capital given its heightened maturities profile, robust fleet renewal program, and the widening spread environment. A secondary consideration is the opportunity to buy high-yield peers to improve asset quality, gain market share, and increase MLP dropdown inventory, as well as heighten pricing power and create a more orderly fleet attrition process.
For more information, see Fitch's Special report, "Transocean Impairment More Than It Seems?" available on www.fitchratings.com.
Additional information is available on www.fitchratings.com.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
Applicable Criteria and Related Research: Transocean Impairment More than It Seems (Impairment Provides Economic Value Indication and Rationalization Signal)