Transocean Ltd. annual report, FY2022

Transocean Ltd. 2022 Form 10-K Summary

Business context and reporting period

Transocean is a Swiss-based international offshore contract drilling company operating in one segment. It provides drilling rigs, equipment and crews, with a focus on ultra-deepwater and harsh-environment markets. The filing covers the fiscal year ended December 31, 2022, with comparisons primarily to 2021.

At December 31, 2022, the company operated 38 mobile offshore drilling units: 28 ultra-deepwater floaters and 10 harsh-environment floaters.
As of February 14, 2023, the fleet comprised 37 units, including 27 ultra-deepwater and 10 harsh-environment floaters, with one wholly owned and one partially owned drillship under construction.
Shell, Equinor and Petrobras represented approximately 33%, 25% and 11% of 2022 operating revenues, respectively.

Financial performance and key metrics

Metric	2022	2021	Change
Contract drilling revenues	$2.575 billion	$2.556 billion	Up 1%
Operating loss	$31 million	$112 million	Improved by $81 million
Loss before income taxes	$562 million	$470 million	Loss increased by $92 million
Net loss	$621 million	$591 million	Loss increased by $30 million
Loss per diluted share	$0.89	$0.93	Improved
Cash flow from operations	$448 million	$575 million	Down $127 million
Capital expenditures	$717 million	$208 million	Up $509 million
Total debt	$7.347 billion	$7.170 billion	Up $177 million

Total fleet average daily revenue declined to $345,500 from $365,600, while fleet revenue efficiency declined to 96.4% from 97.0%.
Total fleet utilization improved to 54.1% from 53.4%; ultra-deepwater utilization was 50.1% and harsh-environment utilization was 64.9%.
Operating and maintenance expense declined modestly to $1.679 billion from $1.697 billion. General and administrative expense increased to $182 million from $167 million.
Interest expense increased to $561 million from $447 million, principally due to a $157 million fair-value loss on the bifurcated compound exchange feature of the 4.625% exchangeable bonds and additional shipyard-loan interest.
The effective tax rate was negative 10.4%, reflecting tax expense despite a pretax loss. Tax expense was $59 million, including a $19 million net benefit from discrete tax items.

Balance sheet, liquidity and debt

Unrestricted cash and cash equivalents were $683 million at year-end, compared with $976 million in 2021. Restricted cash was $308 million, including $276 million held for debt-service and reserve requirements.
Total assets were $20.436 billion, including $17.469 billion of net property and equipment. Total equity was $10.792 billion, down from $11.206 billion.
Debt due within one year was $719 million; long-term debt was $6.628 billion. The filing identifies total scheduled debt obligations of $7.311 billion, including contractual interest installments.
The company had no borrowings outstanding under its Secured Credit Facility at year-end, $6 million of letters of credit issued and $767 million of available borrowing capacity as of February 14, 2023. The facility matures June 22, 2025 and includes a minimum liquidity covenant of $500 million.
Contractual obligations totaled $10.946 billion, including debt, interest, leases, purchase obligations and service agreements.

Material changes versus the prior comparable period

Revenue increased only slightly despite higher operating days and utilization because lower dayrates and lower revenue efficiency offset contributions from the Deepwater Atlas, higher utilization, early termination revenues and reimbursements.
Operating loss improved substantially because of lower operating and maintenance costs and a much smaller loss on asset disposals. However, higher interest expense and the absence of the prior-year debt-retirement gain caused the pretax and net losses to widen.
Operating cash flow declined 22% to $448 million, while capital expenditures more than tripled, primarily due to the newbuild program.
The company issued 61.0 million shares under its at-the-market program for $263 million of net proceeds, compared with 36.1 million shares and $158 million in 2021.
In September 2022, Transocean issued $300 million of 4.625% senior guaranteed exchangeable bonds, including $188 million of cash proceeds, and issued 22.2 million warrants.
Deepwater Atlas entered service in October 2022. Deepwater Titan was delivered in December 2022 and was expected to commence operations in the second quarter of 2023.
Contract backlog was approximately $8.34 billion at December 31, 2022, up 26% from $6.60 billion at December 31, 2021. It increased further to $8.54 billion as of February 9, 2023.

Guidance, outlook, risks and unusual items

Management described the offshore drilling outlook as positive, citing increasing global energy demand, underinvestment in reserve replacement, a smaller high-specification rig fleet and higher customer tendering activity. Management expected demand and dayrates to improve particularly for ultra-deepwater and harsh-environment assets, although project delays related to supply-chain constraints remained a risk.

As of February 9, 2023, 13 rigs were uncontracted, including five that had been out of service for more than five years. Seven operating contracts were scheduled to expire before December 31, 2023.
At that date, uncommitted fleet rates were 39% for ultra-deepwater floaters and 42% for harsh-environment floaters in 2023, rising materially in later years.
In January 2023, the company issued $525 million of 8.375% senior secured notes and $1.175 billion of 8.75% senior secured notes. Proceeds were used in part to redeem approximately $1.137 billion of older secured notes, including make-whole premiums.
In February 2023, Transocean agreed to invest $10 million in Global Sea Mineral Resources and contribute the Ocean Rig Olympia and future engineering services. The company expected to recognize a material loss in the first quarter of 2023 related to the rig contribution.
Significant risks include oil and gas price volatility, cyclical rig supply and dayrates, contract cancellations or renegotiations, customer concentration, substantial leverage and below-investment-grade debt ratings.
Other risks include operational accidents, inadequate insurance or customer indemnities, regulatory and environmental liabilities, tax disputes, cybersecurity incidents, labor negotiations, shipyard delays and climate-related restrictions on fossil-fuel activity.
The company was engaged in an ongoing U.S. Department of Justice matter concerning alleged Clean Water Act permit violations involving seven drillships. Management expected corrective actions and an immaterial monetary penalty, but stated that costs could exceed accrued amounts.
Brazilian tax assessments outstanding at year-end totaled approximately $140 million, including interest and penalties. The company is contesting the assessments.

Most important facts for investors to verify

Whether improving offshore demand and dayrates convert into higher utilization, revenue efficiency and sustainable positive earnings.
The timing and economics of contract renewals for the 13 uncontracted rigs and seven contracts expiring during 2023.
Liquidity after the January 2023 refinancing and debt redemptions, including compliance with the Secured Credit Facility’s $500 million minimum-liquidity covenant.
Debt maturities, interest costs and potential dilution from exchangeable bonds, warrants and additional ATM share issuance.
Actual capital spending and completion costs for Deepwater Titan, the Deepwater Atlas upgrade and the partially owned Deepwater Aquila.
The outcome and cash-flow impact of tax disputes, regulatory matters, customer contract claims and other contingencies.
The amount and timing of the expected first-quarter 2023 loss from contributing Ocean Rig Olympia to Global Sea Mineral Resources.