On Friday August 21 2020, Barron’s published an article titled “Transocean Is a Market Leader. Declaring Bankruptcy Could Help It Stay One, Analyst Says.” In it, it published recent comments made by Bernstein analyst Nicholas Green suggesting that the company should declare bankruptcy so that it has a chance to reduce its debt burden and protect its market position. The stock tumbled more than 28% to close at $1.14 per share. This came after another decline the previous day of more than 20%. This makes me wonder if the analyst’s comments were leaked to some hedge fund or big investors the day before it was published. That should be the job of the SEC to find out, but for now, let’s put that to the side and talk more about Green’s comments.
Back in March, the same analyst had made similar comments. Mr. Green said the following on March 25 2020, “For highly levered upstream names such as Transocean, the ability to refinance sizable debt tranches looks increasingly difficult,”. He even referred to Transocean’s $8.1 billion of net debt against a market capitalization of $3.7 billion as a “timebomb”.
Over the next two years, $1.2 billion of Transocean’s debt will mature, including $581 million in 2020, and $633 million in 2021. The company also planned to spend $1.9 billion over the same period, but under current market conditions is likely to defer at least half of the capex related to new build, Green said.
Further more, the analyst added “With $1.8 billion in cash and $1.3 billion of a revolving credit facility available, a near-term liquidity crisis is unlikely. The company will need to draw heavily on its cash balance and revolving credit facilities to meet its maturing debt, or refinance it in the bond market”.
Transocean has another $1.8 billion of notes due by year-end 2022 and $2.3 billion in 2023, and if the company fails to refinance the debt it “will face a genuine liquidity crisis,” Green said.
The analyst also added “If [the] oil price rips to new highs, [Transocean] could be a 5-bagger,”
How did the stock react?
So what happened to the stock price then? On march 24th the stock was trading for $1.40 and by April 3rd it had declined to $1.08 per share.
A valid question someone can ask is what has the company been doing since then to address its debt? On August 6th, Bloomberg published that the Swiss-based rig contractor hired Lazard Freres & Co. LLC for advice and reached a private deal to swap bonds maturing in 2023 for new notes due 2027, it said Wednesday in a statement. Transocean will have more than $2 billion of debt maturing over the next three years after the exchange. The rig contractor will swap about $356 million of its 0.5% notes due 2023 for about $213 million of new 2.5% guaranteed bonds due 2027, it said.
At that time, James West, an analyst at Evercore ISI said “After a conversation with management we understand the financial advisers were retained for liability management, not a corporate restructuring,”.
Furthermore and on August 10th Transocean announced additional exchange offers and consent solicitations for certain existing notes.
Fast forward to last Friday and similar comments by the same analyst were published by the Barron’s article, but this time the decline in the stock price was sharper, sending the stock price down by more than 28% in one day. Clearly investors are worried that RIG management would listen to the analyst recommendation and file for bankruptcy.
While everything is possible, the recent steps Transocean had taken to swap bonds maturing in 2023 for new notes due in 2027 is telling a different story. It seems management is trying to take steps to manage the debt and push it further out buying time until the offshore drilling conditions improve. From looking at their balance sheet, I trust the debt load is manageable for the next couple of years, so I do not see an urgent need to think of bankruptcy. That’s only my opinion and management can surprise us by taking the route of bankruptcy. Filing for chapter 11 has some disadvantages as well in terms of management compensations and the company would still be required to pay back their debt.
In my opinion, I don’t think Transocean needs to declare bankruptcy at this time, but the odds are really stacked against them for the time being. If RIG can avoid bankruptcy and offshore drilling business improves within the next couple of years, then I agree with Mr. Green’s comments back in March that RIG could be a 5-bagger stock. For now, I would remain on the sidelines until things clear out about the bankruptcy situation.