Transocean Ltd. 2017 Q3 Form 10-Q Summary
Business context and reporting period
Transocean provides offshore contract drilling services, specializing in ultra-deepwater and harsh-environment operations. The filing covers the three and nine months ended September 30, 2017, with unaudited U.S. GAAP financial statements. At September 30, 2017, the company owned or operated 38 mobile offshore drilling units and had four ultra-deepwater drillships under construction or contract.
Key financial metrics
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Operating revenue | $808 million | $906 million | $2.344 billion | $3.187 billion |
| Contract drilling revenue | $699 million | $886 million | $2.142 billion | $2.912 billion |
| Operating income (loss) | $(1.145) billion | $229 million | $(2.516) billion | $816 million |
| Net income (loss) | $(1.411) billion | $236 million | $(2.995) billion | $570 million |
| Loss attributable to controlling interest | $(1.417) billion | $218 million | $(3.016) billion | $535 million |
| Diluted EPS | $(3.62) | $0.59 | $(7.72) | $1.44 |
| Operating cash flow | Not separately provided for the quarter | Not separately provided for the quarter | $887 million | $1.278 billion |
Operating margin was approximately negative 142% in Q3 2017 versus 25% in Q3 2016, and approximately negative 107% for the first nine months versus 26% in the prior-year period. The reported margins were heavily affected by asset impairments and disposal losses.
- Q3 operating and maintenance expense declined 21% to $323 million; depreciation declined 12% to $197 million.
- Q3 included a $1.385 billion impairment loss, primarily on rigs classified as held for sale.
- Nine-month results included $1.498 billion of impairment losses and a $1.602 billion net loss on asset disposals, principally related to the sale of 10 high-specification jackups and novation of five newbuild contracts.
- Cash used in investing activities was $46 million, including $386 million of capital expenditures and $330 million of disposal proceeds.
- Cash used in financing activities was $1.176 billion, principally reflecting $1.629 billion of debt repayments, partially offset by $403 million of debt issuance proceeds.
Liquidity, debt and balance sheet
| Balance-sheet item | September 30, 2017 | December 31, 2016 |
|---|---|---|
| Cash and cash equivalents | $2.717 billion | $3.052 billion |
| Total debt carrying amount | $7.300 billion | $8.464 billion |
| Debt due within one year | $799 million | $724 million |
| Long-term debt | $6.501 billion | $7.740 billion |
| Total equity | $12.803 billion | $15.805 billion |
Transocean had no borrowings or letters of credit outstanding under its $3.0 billion unsecured revolving credit facility and had the full $3.0 billion available. Its debt-to-tangible-capitalization ratio was 0.36 to 1.00 versus a 0.60 to 1.00 covenant limit. Contractual obligations totaled $12.953 billion, including $6.838 billion of debt, $4.396 billion of interest, $914 million of purchase obligations and $805 million of service agreements.
Material changes versus the prior comparable period
- Revenue declined 11% in Q3 and 26% for the nine-month period, driven by lower dayrates, fewer operating days, lower utilization and rigs sold or classified as held for sale.
- Total fleet average daily revenue decreased to $319,000 from $332,100 in Q3 2016. Nine-month average daily revenue decreased 9% to $328,800.
- Total fleet utilization improved to 52% from 49% in Q3, but remained low; nine-month utilization declined to 46% from 49%.
- Debt carrying value declined by $1.164 billion from year-end 2016 after tender offers, open-market repurchases and scheduled maturities, partly offset by new secured debt.
- Operating cash flow decreased $391 million year over year to $887 million, primarily because of lower operating activity and reduced customer termination payments.
- The company entered into an agreement to acquire Songa Offshore, which owned seven rigs. Consideration was expected to include 68.6 million Transocean shares and approximately $575 million of 0.5% exchangeable bonds, subject to closing conditions.
Guidance, outlook, commentary and risks
- Management remained positive on the long-term offshore drilling outlook, particularly for harsh-environment and ultra-deepwater floaters, but acknowledged continued excess ultra-deepwater supply and pressure on dayrates.
- Contract backlog was $9.4 billion as of October 26, 2017, down from $10.2 billion as of July 25, 2017 and $11.3 billion as of February 9, 2017.
- Uncommitted fleet rates remained high for future periods, including 65% for ultra-deepwater floaters in 2018 and 48% for harsh-environment floaters in 2018.
- A customer elected to terminate the Discoverer Clear Leader contract effective November 2017; Transocean expected approximately $148 million of termination fees, while backlog was reduced by approximately $206 million.
- Two uncontracted newbuild drillships had construction paused, and interest capitalization had ceased. Estimated total completion costs for the four major construction projects were $3.4 billion.
- Transocean issued $750 million of 7.50% senior unsecured notes on October 17, 2017, receiving $742 million of net proceeds, primarily to refinance maturing debt.
- The Songa acquisition remained subject to minimum tender, regulatory and other conditions. The transaction agreement could be terminated if the offer was not unconditional by January 31, 2018, subject to permitted extensions.
- Macondo-related litigation remained material. The company recorded $244 million of probable loss contingencies and maintained $237 million in escrow for the approved plaintiff settlement. Additional claims, including 30 settlement-class opt-outs, remained unresolved.
- Brazilian tax assessments totaled approximately $313 million in aggregate across identified matters, including the BRL 846 million and BRL 144 million assessments; an unfavorable outcome could materially affect cash flows.
- Management reported a material weakness in internal control over financial reporting related to income tax accounting. Disclosure controls were therefore considered ineffective as of September 30, 2017; remediation was ongoing and had not yet been validated.
Important facts for investors to verify
- Progress and final terms of the Songa acquisition, including share issuance, exchangeable bonds, regulatory approvals and integration costs.
- Ability to maintain positive operating cash flow while utilization, dayrates and backlog remain under pressure.
- Near-term debt maturities, refinancing actions and the effect of credit-rating changes on interest expense and market access.
- Potential additional impairments or scrap sales for underutilized rigs and the remaining cost and timing of newbuild projects.
- Resolution and cash impact of Macondo litigation, insurance recoveries and Brazilian tax assessments.
- Remediation and external testing of the income-tax-related material weakness in internal controls.