Oil prices cratered earlier this year. A double shock wave – the drop in demand due to COVID-19 and a short-lived price war between Saudi Arabia and Russia – has shaken the oil market, causing a wave of destruction. Several oil companies filed for bankruptcy as a result of this upheaval, with this initial wave leading to many more filings throughout the year.
One of the segments hardest hit by this year’s downturn has been offshore drillers, as a wave of bankruptcies engulfed almost the entire band. Among the few survivors is Transocean (PLATFORM 4.30%). However, given its massive level of debt, it could be the next oil stocks to file.
Investigate the problem
Transocean ended the third quarter with $7.8 billion in long-term debt and another $640 million in borrowings maturing over the next year. The company paid $145 million in interest on those loans in the third quarter alone. Because of this and other costs, it only generated $81 million in net cash from operating expenses during the period. This barely covered the $65 million spent on capital projects, mostly funding new drillships currently under construction.
On the one hand, debt improved by nearly $1 billion from the prior quarter, thanks to a series of moves like debt swaps. Additionally, the company ended the period with approximately $1.6 billion in cash, including $200 million allocated to debt service and approximately $1.3 billion in borrowing capacity available on its credit facility. , giving it about $2.9 billion in total liquidity.
However, it still has a lot of debt to settle, which will be difficult to do given the current challenges in the offshore drilling industry. As a result, most of its peers filed for bankruptcy, allowing them to undergo court-backed restructuring.
A race against time
Transocean’s movements during the third trimester allowed him to breathe a little more. However, things could get tight again very soon, given the company’s projected financial needs. The offshore driller currently has $1.5 billion in debt maturing through 2022 and an additional $1.7 billion in capital investments that it needs to fund over that time. It will supplement this by generating between $900 million and $1.1 billion in operating cash flow, supported by its strong backlog. However, even with these funds coming in, its liquidity could fall to between $700 million and $900 million by the end of 2022.
The company has levers to pull that could help it consolidate its financial situation. For example, it is pushing for $400 million in financing on its Deepwater Titan drilling rig. It also continues to work on new debt swap deals to reduce its outstanding principal and lengthen its maturities. These actions would help preserve its liquidity so it can stay afloat until market conditions improve.
However, Transocean still needs current creditors to agree to its debt swap terms, which they might not do if they believe the company will eventually file for bankruptcy in the future. Some creditors tried to coerce the company’s hand earlier this year by saying its bond swaps amounted to default.
In the meantime, even if he does more debt swaps, it won’t solve the company’s financial problems, as it will still have a large amount of outstanding debt. Bringing that debt down to a more manageable level will be nearly impossible given the likely long-term downturn in the offshore drilling industry, which could keep rig rates, utilization and valuations under pressure for years. Because of all of this, it seems like it’s only a matter of time before the company files for bankruptcy.
The result seems inevitable
Transocean faces a major challenge. Its short-term maturities and capital expenditure requirements allow it to deplete most of its cash over the next two years. In the meantime, he will still have a significant amount of future debt to settle.
Due to these factors, Transocean seems destined to follow its offshore drilling peers into bankruptcy. Given this bleak future, investors should avoid this stock at all costs.