Transocean Ltd. — Q1 2019 Form 10-Q Summary
Business context and reporting period
Transocean is an international offshore contract drilling company focused on ultra-deepwater and harsh-environment drilling. The filing covers the unaudited three months ended March 31, 2019, compared with March 31, 2018. At March 31, 2019, Transocean operated or partially owned 48 mobile offshore drilling units and was constructing four ultra-deepwater drillships and one harsh-environment semisubmersible.
Key financial metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Contract drilling revenue | $754 million | $664 million | 14% increase |
| Operating loss | $13 million | $4 million | Loss increased |
| Net loss attributable to controlling interest | $171 million | $210 million | Loss improved by $39 million |
| Loss per diluted share | $0.28 | $0.48 | Improved |
| Cash flow from operating activities | $(51) million | $103 million | Decreased by $154 million |
| Capital expenditures | $52 million | $53 million | Broadly unchanged |
| Contract backlog, April 17, 2019 | $12.1 billion | $11.5 billion at October 22, 2018 | Higher than prior disclosed level |
Revenue growth reflected approximately $120 million from the Songa and Ocean Rig acquisitions, $55 million from increased operating activity, $20 million from a newbuild drillship, and $15 million from improved revenue efficiency. These benefits were partly offset by lower revenue from disposed or held-for-sale rigs, prior-year contract termination revenue, and lower dayrates.
Operating and maintenance expense increased 20% to $508 million, primarily due to acquired operations and the reactivation of two rigs. Depreciation and amortization rose 7% to $217 million. Interest expense increased to $166 million from $147 million, although debt retirements reduced interest expense by approximately $26 million. The quarter also included an $18 million loss on debt retirement and a $25 million net discrete tax benefit.
Liquidity, debt and balance sheet
- Cash and cash equivalents were $1.886 billion at March 31, 2019, compared with $2.160 billion at December 31, 2018.
- Restricted cash and investments totaled approximately $584 million, including $156 million remaining in escrow for the Macondo settlement.
- Total debt principal was $9.529 billion, with $356 million scheduled to mature within the following 12 months. Carrying value was $9.414 billion.
- Long-term debt carrying value declined from $9.605 billion at year-end 2018 to $9.071 billion.
- Transocean issued $550 million of 6.875% senior secured notes due 2027 and received approximately $538 million of net proceeds.
- The company repurchased $510 million principal amount of notes for $521 million, recognizing an $18 million loss.
- The $1.0 billion secured revolving credit facility had no borrowings, $25 million of letters of credit, and $1.0 billion of available capacity at March 31, 2019.
- Contractual debt principal and interest obligations totaled approximately $14.335 billion, including $973 million due within 12 months.
Material changes versus the prior comparable period
- Revenue increased 14%, while operating loss widened because operating cost growth exceeded revenue growth.
- Net loss improved primarily because the prior-year period included larger tax expense and currency-related losses; Q1 2019 nevertheless included higher interest expense and an $18 million debt-retirement loss.
- Operating days increased 14% to 2,450, average daily revenue increased 7% to $306,500, revenue efficiency improved to 98% from 92%, and fleet utilization improved to 56% from 52%.
- Operating cash flow turned negative, largely because changes in operating assets and liabilities used $154 million compared with a $79 million source in Q1 2018.
- Investing cash flow declined to $23 million from $376 million, reflecting lower investment maturities and the absence of prior-year acquisition cash, partly offset by $123 million of investment maturities and $12 million of asset-sale proceeds.
- Transocean completed the sale of two deepwater floaters and one midwater floater for $11 million of net proceeds and recognized a $1 million gain on those rig sales.
- The company adopted the new lease standard on January 1, 2019, recording right-of-use assets and lease liabilities; management stated that the adoption was not material to operations or cash flow.
Guidance, outlook, risks and unusual items
Management expressed a positive long-term view of the offshore floater market, particularly for high-specification vessels. It cited Brent oil prices above $70 per barrel, improved customer economics, increasing activity, limited harsh-environment rig supply, improving ultra-deepwater utilization and expected dayrate recovery. No formal earnings guidance was provided in the filing.
Backlog was $12.130 billion as of April 17, 2019. Uncommitted fleet rates for the remainder of 2019 were 50% for ultra-deepwater floaters, 23% for harsh-environment floaters and 74% for midwater floaters, indicating substantial future exposure to contracting conditions.
- Key risks include commodity-price volatility, rig oversupply, low utilization, dayrate declines, contract cancellations or renegotiations, operational downtime, construction delays and the need to fund newbuild commitments.
- Four ultra-deepwater drillships under construction had estimated total completion costs of approximately $3.080 billion. Two units lacked drilling contracts and had significant remaining shipyard obligations.
- Transocean invested $59 million in Orion for the Transocean Norge project during the quarter and committed an additional $33 million for January 2020. The rig is expected to begin a six-well contract in July 2019.
- A Brazilian tax assessment remained outstanding at approximately BRL 657 million, or approximately $168 million, including penalties and interest. The company is contesting the assessment.
- The Macondo-related liability recorded was $158 million. Other notable matters include Global Marine litigation, an approximately $80 million overdue Nigerian customer receivable, asbestos claims and environmental contingencies.
- The company stated that its debt rating was below investment grade and that market access could be restricted by downgrades or adverse industry and economic conditions.
- Management concluded that disclosure controls were effective as of March 31, 2019, with no material changes to internal control over financial reporting.
Important facts for investors to verify
- Whether utilization, dayrates and backlog convert into sustained positive operating cash flow.
- The timing and cost of the four newbuild drillships, including financing and contract coverage for the two currently uncontracted units.
- Near-term debt maturities, interest burden and compliance with secured credit facility covenants.
- The outcome and cash-flow impact of the Brazilian tax assessment and other tax examinations.
- Progress and economics of the Transocean Norge project and other reactivation or newbuild activities.
- Potential effects of contract cancellations, renegotiations, force majeure events and continued rig disposals.
- The ultimate exposure from Macondo, Global Marine litigation, Nigerian receivables, asbestos claims and environmental matters.