Fixed Income Research Report | 8/12/19

FIXED INCOME RESEARCH REPORT | 8/12/19

Transocean Ltd. DishRecommendation Network Corporation: BUY COMPANY NAME (Ticker: RIG) (Ticker:Business DISH) Rating: 6 (Ticker: DNR) Security Rating: 5 Author: Swati Jain BUSINESS RATING SECURITY RATING

NEGATIVE POSITIVE NEGATIVE POSITIVE d POTENTIAL FOR RETURN RISK

LIMITED SIGNIFICANT LOW HIGH d Bond Rating: B- Jarvis Rank: 914 Stock Price: 4.58 (8/8/19) Sector: Energy Industry: Energy Equipment Bond Price: 82.00 (8/8/19) & Services

(Data as of 8/8/19 unless specified) Interest Coverage Debt/Equity: 3.68 Debt/EBITDA (TTM): 9.31 1.691 Ratio: Debt/EBITDA EBITDA (TTM): $1.1B1 10.32 Interest Expense: $659M1 (forward): EBITDA (forward): $926M2 Market Cap: $2.8B Cash/Cash Eq.: $2.2B3 Total Debt: $10.3B3 Enterprise Value: $10.2B Debt/EV Ratio: 1.0 Asset Coverage: 2.523 Free Cash Flow: $324M1 Stock 200 Day RSI (stock): 51.3 $7.98 Dividend Yield: NA Moving Average:

Insider Transactions (2019): Three directors bought ~39,300 shares; Payout Ratio: NA SVP David Tonnel sold a total of 16,561 shares

Spread/Turn OAS Spread: 933.1 YTM: 11.0% 1.18 Leverage (TTM): (Report based on 7.45% 4/15/2027 bond with $88 million Grab-and-Go outstanding) THESIS “An investment in Transocean is a WHY WE RATE TRANSOCEAN play on oil and gas pricing trends,  E&P capital spending outlook, BONDS A BUY improving dayrates and utilization rates in the challenging offshore We rate Transocean’s 7.45% 4/15/2027 bond (CUSIP: 893817AA4) a drilling market. Oversupply of high spec rigs and uncontracted BUY at this time. Transocean’s large and high-quality rig fleet, newbuilds is currently advanced drilling capabilities, and diversified international pressurizing dayrates in the highly footprint, which has historically provided earnings stability in an competitive market. Transocean’s inherently cyclical industry, are credit positives. A strong liquidity largest and highly specialized fleet concentrated in ultra-deepwater and harsh environment floaters 1 Last Twelve Months ending June 2019 will help in sustaining its 2 Based on FactSet consensus forward EBITDA estimate leadership position.” 3 As of end Q2 2019 (6/30/19)

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profile, no significant upcoming maturities and access to capital markets further support our rating. However, headwinds in the offshore drilling market and high leverage pose downside risks for Transocean. With a more challenging business environment in 2019, improving its free cash flows and optimizing its balance sheet will be of primary focus for the company. The following are the key reasons why we rate the bond a BUY:

1. Large and high-quality asset portfolio with a focus 

on harsh environment assets: Transocean is the Grab-and-Go market leader with a large fleet size of 53 floaters TALKING POINTS (including newly added), 93% of which is comprised of ultra-deepwater and harsh WHAT WE LIKE WHAT WE DON’T LIKE environment drilling rigs in the floater space. The Large and High- Headwinds in the average age of the overall floaters is ~11 years and quality Asset Portfolio Offshore Drilling with a Focus on Harsh the average age of ultra-deepwater floaters is ~8 Market years. Ocean Rig acquisition secures 34% of top 50 Environment Assets Better Competitive UDW floaters and 31% of top 100 UDW floaters High Leverage Position worldwide. The fleet utilization rate is at 56% and is improving. Customer Repurchase of Bonds Concentration 2. Better competitive position: Transocean is well- positioned in comparison to its competitors and Robust Inorganic Huge Capex has the industry's largest and most technically Growth capable fleet of floating rigs along with the most Strong

talented and experienced crews and shore-based Liquidity Position support personnel. Its fleet is twice as large as its largest competitors (Ensco Rowan and Seadrill) Positive FCF and is high-spec heavy. It accounts for the highest Access to Capital number of UDW and harsh environment floaters as Market compared to its peers. RIG’s contract backlog of $11.4 billion is 4x larger than its next competitor.

3. Repurchase of bonds: RIG has a history of open market bond repurchases. The company’s continuous bond repurchase activity in the open market is perceived positively by the bondholders. The company repurchased $130 million of its senior notes for six months ending June 2019. Such actions instill confidence that the company is committed to its bond investors and will manage the financial obligations appropriately in the future.

4. Robust inorganic growth: Transocean has completed multiple acquisitions in the past such as Ocean Rig and Songa. These acquisitions have helped in adding fleet capacity as the company acquired 11 offshore drilling units from the Ocean Rig acquisition and seven offshore drilling units from the Songa acquisition. RIG’s strategy is to grow through acquiring rigs in various segments; however, management will now focus more on utilizing its idle fleet capacity. If the company pursues additional debt-funded acquisitions, the company’s financial metrics might deteriorate further.

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5. Strong liquidity: Transocean has adequate liquidity of $3.6 billion comprising of $2.2 billion of cash and $1.36 billion available under the new revolver. RCF can be upsized by $140 million to $1.5 billion in the future, further enhancing the company’s liquidity. The company has a reasonably long liquidity runway through June 2023.

6. Positive FCF: Despite subdued performance in the last few years, Transocean was able to generate positive free cash flows. The FCF remained positive but declined by ~42% on a y-o-y basis in FY 2018 due to declining dayrates because of oversupplied offshore drilling market. The company reported FCF of $324 million during LTM June 2019. Improving offshore drilling market conditions will help the company in maintaining its track record of generating positive free cash flows in the coming years.

7. Access to capital market: Recent issuance of 5.375% senior secured notes depicts the company’s access to the capital market at a lower rate. Despite high leverage and declining revenue, access to capital markets was not that tough for Transocean. Raising additional debt to repay existing debt is basically buying more time with expectations of an industry upturn.

8. Headwinds in the offshore drilling market: The offshore drilling market is unfavorable due to the excess supply coming from the overhang of uncontracted newbuilds and idle supply. CEO Jeremy Thigpen mentioned that with the Brent crude averaged to the level of $65/bbl level currently, there will be heightened demand for offshore rigs. Transocean is well prepared for any kind of further slowdown in the market as it has the most profitable backlog, providing unparalleled visibility to future cash flows.

9. High leverage: Currently, the company has a high debt load of $10.3 billion including $495 million of finance lease obligations. The company’s credit metrics are deteriorating gradually with leverage at 9.3x (6.7x net) and interest coverage at 1.69x as of Q2 2019. Any further slowdown in offshore drilling activity or increase in CapEx will impact the free cash flows of the company and worsen the credit metrics. However, the asset coverage ratio of 2.52x provides the company enough reserve to pay off its debt in full.

10. Customer concentration: Its top three clients, Royal Dutch Shell plc, Chevron Corporation and Equinor ASA, account for ~65% of consolidated operating revenues and ~88% of total contract backlog. This shows high customer concentration risk.

11. Huge capex: The company is facing significant newbuild capital spending in the coming years with expected CapEx of $900 million in 2020 and $900 million in 2021. Due to the expansionary capex and $621 million of near-term debt through 2021, the company is estimating liquidity of $1 billion to $1.2 billion by 2021.

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 SUMMARY OF THE BUSINESS AND THE INDUSTRY ◼ Business Transocean Ltd. (RIG), founded in 1954 and headquartered in Steinhausen, Switzerland, is the largest international offshore drilling contractor with a presence in every major offshore producing basin around the world. The company was formed as a result of the merger of Southern Natural Gas company, later Sonat, with many other smaller drilling companies. In September 1996, Sonat Offshore Deepwater Drilling Inc. acquired Transocean ASA. During this period, the company name was changed to Transocean Offshore Deepwater Drilling Inc. In 1993, Schlumberger spun off Sedco Forex, which merged with Transocean Offshore Inc. to become Transocean Sedco Forex, the world’s largest offshore drilling contractor. Multiple mergers and acquisitions have helped Transocean to become the largest offshore drilling contractor and have continued to set world deepwater drilling records by upgrading the high-specification fleet. The Company's primary business is to contract its drilling rigs, related equipment and work crews on a dayrate basis to drill oil and gas wells. The Company's drilling fleet consists of floaters, including drillships and semisubmersibles, and jackups, which are used for both exploration and development. Transocean categorized its offshore drilling fleet in five categories namely ultra-deepwater (UDW) floaters (59% of total revenue), harsh environment floaters (32%), deepwater floaters (4%), midwater floaters (2%) and high specification jackups (2%). As of June 30, 2019, the company owned and operated 47 mobile offshore drilling units, including 31 ultra-deepwater floaters, 13 harsh environment floaters and three midwater floaters and constructing four additional ultra-deepwater drillships and one harsh environment semisubmersible.

Ultra-Deepwater Deepwater / Midwater Jackups As of Q2 2019, the company’s contract backlog was $11.4 billion with total fleet average revenue efficiency at 98% and low rig utilization rate at 56%. The company has 19 stacked rigs and three ultra‑deepwater drillships under construction as of February 2019. Also, nine existing drilling contracts are scheduled to expire before December 2019.

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In terms of geography, Transocean is a globally diversified offshore drilling service provider with 50% of revenue from the US, 22% from Norway, 5% from UK, 4% from Brazil and the remaining from other international regions. As of February 2019, the drilling fleet including stacked rigs but excluding rigs under construction, is located in the Norwegian North Sea (nine units), the US Gulf of Mexico (seven units), Trinidad (six units), Greece (five units), United Kingdom (UK) North Sea (five units), Angola (two units), Canada (two units), India (two units), Spain (two units), Australia (one unit), Brazil (one unit), Brunei (one unit), China (one unit), Equatorial Guinea (one unit), Ivory Coast (one unit), Malaysia (one unit), Mexican Gulf of Mexico (one unit) and Romania (one unit). The Company’s customers are integrated oil companies as well as government controlled and independent oil companies. The company’s significant customers are Royal Dutch Shell plc, Chevron Corporation and Equinor ASA representing ~26% of operating revenues, 21% and 18%, respectively. No other customers accounted for more than 10% of operating revenues in FY 2018. Transocean operates on a multi-pronged strategy: 1. Leveraging existing global infrastructure and operating structure to capitalize on growth opportunities 2. Enhancing drilling technologies to provide value-added services to customers 3. Strengthening core business lines and disposing non‑strategic drilling units ◼ Industry/Competition Transocean is an offshore drilling and rig services company and is dependent on the level of capital spending by oil and gas companies for exploration, development and production activities, which is correlated to the prices of oil and natural gas. Prices of oil and natural gas are highly volatile and put tremendous pressure on E&P companies to reduce their capital spending in a low-price environment. This results in a decline in the demand for offshore drilling services and a reduction in day rates and utilization rate, which adversely affect the company’s revenue and profitability.

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The outlook for offshore spending is positive and moving north to ~$200 billion by 2021-2022. This will improve the demand supply dynamics for the offshore drilling units and will help in improving the utilization trends.

Ultra‑deepwater rigs are the latest generation, highest capability and technologically advanced class of the offshore fleet that are attractive to E&P companies as they try to replace reserves to meet global demand for hydrocarbons. Currently, the floater market has a global fleet of 219 floaters and is emerging with the demand for high-specification harsh environment floating drilling rigs, resulting in an inflow of several newbuild rigs. Also, the utilization of ultra-deepwater drilling rigs will continue to gradually increase with the increase in rig demand by 2020 and beyond.

The offshore drilling market is currently oversupplied with the ultra-deepwater drillships, pressurizing the dayrates due to the overhang of uncontracted newbuilds that are ready to enter the market. However,

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we expect an upturn in the dayrates in the coming years driven by the positive offshore spending outlook.

The offshore drilling industry is highly competitive. Key competitors are Ensco Rowan plc, Seadrill, Diamond Offshore Drilling, Maersk Drilling, Noble Corporation, Pacific Drilling and Overseas Drilling Ltd. RIG has the largest fleet among its peers with multiple rigs on long-term contracts with above-market dayrates. RIG’s contract backlog ($11.4 billion) is 4x larger than its next competitor’s, of which 94% is related to IG-rated companies, reflecting high cash conversion. The company’s high-quality asset base in the floater market and its sharp decision to expand its exposure in harsh environment market through acquisitions, which provided an edge over its competitors.

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Offshore Drilling Sector - Peer Comparables Net EBITDA Total Enterprise Debt / EBITDA/ EV/ Company Revenue EBITDA Debt / Margin Debt Value EBITDA Interest EBITDA EBITDA Transocean Ltd. 3,022 1,112 36.8% 10,338 10,766 9.3x 6.7x 1.7x 9.7x Valaris Plc 1,820 289 15.9% 5,010 7,002 17.3x 15.2x 1.0x 24.2x Seadrill Ltd. 1,253 253 20.2% 6,881 5,436 27.2x 20.9x 0.8x 21.5x Diamond Offshore Drilling Inc. 969 269 27.8% 1,974 2,646 7.3x 5.6x 2.2x 9.8x Noble Corporation 1,165 343 29.4% 3,877 4,495 11.3x 10.2x 1.2x 13.1x

Mean 1,302 289 23.3% 4,436 4,895 15.8x 13.0x 1.3x 17.2x Median 1,209 279 24.0% 4,444 4,966 14.3x 12.7x 1.1x 17.3x High 1,820 343 29.4% 6,881 7,002 27.2x 20.9x 2.2x 24.2x Low 969 253 15.9% 1,974 2,646 7.3x 5.6x 0.8x 9.8x Source: Bloomberg (Data as of August 12, 2019) ; Figures as of June 30, 2019 (in $ mm) From the above table, we can infer that the offshore drilling industry is highly levered with the mean leverage of 15.8x and an interest coverage ratio of 1.3x. Transocean has high leverage of 9.3x but is below the industry average. Also, the company’s EBITDA margin is the highest (36.8%) among its peers. LB•LOGIC The company’s move towards high-spec harsh environment assets in the recent past has proved wise as it remains a rare bright spot in the cyclical offshore drilling industry. Improving dayrates trends and offshore capital spending by E&P firms are positive indicators for offshore drilling companies like Transocean. RIG’s large and high-quality fleet will help in leveraging the improving conditions in the market. ◼ The Last Downturn The swoon in oil prices in 2016 has severely affected the offshore drillers as the oil and gas explorers and producers lowered their rig count and capital spending. With the plunge in the Brent crude oil price to $26.21 per barrel in 2016, the company’s revenue declined by 44% y-o-y to $4.2 billion. Its EBITDA declined by 40% y-o-y to $2.0 billion and its FCF by 61% to $567 million in 2016. Transocean has significant exposure in the ultra-deepwater market, which is yet to recover from the previous downturn. Also, pricing pressure due to excess supply in the market despite improving utilization rates hurt the company’s financial performance. ◼ Quality of Product/Service Ultra-deepwater floaters (31 units): These operate in water depth ranging from 7,500-12,000 ft and have drilling depth ranges from 30,000-40,000 ft, and 30 have dynamic positioning station keeping. More than 60% of the company’s ultra-deepwater rigs are less than ten years old, of which nine were delivered within the last four years. The company’s ultra-deepwater fleet represents the most diverse and flexible rigs in the world with some of the newest rigs featuring patented hybrid power technology. Harsh-environment semisubmersibles (13 units): The company operates harsh-environment semisubmersibles with propulsion systems, and many feature dynamic positioning systems. Seven rigs are equipped for shallow depths, two for deepwater and three for ultra-deepwater. Operating variable deck load capacities range from 2,900 to 6,500 metric tons.

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Midwater floaters (3 units): It can operate in maximum water depth ranging from 1,500-4,500 ft and maximum drilling depth of 25,000 ft. Operating variable deck load capacities range from 2,700 to 3,990 metric tons. The majority of these rigs come with a 15,000 psi BOP and hook load capacities ranging from 1 million to 1.3 million pounds.

The company’s reputed clientele speaks for its high-quality products and services. ◼ CapEx Requirements of the Business • The Company primarily invests CapEx in major rig upgrades, new rig construction, or acquisitions of rigs under construction

• The company has drastically curtailed its capital expenditures by 91% to $184 million in 2018 from $2.0 billion in 2015. This is due to the timing of milestone payments for major construction projects and other shipyard projects. The capital spending in Q2 2019 amounts to $86 million

• CapEx is expected to increase dramatically to ~$1.3 billion by 2021 due to newbuild construction projects. The company is planning to fund it through either cash flows from operations, sale of assets or by taking additional borrowings

 COMPANY MANAGEMENT ◼ Current Management Jeremy D. Thigpen has been the President, Chief Executive Officer, and a member of the Board of Directors at Transocean Ltd. since April 2015. He served as Senior Vice President and Chief Financial Officer at National Oilwell Varco, Inc. from December 2012 to April 2015. He also served as President, Downhole and Pumping Solutions from August 2007 to December 2012, as President of the Downhole Tools Group from May 2003 to August 2007 and as Manager of the Downhole Tools Group from April 2002 to May 2003. He

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served as the Director of Business Development and Special Assistant to the Chairman for National Oilwell Varco, Inc from 2000 to 2002. He holds a Bachelor of Arts degree in Economics and Managerial Studies from Rice University in 1997, and he completed the Program for Management Development at Harvard Business School in 2001. ◼ Capital Allocation (M&A, buybacks, expansion) • Completed the sale of the ultra-deepwater floaters Deepwater Frontier and Deepwater Millennium, the harsh-environment floater Eirik Raude, the deepwater floaters Jack Bates and Transocean 706 and the midwater floaters Actinia and Songa Delta for $37 million in June 2019

• Bond repurchases:

o For the six months ended June 2019, the company repurchased bonds of $130 million

o The company repurchased $95 million, $557 million and $399 million of the principal amount of bonds in the open market in FY 2018, FY 2017 and FY 2016, respectively

• Cash tender offers:

o For the six months ended June 2019, the company completed cash tender offers of 2019 Tendered Notes of $510 million

o In FY 2017 and FY 2016, the company completed cash tender offers of the aggregate principal amount of $1.2 billion and $981 million of 2017 Tendered Notes and 2016 Tendered Notes, respectively

• In December 2018, the company acquired Ocean Rig UDW Inc. (Ocean Rig), a Cayman Islands exempted company for $2.5 billion through the issuance of 147.7 million shares with a market value of $9.32 per share and a cash payment of $1.2 billion

• Sold 6 ultra‑deepwater floaters, 1 deepwater floater, and 1 midwater floater for $36 million in December 2018

• Acquired Harsh Environment Newbuild Semisubmersible for $500 million in May 2018

• In March 2018, the company acquired 100% ownership interest in Songa Offshore SE, a European public company for $1.8 billion through the issuance of 68.0 million shares with a market value of $10.99 per share and issued $863 million of 0.50% exchangeable senior bonds due January 30, 2023

• Sold ten high‑specification jackups and novated the contracts relating to the construction of 5 high‑specification jackups for $319 million in FY 2017

• Divested one ultra‑deepwater floater and three midwater floaters for $22 million in December 2017

• Acquired Transocean Partners LLC for $241 million in December 2016

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• Reduction in the par value of each of the company’s shares to CHF 0.10 from the original par value of CHF 15.00 in January 2016

• Cash dividend amounting to $1.1 billion ($3.00 per share) was paid in 2014 and $109 million ($0.60 per share) in H1 2015. No cash dividend paid since H2 2015

• Sold 38 Shallow Water Drilling Rigs to a consortium led by Lime Rock Partners LLC for ~$1.0 billion in January 2013

• In November 2011, raised $1.2 billion through additional equity offering priced at $40.5 per share

• Divested GSF Adriatic XI Offshore Jack-up Rig to Buccaneer Energy Ltd for $68.5 million in November 2011

• Acquired Transocean Norway Drilling AS for NOK 16,974 million in November 2011

• Divested Challenger Minerals North Sea Ltd to Ithaca Energy Ltd for $25 million in October 2011

LB•LOGIC Transocean is buying back its bonds in the open market. Such debt repurchase activity helps in deleveraging and reducing the future interest expense burden. The company’s growth has been inorganic with multiple acquisitions in the recent past. The company is still trying to integrate and realize synergies out of it. Given the complex and heavy debt structure, the aggressive acquisition-driven growth strategy may not be favorable for debtholders. However, the company is also divesting its non-core assets perpetually. Monetization of non-core assets will help the company to meaningfully reduce its debt load. ◼ Insider Transactions • Total insider ownership of only 0.63% of total outstanding shares

• Three directors bought ~39,300 shares in 2019

• SVP David Tonnel sold a total of 16,561 shares in 2019

 TREND ANALYSIS ◼ Debt Ratios 2014 2015 2016 2017 2018

DEBT/EQUITY 1.52 1.88 1.47 1.77 2.36

DEBT/ENTERPRISE VALUE 0.71 0.80 0.79 0.90 0.88

TOTAL DEBT (IN MILLIONS $) 10092.0 8490.0 8464.0 7396.0 9978.0

◼ Credit Ratios

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2014 2015 2016 2017 2018 DEBT/EBITDA 2.62 2.46 4.06 5.18 9.58 DEBT/EBIT 3.72 3.41 7.11 12.39 89.09 INTEREST COVERAGE 6.25 6.03 3.56 2.35 1.59 ASSET COVERAGE 3.11 3.54 3.47 3.13 2.58 ◼ Income Data 2014 2015 2016 2017 2018 EBITDA (MILLIONS USD) 3851.0 3450.0 2084.0 1429.0 1042.0 EBITDA MARGIN (%) 42.0% 46.7% 50.1% 48.1% 34.7% OPERATING INCOME (MILLIONS USD) 2712.0 2487.0 1191.0 597.0 112.0 EBIT MARGIN (%) 29.6% 33.7% 28.6% 20.1% 3.7% ◼ Cash Flow Metrics IN MILLIONS USD 2014 2015 2016 2017 2018 TOTAL CASH FLOW -608.0 -296.0 713.0 -533.0 -386.0 CASH FLOW FROM OPERATIONS (CFO) 2220.0 3445.0 1911.0 1144.0 558.0 TOTAL CASH/CASH EQ. ON HAND 2749.0 2679.0 3518.0 3435.0 2834.0 FREE CASH FLOW 55.0 1444.0 567.0 647.0 374.0

◼ Yield Data 2014 2015 2016 2017 2018 OPTION ADJUSTED SPREAD (BPS) 546.0 1295.0 709.0 609.0 843.0 YIELD TO MATURITY (BPS) 767.0 1627.0 956.0 847.0 1066.0 SPREAD PER TURN LEVERAGE 2.93 6.61 2.35 1.64 1.11

◼ Equity Data

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2014 2015 2016 2017 2018 STOCK PRICE ($/SHARE) 18.33 12.38 14.74 10.68 6.94 MARKET CAP (MILLIONS USD) 6641.0 4506.3 5739.8 4178.0 4230.6 SHARES OUTSTANDING (MILLIONS) 362.3 364.0 389.4 391.2 609.6

 FINANCIAL STATUS (QUANTITATIVE METRICS) ◼ Stock performance history (based on 8/8/19 close at 4.58): Price Return (%) Last 30 days 6.14 -25.4 Quarter to date (since 6/30/19) 6.41 -28.5 Year to date (since 12/31/18) 6.94 -34.0 Last three years 11.01 -58.4 Last five years 38.92 -88.2

◼ Bond to stock ratio (7.45% 4/15/2027):

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CURRENT (7/8/19): 17.90 (BOND PRICE: 82.00, STOCK PRICE: 4.58)

• 4/25/19: 10.12 (BOND PRICE: 90.38, STOCK PRICE: 8.93) HISTORICAL CONTEXT: • 12/6/18: 9.47 (BOND PRICE: 82.75, STOCK PRICE: 8.74)

◼ Current OAS vs. Historic OAS

 FINANCIAL STATUS (QUALITATIVE INFORMATION) ◼ Is the company deleveraging? To what degree? The company is highly levered at 9.3x given its high debt of $10.3 billion (including finance lease obligations) as of June 2019 and has no default history while servicing its high level of debt. Transocean’s leverage deteriorated to 9.6x in FY 2018 from 4.1x in FY 2016. This increase in leverage was due to the multiple issuances of unsecured notes recently by the company to address its near-term maturities and to fund its CapEx needs and acquisitions. Currently, the company has near-term maturities of $621 million through December 2021 and $1.8 billion of CapEx through 2022 for new build drillships. RIG’s maturity schedule has improved following the cash tender offer for 2020-2023 bonds. Due to the current pullback from the unfavorable environment in offshore drilling activity, improvement in EBITDA seems a little challenging. The company has a strong liquidity position of $3.6 billion as of Q2 2019 consisting of $2.2 billion of cash and ~$1.4 billion of undrawn revolving credit facility. In H1 2019, the company amended its RCF to extend

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its liquidity runway. Recently, the company sold ultra-deepwater and midwater floaters for $37 million in June 2019. The company is divesting many of its non-core assets to deal with the near-term maturities and high expected CapEx. LB•LOGIC Transocean’s high leverage might reduce if there is an improvement in offshore drilling activity and with improving contracted revenue backlog through acquisitions and new contracts, although at lower dayrates and margins. The company will benefit from a liquidity runway but needs a cyclical improvement in offshore drilling market fundamentals in order to deleverage. ◼ Why did bond spreads widen? Is it a temporary or secular situation? At the time of industry downturn, the oil price reached its low of $26/barrel in February 2016 and at the same time, bonds sold off dramatically and the price reached its low at 45 cents on a dollar with yield and spread over treasuries reaching at 19.9% and 1,831 bps, respectively. Bond prices recovered with the rebound in oil prices in 2017. However, a similar trend has been observed when oil price reached $45.15/barrel in December 2018 and the bond prices plunged with yield reaching as high as 11.2% and spread over treasuries at 860 bps in December 2018. Bond prices picked up again on February 2019 with the rebound in oil prices and the company’s decent results in Q4 2018 and Q1 2019, resulting in yield reaching 9.2% and spreads coming to the range of 679 bps in April 2019. However, with the new issuance of $500 million of 5.375% notes due 2023 in May 2019, the bond prices plummeted to 84.75 cents on a dollar, resulting in a high yield of 10.3%. LB•LOGIC The company is actively considering asset sales that would help in improving the fleet quality and reducing the enterprise’s debt load to some extent. Also, the contract backlog of $11.4 billion as of July 2019 provides enormous support in terms of future cash flow generation. Despite high leverage and declining revenue, access to capital markets has not really been a problem for RIG. But if there is prolonged deterioration in market conditions over the next six months, the company’s profitability and cash flows might be under pressure and bond prices might plummet. ◼ Is this a good company with a bad balance sheet? As of June 2019, total balance sheet size was $25.6 billion, of which $10.3 billion consisted of debt (including finance lease), ~$12.7 billion of book equity, and $20.0 billion of PP&E, reflecting a strong balance sheet position. Leverage is high at 9.3x (6.7x net). The company has adequate liquidity of $3.6 billion ($2.2 billion in cash and $1.4 billion available under RCF) with no significant maturities until 2021 and comfortable headroom under its financial covenants (collateral coverage, debt to total capitalization of 0.60x and minimum liquidity of $500 million). Also, asset coverage of 2.52x shows that the company has a large asset base to cover its high debt stack. CEO Jeremy Thigpen says that acquisitions, divestitures, fleet management, and balance sheet optimization have helped RIG to survive the turmoil. The company has levers to pull to manage its near-term maturities, high capex requirement, and high leverage including monetization of assets, subsidiary-guaranteed note issuance (at an interest rate of less than 7%), and additional revolver capacity. LB•LOGIC RIG’s fleet quality is the highest in its peer group and is improving further with the addition of newbuild rigs. Management is actively investing to improve its fleet base and quality and at the same time managing its balance sheet prudently. Despite the revenue contraction by ~70% since 2013, the

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company remains focused in optimizing the capital structure, thereby reducing the likelihood of capital restructuring. ◼ Credit Rating History Date Rating Agency 8/30/18 B- S&P

 CATALYSTS ◼ Business Offshore drilling and rig services companies are highly dependent on the CapEx of E&P firms, which is correlated with oil and natural gas prices. The demand for offshore drilling rigs and related services is driven by the activity levels and capital expenditures of E&P companies, which ultimately is dependent on the price and demand for oil and natural gas. With the improvement in oil prices, rig utilization has improved from 48% in 2016 to 59% in 2018. The demand for drilling and rig services is expected to increase with the rise in rig count. Rates and utilization are also expected to improve with the increase in oil prices. This would act as a business catalyst for Transocean. Transocean developed a dual‑activity drilling technology to improve efficiency in both exploration and development drilling. Additionally, the digital transformation program was developed to deliver real‑time data feeds from equipment and processes to build machine health models. This deployment is an important milestone as it helped the company optimize equipment and achieve higher levels of operational efficiency. Transocean also invests in companies that are involved in research and development technology to improve automation in drilling and other activities. The continued commercialization of new technologies will help in growing drilling solutions and rig technologies businesses and will act as a business catalyst. The company has made rigorous efforts to improve its fleet profile by adding high‑specification ultra‑deepwater units. The recent acquisitions of Songa and Ocean Rig by the company enhanced the high‑specification asset portfolio by adding 17 mobile offshore drilling units. Given the strong track record of M&A activities in the past, strategic opportunities, including acquisitions, divestitures, joint ventures, alliances, and other strategic transactions could be a potential catalyst for Transocean if executed well. Transocean is well-positioned to take advantage of the opportunities in emerging geographies like Angola, Nigeria, Ghana, Equatorial Guinea, and Senegal. In Egypt, the Discoverer India will begin her campaign with Borealis in August following a successful campaign with CNRL in the Ivory Coast. The company’s geographically diversified operating model will provide stability in earnings and gives the company an edge over other players in the industry. ◼ Financials Transocean’s revenue and EBITDA have seen a declining trend since 2013, with revenue declining by almost 70% driven largely by weakness in the oil and gas sector and reduced activity level and capex spent

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by E&P firms. In Q2 2019, revenue was $758 million, which was flat q-o-q and a ~4% y-o-y decrease, as high dayrates were offset by lower activity. RIG’s fleet dayrate was $314,900 in Q2 2019, up 3% q-o-q and 2% y- o-y with a utilization rate of 56%. Additionally, the combination of strong uptime performance and customer bonuses has resulted in revenue efficiency of ~98%, which shows superior operating performance from both the legacy Transocean fleet and from the acquired assets over the past two years. In Q2 2019, rig operating and maintenance expense were $510 million, an increase of 18% y-o-y, due to the timing of in-service maintenance and project costs. Adjusted EBITDA increased marginally q-o-q and declined 17.4% y-o-y to $257 million in Q2 2019. The adjusted EBITDA margin remained at 32%. In 2016, when the company’s financial performance was weak, the company still managed to generate positive FCF. The company reported CapEx of $86 million in Q2 2019, resulting in FCF of $67 million. LTM FCF amounts to $324 million as of Q2 2019. Capex is expected to rise by 2020-2021 as newbuild drillships are due for delivery. In the Q2 2019 earnings call, management mentioned that an increase in utilization and dayrates in both the harsh environment and ultra-deepwater segments will help in generating free cash flow in the coming years.

LB•LOGIC Transocean will benefit from its superior revenue backlog of $11.4 billion and its high level of fleet average revenue efficiency (98%). Reducing operating costs, addressing debt maturities and enhancing operational utilization of its active rigs will help the company in maintaining its positive FCF trajectory. Furthermore, the company has non-core assets that it could elect to monetize, which could improve its financial leverage metrics. ◼ Asset Coverage (As of Q1 2019) • Total assets = $25.6 billion, Intangible assets = $853 million, Tangible assets = $24.8 billion

• Long term debt = $9.8 billion; Asset Coverage = 2.52x

• Cash = $2.9 billion, Current Assets = $4.2 billion

◼ Capital Structure (See graphic at end of report)

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◼ Current Yields on Outstanding Issues (as of 8/8/19)

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Quantity Last Traded CUSIP Issue Price (in millions USD) Yield (%) G9007CAA8 5.375% 5/15/2023 525 99.25 5.61 G90077AA9 7.750% 10/15/2024 450 105.50 5.37 G9007YAA0 6.250% 12/1/2024 469 102.0 5.53 893800AA0 5.875% 01/15/2024 708 101.25 5.51 G9008BAA9 6.125% 08/1/2025 567 101.5 5.77 893830BF5 7.5% 01/15/2026 750 91.25 9.34 G9008JAA2 6.875% 02/1/2027 550 104.5 5.78 893817AB2 8.0% 04/15/2027 57 82.63 11.45 893817AA4 7.45% 04/15/2027 88 82.0 10.97 379352AL1 7.0% 06/1/2028 300 93.0 8.12 893830AY5 6.50% 11/15/2020 229 103.0 4.04 893830BB4 6.375% 12/15/2021 250 105.0 5.81 893830BC2 3.80% 10/15/2022 218 98.75 6.22 FDS0NNFX3 5.520% 05/31/2022 243 103.7 4.30 893830BE8 9.0% 07/15/2023 938 103.28 7.73 893830BJ7 0.5% 01/30/2023 863 85.44 5.13 893830BK4 7.25% 11/1/2025 750 91.0 9.17 893830AF6 7.5% 04/15/2031 588 78.5 10.77 893830AT6 6.8% 03/15/2038 1000 66.75 11.04 893830AZ2 7.35% 12/15/2041 300 85.0 11.18

◼ Pricing of Outstanding Term Loans and Senior Securities (as of 6/30/19) • Revolving Credit Facility of $1.36 billion (Fully available; matures in June 2023):

o Priced at LIBOR + 275 bps

o Undrawn portion subject to commitment fee of 50 bps

 RISKS TO THE BUSINESS • Trajectory of market prices for oil and natural gas

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• Volatility in rig counts

• Unpredictable capital spending budget of oil and gas exploration and production companies

• Customer concentration: Three top customers, Royal Dutch Shell plc, Chevron Corporation and Equinor ASA, account for ~65% of contract drilling revenue

• Unfavorable weather conditions

• Environmental and regulatory related risks

 KEY BOND INFORMATION (SOURCED FROM FINRA TRACE)

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 VISUAL REPRESENTATION OF CAPITAL STRUCTURE

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Revolving Credit Facility (Available $1.36 billion; Maturity June 2023)

$525 million 5.375% Senior Secured Notes (Maturity 5/15/2023) $708 million 5.875% Senior Secured Notes (Maturity 1/15/2024) $450 million 7.75% Senior Secured Notes (Maturity 10/15/2024) $469 million 6.25% Senior Secured Notes (Maturity 12/1/2024)

26.7% $567 million 6.125% Senior Secured Notes (Maturity 08/1/2025) $243 million 5.52% Senior Secured Notes (Maturity 5/31/2022) $550 million 6.875% Senior Secured Notes (Maturity 2/1/2027)

$229 million 6.5% Sr. Unsecured Notes (Maturity 11/15/2020) $250 million 6.375% Sr. Unsecured Notes (Maturity 12/15/2021) $218 million 3.80% Senior Notes (Maturity 10/15/2022) $863 million 0.50% Exchangeable Bonds (Maturity 1/30/2023) $938 million 9.00% Senior Notes (Maturity 7/15/2023) $750 million 7.25% Senior Notes (Maturity 11/1/2025)

$750 million 7.50% Senior Notes (Maturity 1/15/2026) 48.2% $88 million 7.45% Sr. Unsecured Notes (Maturity 4/15/2027)

$57 million 8.00% Debentures (Maturity 4/15/2027) $300 million 7.00% Notes (Maturity 6/1/2028) $588 million 7.50% Notes (Maturity 4/15/2031) $1000 million 6.80% Senior Notes (Maturity 3/15/2038) $300 million 7.35% Senior Notes (Maturity 12/15/2041)

$495 million Finance 3.8% lease obligations

21.3% $2.8 billion Equity Cushion

 GLOSSARY

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Asset (PV-10) Coverage: A solvency measure intended to describe a company’s ability to cover debt obligations with tangible assets on the balance sheet; calculated by dividing Tangible Assets (Total Assets – Intangible Assets) by Total Debt

Cost per BOE: Applicable only to Oil Exploration and Production (E&P) companies. This is a measure of the amount of money required to produce one barrel of oil (or oil equivalent). Calculated by dividing all costs involved in production (exploration costs, ad valorem taxes, SG&A, marketing, and other expenses) by volume of oil produced.

Daily Production (Mboe/d): Applicable only to E&P companies. This is a measure of daily oil production, describing how many 1000s of barrels of oil (or equivalent) are produced per day.

Debt/Equity: A leverage ratio designed to describe the amount of a company’s funding that comes from debt or equity. Calculated by dividing Total Debt by Market Capitalization (see below).

Debt/EV Ratio: A leverage ratio that describes the level of a company’s indebtedness compared to the total value of the enterprise. A ratio of one indicates that the company’s funding is entirely from debt capital.

EBITDA: Earnings Before Interest, Taxes, Depreciation, and Amortization. A measure of a company’s operating performance, which allows the investor to analyze the earning power of an enterprise without having to consider financing or accounting decisions or tax environments.

Interest Coverage Ratio: A coverage ratio intended to describe the ability of a company to service its debt payments using its earnings capability. Calculated by dividing EBITDA by Yearly Interest Expense.

Market Cap: Market Capitalization. Calculated by multiplying stock price by number of outstanding shares.

Oil Price at which EBITDA is Breakeven: Industry-specific for E&P companies. This is the market price of oil at which the company’s EBITDA equals zero. This is a useful metric for comparing cost structures of competitor E&P entities.

OAS Spread: Option-adjusted spread. This is a measurement of the yield difference between a given fixed-income security and a treasury bond of the corresponding maturity, also taking into account the possibility that the issuer may recall the bond before maturity. A measure that allows direct comparison of credit risk between securities.

Payout Ratio: Percentage a company’s net income it pays out to shareholders in the form of dividends.

PV-10: Applicable only to E&P companies. PV10 is the present value of estimated oil and gas reserves, net of associated expenses, discounted at an annual discount rate of 10%. This is an industry-standard measurement of the amount of energy reserves controlled by a given company.

RSI: Relative Strength Index. A technical indicator used to measure momentum. A reading of 0-20 suggests an oversold condition; a reading of 80-100 suggests a security is overbought.

Spread/Turn Leverage: An internal metric we use at Left Brain to measure yield on a risk-adjusted basis. The higher the number, the more compensation the investor receives for owning the security. At Left Brain, we consider a ratio higher than 2 indicative of a favorable risk/reward dynamic. Calculated by dividing YTM (see below) by Debt/EBITDA ratio.

TTM: Shorthand for “Trailing Twelve Months”.

YTM: Shorthand for “Yield to Maturity”. YTM is the total return expected if an investor holds a bond to maturity, with the assumption that all coupon and interest payments are made on schedule.

DISCLAIMER: This Report is provided for informational purposes only and is prepared without regard to the investment objectives, financial situation, or needs of any investor. The Report is not intended, and should not be relied upon, as a source of any investment recommendation, makes no implied or express

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recommendation to hold, sell, purchase or take any other action with regard to a security, and is not an offer or solicitation for the purchase or sale of the security that is the subject of the Report. Investors must exercise their own independent judgment as to the suitability of a security.

Past performance is not indicative of future performance. The price of securities can and will fluctuate, and any individual security may become worthless. A high or favorable rating, rating outlook, gauge, or similar opinion is not indicative of future performance, and no user should rely on any such rating, rating outlook, gauge, or similar opinion to predict performance or potential for return. Future performance may not equal projected or forecasted performance or potential for return. All ratings and related analysis, as well as data, statistics, analysis and opinions contained herein are solely statements of opinion, and are not statements of fact or recommendations to purchase, hold, or sell any security or make any other investment decisions.

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