Transocean Ltd. 2021 Q2 Form 10-Q Summary
Business context and reporting period
Transocean is a global offshore contract drilling provider focused on ultra-deepwater and harsh-environment drilling. As of June 30, 2021, it operated 37 mobile offshore drilling units, including 27 ultra-deepwater floaters and 10 harsh-environment floaters, and was constructing two ultra-deepwater drillships. The filing covers the three and six months ended June 30, 2021, compared with the corresponding 2020 periods.
Key financial metrics
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Contract drilling revenue | $656 million | $930 million | $1.309 billion | $1.689 billion |
| Operating loss | $2 million | $264 million | $69 million | $463 million |
| Net loss attributable to controlling interest | $103 million | $497 million | $202 million | $889 million |
| Loss per share | $0.17 | $0.81 | $0.33 | $1.45 |
| Cash flow from operations | Not separately reported | Not separately reported | $249 million | $39 million |
| Capital expenditures | Not separately reported | Not separately reported | $100 million | $153 million |
Approximate margins were negative: Q2 operating margin was approximately (0.3)% and net margin approximately (15.7)%; six-month operating margin was approximately (5.3)% and net margin approximately (15.4)%. Total fleet average daily revenue increased to $369,400 in Q2 from $307,800, while revenue efficiency improved to 98% from 97%. Fleet utilization declined to 55% from 66%.
At June 30, 2021, unrestricted cash and cash equivalents were $988 million and restricted cash was $502 million. Total debt had a $7.150 billion principal amount and a $7.527 billion carrying amount, including $536 million due within one year. Total equity was $11.312 billion. The company had no borrowings under its $1.3 billion secured revolving credit facility, $23 million of letters of credit outstanding, and $1.3 billion of available capacity.
Material changes versus the prior comparable period
- Revenue declined 29% in Q2 and 22% for the six-month period, largely because the 2020 periods included approximately $200 million of dispute-settlement and early-termination revenue, as well as revenue reductions from cold-stacked, sold, idle and shipyard rigs.
- Higher average daily revenue and improved revenue efficiency partially offset lower operating days and utilization.
- Operating and maintenance expense declined 17% in Q2 and 18% for the six months, reflecting cold-stacked and sold rigs, lower personnel costs, reduced COVID-19-related activity and the absence of prior-year litigation and settlement costs.
- The prior-year periods included substantial impairment charges: $429 million in Q2 and $597 million for the six months. No impairment charge was recorded in 2021, but the company recognized a $60 million loss on the sale of the harsh-environment floater Leiv Eiriksson and related assets.
- Interest expense declined to $115 million in Q2 and $230 million for the six months, reflecting prior debt restructuring and debt repayments. The six-month period also included a $51 million gain from exchanging $323 million of 0.50% exchangeable bonds for $294 million of 4.00% exchangeable bonds plus $11 million in cash.
- Operating cash flow increased by $210 million year over year to $249 million, while debt repayments declined to $239 million from $1.009 billion.
- The company launched a $400 million at-the-market equity program. It raised $66 million from 15.2 million shares during the quarter and received an additional $77 million from 16.5 million shares after quarter-end.
Guidance, outlook, management commentary and risks
Management reported a cautiously optimistic outlook for offshore drilling, citing improving economic and oil and gas fundamentals, increasing exploration and production activity, fleet attrition and a growing scarcity of high-specification drilling units. Management expects demand for hydrocarbons could return to or exceed pre-pandemic levels within one to two years and anticipates stronger North Sea harsh-environment activity in 2022 and 2023. No formal revenue or earnings guidance was provided.
Contract backlog was $7.345 billion as of July 21, 2021, down from $7.403 billion in April and $7.842 billion in February. Uncommitted fleet rates remained high, including 49% for ultra-deepwater floaters and 45% for harsh-environment floaters for the remainder of 2021. The company expects Deepwater Atlas delivery in the fourth quarter of 2021 and Deepwater Titan delivery in the second quarter of 2022, with expected shipyard borrowings of approximately $370 million and $90 million, respectively.
Management expects operating cash flows to remain positive over the next year but identifies significant uncertainty from COVID-19 and variants, oil-price volatility, OPEC-related production actions, customer financial health, contract cancellations or renegotiations, low utilization, dayrate pressure, rig reactivation and stacking costs, shipyard delays, capital-market access and below-investment-grade debt ratings.
Debt and contractual obligations remain significant. Scheduled debt principal and other installments total $7.612 billion, with $548 million due in the twelve months ending June 30, 2022. Debt and interest obligations total $10.215 billion. The secured credit facility includes minimum liquidity, leverage, debt-to-capitalization and collateral coverage requirements.
Contingencies include Brazilian tax assessments of approximately $149 million in aggregate, debt-exchange litigation and an appeal by Whitebox, asbestos-related claims, environmental matters and other ordinary-course litigation. Management does not currently expect most matters to have a material adverse effect, but unfavorable outcomes could materially affect cash flows or financial results.
Most important facts for investors to verify
- Whether improving offshore demand converts into higher utilization, dayrates and backlog, given uncommitted fleet rates of 45% to 100% across 2021-2025.
- The timing, final cost and customer commitments for Deepwater Atlas and Deepwater Titan, including the expected $460 million of shipyard financing.
- Liquidity relative to $548 million of debt and other installments due within twelve months and the company’s $500 million minimum-liquidity covenant.
- The extent of dilution from the ATM program and potential equity issuance, including the 31.7 million shares sold in June and July 2021.
- Future customer contract cancellations, early terminations, dayrate reductions, receivable collections and COVID-19-related operating disruptions.
- Developments in Brazilian tax assessments, debt-exchange litigation and other legal or regulatory contingencies.
- Whether improved results are sustainable without prior-year settlement revenue and impairment comparisons benefiting reported earnings.