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Transocean LTD (RIG) $28.78 October 2014

Transocean is the owner of older rigs heading into a long downturn. As utilization across the ultra- deepwater space drops, Transocean will be forced to lock-in day rates well below current rates or idle rigs. Transocean’s over-leveraged balance sheet will not help the company weather the storm.

Ticker: RIG Current Price: $28.78 Action: Short Market Cap (M) $10,990 Expected Timeframe: 1-2 years Enterprise Value(M): $21,440 Asset Class: Common Equity Target Price: $15.00 Target Allocation: 0.75-1.5% Benchmark: S&P 500 Catalysts: Continued downturn in rig rates, dividend cut, dilution

Investment Overview

Transocean shares have declined more than 35% in 2014. This decline has been caused by a glut of newbuild ships expected to be delivered in 2014, announcements of reduced capital spending by many major oil companies, and lower oil prices. This is not surprising and many of these variables are simply a fact of highly cyclical companies. The belief that this is the bottom has brought in many investors who proclaim the company is cheap on numerous metrics.

These beliefs are myopic and fail to really comprehend industry dynamics. Transocean, a large offshore driller, is directly in the center of these issues. Transocean will suffer from both equipment obsolescence and the aforementioned industry issues. Even with the current slide in share price, there is more downside ahead. Transocean’s leveraged balance sheet will exacerbate any further deterioration in day rates.

If the current industry dynamics continue, Transocean will be forced into difficult decisions including stacking rigs or accepting contracts materially below today’s rates. Oil companies are becoming more stringent and can require the best technology for new tenders. This bifurcation will hurt Transocean, and I believe that more than 50% downside exists in shares today. As investors wake up and realize the company has a history of poor capital allocation that barely earns more than its cost of capital, shares will re-rate to a more appropriate valuation. Asset write downs will come sooner, rather than later, and this will force current value investors in Transocean to reevaluate just how robust these assets are. Finally, investors will slowly begin to realize that the large dividend currently being offered is unlikely to remain. Management has cut the dividend in the past and will likely do the same now.

Disclaimer: This research report expresses our opinions. Any investment involves substantial risks, including the complete loss of capital. Any forecasts or estimates are for illustrative purpose only. Use of Dichotomy Capital LLC's research is at your own risk and proper due diligence should be done prior to making any investment decision. This is not an offer to sell or a solicitation of an offer to buy any security. Dichotomy Capital LLC is not registered as an investment advisor. All expressions of opinion are subject to change without notice and Dichotomy Capital LLC does not undertake to update or supplement this report or any of the information contained herein. All the information presented is presented "as is," without warranty of any kind. Dichotomy Capital LLC makes no representation, express or implied, as to the accuracy, timeliness, or completeness of any such information or with regard to the results to be obtained from its use.

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Transocean Overview

Transocean is the owner of 79 oil rigs split among ultra-deepwater, deepwater, harsh environment floaters, midwater floaters, and high-specification jackups (Appendix 1). In the Q4 2013 conference call management iterated that the long-term goal is to have a fleet comprised of 50% ultra-deepwater rigs, 40% high-spec jackups and 10% harsh environment rigs. This fleet composition goal is intended to help them weather the current demand stagnation that management predicted would end in 2016.

The proposed fleet transformation will be accomplished via some combination of asset sales, spin-offs, and newbuilds. Regarding the latter, Transocean has five ultra-deepwater rigs contracted to start between Q1 2016 and Q2 2017. There are another two ultra-deepwater rigs that do not have contracts, and five high-specification jackups slated for delivery as well. As these newbuilds are delivered, Transocean will still need to bring down its exposure to deepwater and lower-spec units. To do this management has formed Caledonia Offshore Drilling, a United Kingdom North Sea focused drilling entity. The current plan entails separating these assets from Transocean in Q4 2014, a topic that will be discussed later in this report. Following that separation, Transocean will focus on ultra-deepwater drilling; an area management believes displays strong long-term fundamentals.

Ultra-Deepwater Market

The ultra-deepwater oil exploration area has been the darling of the market for several years following the discovery of oil off of Brazil’s coast and renewed interest in other parts of the world. Day rates fell in 2010, following the Macondo disaster, and have risen since. Across the world there are currently 85 drillship floaters working at depths greater than 4000’, which collectively average $524,000 per day. The rise in rates caused a building frenzy. Under construction there are 61 drillships capable of drilling at least 5,000 feet deep, and there are 32 drillships being built that can drill at a rated water depth of 12,000 ft. As of October 2014, 89 drillships are being utilized worldwide (80.9% current utilization rate). The chart below shows construction activity by design depth.

Chart 1. Rigs Under Construction. Source: Rigzone

Rigs Under Construction or Available by Depth 80 72

60

40

17 20 14 14 11 9

0 1,000-5,000 ft 5,000-7,500 ft >7,500 ft Under Construction Ready Stacked

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Unsurprisingly, rates have come under pressure. Most analysts seem to believe this rate depression is temporary and will likely reverse itself in 2015, or 2016 at the latest. I do not believe that to be the case. I believe the increase in onshore oil production (shale gas/oil) and the low returns from offshore production has caused a shift in production spend that will last longer than analysts believe. When this is coupled with the onslaught of newbuilds, rate compression will continue for an extended period. One of the best examples of poor returns can be seen in the chart below, it doesn’t take a mathematician to realize spending at 14% and earning 1.8% is unsustainable.

Graphic 1. Oil Spend and Production 2000-2013 Source: SBM Offshore Barclays Presentation 2013

Unless production magically ramps up, it seems fair to expect E&P executives to act economically rational and pullback on investment in areas that are the least profitable. Many majors are limiting their upstream capital expenditures to increase free cash flow (see Chevron and Exxon Mobile as examples). Deepwater is now considered the marginal barrel by some players:

“In our view, deepwater barrel is the marginal barrel today. And until commodity price or economics improve based on rig rates, it will likely continue to be the marginal barrel for the next year or so.” -Mark McCollum, CFO of , Barclays Energy Power Conference 9/2/2014.

Further complicating this shift is the requirement that newer rigs be built with much better specifications and safety equipment. This bifurcation is happening everywhere in offshore drilling. Higher-spec rigs experience reduced downtime and better operational efficiencies. In the case of drillships, higher-spec rigs can be safer rigs. Outfitting a drillship with dual Blow-Out Preventers (BOP) can save more than $30 million per year in spread costs and reduce downtime by several days. With an

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increase in savings and improved safety, dual BOP rigs are expected to become the norm within the industry.

Unfortunately for older ships, retrofitting is usually not an option. Oil companies want the best, and with a glut of newbuilds entering the market, they can demand the best. This is not good for companies with older rigs, and in this case, rigs that are only a few years old. While there are a number of newbuilds on the way, they are finding work because they are superior to currently operating drillships. The graphic below shows uncontracted newbuilds at the end of 2013, many of which have found contracted work since.

Graphic 2. Uncontracted Newbuild Drillships 2014. Source: Credit Suisse 12/18/2013

Transocean has a fleet of 76 rigs (excluding jackups) already built or under construction. Of those, 20 are considered 6th generation or 7th generation rigs, higher spec rigs that are the most desirable by operators today. Seven of these rigs are still under construction and years away from production. This puts Transocean’s remaining fleet in a difficult position: how do they renew rates at high day rates if a number of newbuilds are coming on the market over the next few years? In short, I don’t believe it is possible and I believe that Transocean rigs will continue to experience rate compression. And there are plenty of rigs that could experience rate compression. The table below highlights Transocean’s contract rollovers in 2014, 2015, and 2016.

Table 1. Transocean Contract Rollovers

In '000's, except Rigs 2014 2015 2016 Est Rev up for Renewal $1,928,310 $2,317,906 $1,752,380 # of Rigs 14 17 13 Current Ave. Day Rate $447 $411 $402 4 Dichotomy Capital LLC [email protected] Scarsdale, NY

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The ultra-deepwater drillship contracts that roll off soon currently enjoy some of the best rates in the industry, a sobering reality for Transocean. As these drillships (many of which are 5th generation) roll off contract they will be fighting with uncontracted newbuild ships. Given the commodity like nature of offshore drilling, lower cost for more bells & whistles will win. The only way that Transocean can compete is on price, eroding their current hefty day rate spread. Management of Transocean appears to acknowledge this.

“Deepwater and midwater markets remain weak but largely unchanged and as in previous oversupply cycles most capable rigs will compete down and displace lower specification units. We expect this displacement will result in some units being permanently retired as continued investment in this fleet may not yield the necessary economic returns over the remaining life of the asset.” Terry Bonno SVP, Marketing at Transocean. Earnings Call August 7, 2014.

I believe that ultra-deepwater drillships will have no choice but to compete with deepwater and mid- water drillships, a view that industry leader Diamond Offshore agrees with. If that turns out to be the case, rates for 5th generation ultra-deepwater drillships could drop to mid-water rates, which currently hover around $300K/day. This would be an incredible drop in profitability for Transocean’s drillships, which currently command day rates of $412K-$681K. It doesn’t take a large leap of rationality to then conclude mid-water rates for lower-spec units will come under more pressure. Perhaps this explains why Transocean is so eager to dispose of their mid-water units in Caledonia?

Caledonia

Transocean plans to right spec their fleet by putting eight rigs in a separate entity known as Caledonia. These rigs will be monetized via a spin-off that was announced October 15, 2014. The goal here is similar to Noble Corp’s spin-off of assets into Paragon (also written up by Dichotomy Capital): get money for undesirable assets. A spin-off is the most logical, and as Paragon proved, valuations can basically be made up. My expectations for Caledonia’s revenue and EBITDA are shown below.

Table 2. Caledonia Rigs, revenue, and estimated EBITDA at 95% uptime.

Rig Dayrate (K/day) 2015 Revenue Sedco 704 $383 $132,805 Sedco 711 $361 $125,177 Sedco 712 $391 $135,579 Sedco 714 $440 $152,570 Transocean John Shaw $416 $144,248 Transocean Prospect $375 $130,031 GSF Arctic III $411 $125,766 JW McLean Stacked $0 Total $946,177 O&M ($459,573) Estimated SG&A ($30,000) Caledonia EBITDA $456,603

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So, what valuation can Caledonia be spun-off at? Optimistically, sell-side analysts have suggested multiples of >6X EV/EBITDA, which is the same as Transocean’s current valuation. Based on my calculations, that would imply an enterprise value of at least $2.7 billion. If capitalized at 50:50 debt and equity, Caledonia would spin-off more than $1.4 billion of cash to Transocean.

I think this is absurd and I will be the first person to congratulate Transocean if they can spin these assets off (or sell them) at >6X EBITDA. A valuation like that assumes that Caledonia has the same global footprint, same financing opportunities, and same operational scale as Transocean. This simply does not make sense and I believe a lower valuation should be used. The range of potential outcomes can be seen in the table below.

Table 3. Valuation Ranges for Caledonia. Dichotomy Calculations. All figures in 000’s

EBITDA $456,603 $456,603 $456,603 Multiple 4X 5X 6X Enterprise Value $1,826,412 $2,283,015 $2,739,618 50% Debt $913,206 $1,141,508 $1,369,809

Currently, Transocean is spinning off a minority interest of Caledonia and will receive $125-$185 million in proceeds from Caledonia’s share capital. There will also be a first lien secured bond issuance (amount not disclosed) and a second lien secured bond issuance that intends to raise $350 million. While investors patiently wait for the announced first lien debt and structure of the equity, Transocean will need to confront the inevitable decision to keep the dividend or keep an investment grade rating.

Tough Decisions: Investment Grade or Dividend?

Transocean currently has an investment grade rating, sporting a Baa3 rating from Moody’s and a BBB- rating from S&P. And thanks to gentle prodding from Carl Icahn, they also give shareholders more than $1 billion per year in dividends. However, between the Caledonia spin and the downturn in rates, I think that Transocean will need to decide whether or not they will cut the dividend. My expectations for Transocean are shown on the next page.

I have assumed varying levels of idleness for all scenarios and rate resets for contracts that need to be renewed. I consider Free Cash Flow to be the cash that a company can pay out directly to shareholders, and have deducted newbuild capital expenditures. Given the need to replace assets on a fairly regular basis due to depreciation, technological obsolescence, and strict safety requirements, I believe newbuild capital expenditures are simply a cost of doing business for offshore drillers.

Currently the company has $2.117 billion of cash on their balance sheet, $1.5 billion of that is considered a “comfortable level” of cash to keep on the balance sheet. Therefore, Transocean has a little more than $600 million of cash available for distribution. As more contracts roll off, free cash flow currently being generated will decrease.

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Table 4. 2015 Transocean Estimates: Dichotomy Calculations, public filings

2015 Consolidated in '000's Bear Base Bull Revenue $7,242,744 $7,484,219 $9,314,583 Operating Expenses ($2,578,000) ($2,699,000) ($3,081,000) Drilling Support Costs ($756,000) ($720,000) ($800,000) Out Of Service Costs ($1,071,000) ($1,020,000) ($1,200,000) Rig Operating Profit $2,837,744 $3,045,219 $4,233,583 G&A ($275,000) ($250,000) ($284,000) EBITDA $1,806,744 $2,075,219 $3,149,583 Interest ($425,000) ($425,000) ($425,000) Depreciation ($1,197,000) ($1,197,000) ($1,197,000) Pre-Tax Income $184,744 $453,219 $1,527,583 Taxes ($36,949) ($81,579) ($213,862) Maintenance CapEx ($939,750) ($895,000) ($850,250) New Build CapEx ($1,210,000) ($1,210,000) ($1,210,000) Free Cash Flow ($804,955) ($536,361) $450,471

As stated earlier, management has committed to a $1 billion per year dividend. I am unsure how this remains funded from cash flow if Caledonia is indeed separated out. In my base scenario, there is no way that the dividend is covered, even if one considers newbuild costs a true capitalized cost!

Management of Transocean will therefore be in a tough position – cut the dividend, or fund the dividend with increasing levels of debt and hope for a rebound. Management seemed to address the dividend in the Q2 2014 conference call.

“But as both I and Esa commented in our remarks, we are committed to maintaining a competitive and sustainable dividend. So that’s very important to management and the Board.” Steven Newman Q2 2014 Conference Call

“So the immediate impact, if we lose our investment grade rating, isn’t all that dramatic. It adds a little bit of cost to our existing debt profile.” Esa Ikaheimonen Q2 2014 Conference Call

This seems great for shareholders who love dividends. Unfortunately, it doesn’t come to terms with Transocean’s historical actions. In 2012, when cash flows became constrained, the Board cut the dividend, when it was also $1 billion/year. If the going gets tough, I believe that Transocean will work to maintain their investment grade rating, a variable that National Oil Companies consider a plus. Besides their past actions, management has also made statements that indicate they are committed to the dividend. For example, in the 2013 analyst day call, Transocean repeated their intentions to maintain an investment grade rating six times.

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At the end of the day there is no debate between cutting the dividend or losing investment grade ratings. Transocean cannot afford their dividend much longer and in the past has shown no commitment to a dividend. Investors will be forced to evaluate the company merely on long-term fundamentals rather than a yield-hog parking lot.

Valuation

There are a number of ways to value offshore drillers. Anecdotally, one of the most popular valuation methods is the price to book value (P/B). The table below shows book value as of 6/30/2014. I have adjusted book value for $1.5 billion less of cash. Management has made it clear that this is a comfortable amount of cash needed to fund the business on an ongoing basis (and to keep debt holders/rating agencies happy). Therefore, I do not consider it extra cash that should be added to book value for shareholder valuations.

Table 5. Book Value of Transocean. Source: 6/30/2014 10Q

In Millions Assets as of June 30, 2014 $32,067 Shares Outstanding 362.19 Liabilities as of June 30, 2015 ($11,891) GAAP Book Value $20,176 Less Required Cash ($1,500) Book Value $18,676

Book Value Per Share $51.56

On a book basis (adjusted for mandatory cash or not), Transocean looks cheap and this is probably why the name is attractive to many value investors. However, book value is only worth book value if the returns justify that book value. If a company fails to produce a return that is greater than the general market, why should it trade at book value or greater? Further, the assets may be held at greater than true values, thus actual book value may be materially lower. Asset write downs are already happening. For instance, Ensco recently wrote down $1.5 billion of assets related to eight floaters. These were not old ships and Ensco noted deterioration of demand. (emphasis added)

“Demand for floaters deteriorated further as a result of the continued reduction in capital spending by operators in addition to recently announced delays in operators drilling programs. The further reduction in demand, when combined with the increasing supply from newbuild floater deliveries, has led to a very competitive market. In general, contracting activity for floaters declined significantly and new day rate fixtures were substantially lower than rates realized during the first quarter of 2014 and fourth quarter of 2013. More specifically, drilling contractors have been unable to contract older, less capable rigs as operators are now targeting premium, high-specification rigs at lower day rates. The significant supply and demand imbalance will continue to be adversely impacted by future newbuild deliveries, program delays and lower capital spending by operators. As a result, day rates and utilization will remain under pressure, especially for the older, less capable floaters.” Ensco 10Q, page 16 8 Dichotomy Capital LLC [email protected] Scarsdale, NY

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I believe the same inflated book value present at Ensco is present at Transocean. What should worry Transocean bulls is that several of the rigs written down were constructed in the late 1990’s and are 5th generation rigs. Transocean owns of 36 drillships, 47% of which are 5th generation rigs. These rigs are unlikely to generate earnings that can justify the book value. This is nothing new. As a whole, the offshore drilling space has generated poor returns on capital employed. The table and two slides below show Transocean and industry wide returns on capital employed.

Table 6. Transocean Historical Return on Capital Employed Source: Company Filings, Dichotomy calculations

Transocean Return On Capital Employed 8.00% 7.00% Cost of Debt 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% 2010 2011 2012 2013 H1 2014

Graphic 3: Select Offshore Drillers Return on Capital Employed – 5-yr Average. Source: Diamond Offshore Presentation, Barclays Conference 9/12/2013

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With a cost of debt averaging 5.3%, shareholders are left with slim returns (if any). Keep in mind, these returns on capital took place during a period of escalating day rates and unprecedented interest rate declines. What happens if day rates stabilize (or decrease) or interest rates rise?

With such a poor return on capital there is little reason to let book value guide valuations. Since 2010 Transocean has written down more than $6.4 billion of assets, a trend that is likely to continue if a downturn in day rates continues. Given the capital intensive nature of the business, using some combination of free cash flow (FCF) and EV/EBITDA multiple makes sense from a valuation perspective. In Table 4 I laid out my estimates for 2015’s EBITDA and FCF. In the table below I have shown sensitivity for varying EV/EBITDA multiples using my bear, base, and bull EBITDA estimates.

Table 7. EV/EBITDA Sensitivity in Millions. Source: Dichotomy Capital

Multiple Bear EBITDA Base EBITDA Bull EBITDA 4X $7,224 $8,300 $12,596 5X $9,030 $10,375 $15,745 6X $10,836 $12,450 $18,894 7X $12,642 $14,525 $22,043

After factoring the Transocean Partners LLC proceeds of $415 million, Transocean has an enterprise value of $20.653 billion, detailed in the table below.

Table 8. Enterprise Value Calculations

Debt $10,457 Excess Cash as of 6/30/2014 $617 Add RIGP Proceeds $415 Total Excess Cash $1,032 Market Capitalization @ $31/share $11,228

Current Enterprise Value $20,653

I do not want to come off as draconian, but why should a capital intensive, cyclical company subject to the whims of major oil companies be valued at some premium multiple? I am of the opinion that valuing a business such as Transocean at 8, or 10 times EBITDA is very optimistic, especially when one considers the long-term delivery schedule of drillships and depressed E&P spend. Using a 6X multiple on my base EBITDA projection ($2,075M), EV would be $12.45 billion. Compared to a current enterprise value of $20.65 billion, this provides $8.2 billion of downside, almost all of which would be directed at equity. It is not unreasonable to believe that shares of Transocean could experience more than 50% downside, implying a fair value below $15/share even if we assume debt paybacks, dividend cuts, or asset sales.

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To the bulls who say that Transocean has financial flexibility with Transocean Partners LLC, I wonder if there is $8.2 billion of flexibility. Sell-side reports optimistically predict more than $9 billion of total value from Transocean Partners, an inflated figure that requires buyers to line up and purchase interests in rigs at premium multiples. These reports also arrive at this value by assuming multiples for rigs delivered more than 3 years from now, assumptions that are guesses at best.

Alternatively, investors could value the company’s equity via a FCF multiple. To be conservative, let us assume that my bullish FCF multiple ($450M in Table 4) is the only plausible scenario. Let us also assume that this is a trough FCF figure and thus a larger multiple should be used. In order to justify today’s market capitalization of $11.228 billion, a 24.95X ($11,228/$450) multiple is being placed on the business. What kind of low-growth, capital intensive, cyclical company deserves a FCF multiple in excess of 24X? To make matters worse, the FCF generated in my bullish scenario is still inadequate to cover the dividend of more than $1 billion per year.

I believe that any valuation arrives at the same conclusion: Transocean doesn’t generate enough returns to justify their current market capitalization. My valuations are not a leap of faith, unless you believe the bullish arguments.

Bullish Arguments

Any short argument deserves an analysis of bullish arguments. I have spoken with several Transocean/offshore drilling bulls and read many bullish takes on Transocean. In their eyes, there are three main arguments for why Transocean is a buy now.

1. The current downturn will reverse itself soon and day rates will climb back to current day rates 2. Buying below book value offers a margin of safety 3. Transocean has financial flexibility to weather the storm and keep the dividend

The first point is well-established within the investing community, but seems like a guess to me. Transocean has made it clear that they believe the current downturn is a small one and the market will pickup in 2016. I find this hard to believe given the number of floaters entering the market over the next few years, many of them willing to take work at much lower rates.

Furthermore, how can a rebound arrive when Transocean itself expects to feed into the glut of ships? In a September 2, 2014 Jefferies note, management of Transocean made it clear that they would not be stacking rigs and they wanted to maintain utilization as long as contracts were above cash break-even. By my calculations, and the calculations of sell-side analysts, Transocean has daily operating expense costs of ~$175-$200K/day for their main ultra-deepwater fleet. This means that Transocean is willing to drop rates by more than $400K/day on some rigs just to maintain utilization!

The first bullish point ignores the irrationality of Transocean and other players to keep rigs in service. This is no different than any other commodity industry which will often see an increase in production as rates fall as marginal players try to make up for lower profits. This usually exacerbates the fall.

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The second point is addressed in my valuations section. In a business such as offshore drilling, book value is a poor judge of intrinsic value. Other offshore drillers are already writing down asset values and I expect Transocean will too. Considering their history of asset impairments, how reliable is book value here?

The final point is valid to a certain point. Transocean, compared to smaller players in the offshore space, has scale and can drop down assets(that is, sell interests to other investors), so long as someone is willing to buy more shares of Transocean Partners LLC. Key to the drop downs is making sure the asset values stay up and there are people willing to buy more shares. These both seem like fickle points to hope for, especially with a glut of newbuilds on the horizon. I believe when Transocean Partners LLC is required to pay a “purchase price equal to the greater of the fair market value (taking into account the anticipated cash flows under the associated drilling contracts), or the all-in construction costs” investors may question just how good of a deal this is. However, I concede that this is a notable point of flexibility for Transocean and buys them time.

At the end of the day, Transocean cannot overcome the older rigs that will see dramatic drops in day rates by dropping down new rigs. So while financial flexibility may buy them time, it hardly compensates for the legacy business. I did not elaborate on Transocean Partners LLC because I believe it is a temporary solution and the guesswork required is outside of the scope of this research piece. Most of the drop-down assets are being delivered in 2016/2017. By late 2016, rigs producing ~$6 billion of current revenue will have their contracts expire (see Table 1). If my thesis is correct, or in the ballpark, these rigs will be producing significantly less revenue and dramatically less EBITDA, assuming they are not idle.

Conclusion

Transocean is facing a tough stretch, far tougher than the market is accounting for. While shares have been hit hard, a lower price does not mean a correct price. Mr. Market is failing to properly account for the massive influx of new deepwater and ultra-deepwater rigs being constructed. Many of these ships offer better equipment and will begin to compete with older rigs.

After committing to a dividend only a year ago, Transocean finds itself in a precarious situation and will soon need to decide who it keeps happy, business partners or shareholders. I believe Transocean will cut the dividend as their fleet begins to roll off contract to save their investment grade rating. At current prices, investors are paying a large premium for a company that will likely write down assets and see EBITDA compress dramatically.

While an exact price target is impossible to gauge I believe the aforementioned issues, sale of profitable Caledonia rigs, and reduced E&P offshore spend gives Transocean shares more than 50% downside from a price of $28.78/share. I believe fair value is below $15 per share and would more accurately price the poor returns on capital and mismanaged capital allocation that Transocean has displayed in the past. There is no easy way out of this downturn and I believe it is just getting started.

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Appendix 1. Rigs/dayrates of Transocean as of 9/22/2014

High Spec UDW Day Rate High Spec Floaters: HE Day Rate Cajun Express $495 Henry Goodrich $476 Deepwater Asgard $595 Paul B. Loyd, Jr $440 Deepwater Champion $677 Polar Pioneer $578 Deepwater Expedition $650 Transocean Artic $414 Deepwater Frontier $565 Transocean Barents $602 Deepwater Invictus $595 Transocean Leader $409 $615 Transocean Spitsbergen $545 $533 Midwater Floaters Deepwater Pathfinder $480 Actinia $190 $461 GSF Aleutian Key Stacked Development Driller III $589 GSF Arctic I stacked Dhirubhai Deepwater KG1 $447 GSF Arctic III $411 Dhirubhai Deepwater KG2 $510 GSF Grand Banks $409 Discoverer Americas $735 GSF Rig 135 $311 $590 GSF Rig 140 $260 Discoverer Deep Seas $595 JW McLean Stacked $615 Sedco 601 stacked Discoverer India $528 Sedco 700 stacked Discoverer Inspiration $595 Sedco 704 $383 Discoverer Luanda $483 Sedco 711 $361 Discoverer Spirit $556 Sedco 712 $391 GSF CR Luigs $580 Sedco 714 $440 GSF Development Driller I Idle Transocean Amirante No info GSF Development Driller II $355 Transocean Driller $266 GSF Explorer $412 Transocean John Shaw $416 GSF Jack Ryan Idle Transocean Legend $429 10000 $439 Transocean Prospect $375 Sedco Energy $380 Transocean Searcher $395 Sedco Express $455 Transocean Winner $477 High Spec Floaters: Deepwater High-Spec Jackups Deepwater Navigator $377 GSF Constellation I $150 Discoverer Seven Seas $400 GSF Constellation II $165 GSF Celtic Sea $338 GSF Galaxy I $221 Jack Bates $420 GSF Galaxy II $221 MG Hulme Jr $200 GSF Galaxy III $160

13 Dichotomy Capital LLC [email protected] Scarsdale, NY

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Dichotomy Capital LLC Contrarian and Research Driven

Sedco 702 $461 GSF Monarch $171 Sedco 706 $298 Transocean Andaman $150 Sedco 707 $397 Transocean Honor $194 Sedco 710 stacked Transocean Siam Driller $140 Sovereign Explorer Stacked Transocean Ao Thai $139 Transocean Marianas $370 Transocean Rather Stacked

Appendix 2. Debt

Note Interest Rate Debt as of 6/14 in mm Senior 2015 4.95% $1,109 Senior Dec 2016 5.05% $999 Senior Oct 2017 2.50% $748 Eksportfinans Loan Jan 2018 4.15% $517 Senior Note March 2018 6% $1,002 Senior Note April 2018 7.38% $247 Senior Note Nov 2020 6.50% $903 Senior Note Dec 2021 6.38% $1,199 Senior Note Oct 2022 3.80% $746 April 2027 Notes 7.45% $97 June 2028 Notes 7% $310 April 2027 Debentures 8% $57 Capital Lease Contract $626 April 2031 Notes 7.50% $598 Senior Notes March 2038 6.80% $999 Senior Notes Dec 2041 7.35% $300 Total $10,457 Cost of Debt 5.31%

14 Dichotomy Capital LLC [email protected] Scarsdale, NY

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