Transocean Ltd. 2015 Q3 Form 10-Q Summary
Business context and reporting period
Transocean is an international offshore contract drilling company focused on deepwater and harsh-environment operations. The unaudited filing covers the three and nine months ended September 30, 2015, with comparisons to the corresponding 2014 periods. At September 30, 2015, the company operated 62 mobile offshore drilling units and had seven ultra-deepwater drillships and five high-specification jackups under construction or contracted for construction.
Key financial metrics
| Metric | Q3 2015 | Q3 2014 | YTD 2015 | YTD 2014 |
|---|---|---|---|---|
| Total revenue | $1.608 billion | $2.270 billion | $5.535 billion | $6.937 billion |
| Contract drilling revenue | $1.569 billion | $2.215 billion | $5.346 billion | $6.785 billion |
| Operating income (loss) | $445 million | $(2.168) billion | $630 million | $(731) million |
| Net income (loss) attributable to controlling interest | $321 million | $(2.217) billion | $180 million | $(1.174) billion |
| Diluted EPS | $0.88 | $(6.12) | $0.49 | $(3.24) |
| Cash flow from operations | $648 million | $882 million | $2.485 billion | $1.654 billion |
Calculated operating margins were approximately 27.7% in Q3 2015 and 11.4% for the first nine months of 2015. The reported improvement in operating income and net income primarily reflects the absence of the substantial 2014 goodwill and asset impairments, plus a $788 million pre-tax benefit in 2015 related to Macondo recoveries and liability reductions. These margins are therefore not representative of recurring operating performance.
- Q3 2015 operating days declined 26% year over year to 4,063; average daily revenue declined 4% to $385,300; utilization fell to 70% from 76%.
- For the first nine months, operating days declined 19% to 13,515; average daily revenue declined 3% to $394,800; utilization fell to 75% from 78%.
- Q3 revenue efficiency improved to 95% from 93%, while nine-month revenue efficiency improved to 96% from 95%.
- September 30 cash and equivalents were $2.234 billion, down from $2.635 billion at December 31, 2014. Management estimated approximately $1.3 billion was required for working capital and operating needs.
- Total debt was $8.753 billion, including $123 million due within one year, versus $10.092 billion at December 31, 2014. The company had $3.0 billion of undrawn capacity under its revolving credit facility.
- Capital expenditures were $1.336 billion for the first nine months, and management expected approximately $2.0 billion for full-year 2015.
Material changes versus the prior comparable period
- Contract drilling revenue decreased 29% in Q3 and 21% year to date, primarily because more rigs were idle or stacked, rigs were sold or classified as held for sale, and dayrates declined.
- Operating and maintenance expense decreased 33% in Q3 and 43% year to date, driven by fewer shipyard and mobilization days, asset disposals, and cost reductions for idle or stacked rigs.
- 2015 impairment charges totaled $1.839 billion, comprising $507 million for the Deepwater Floater asset group, $668 million for the Midwater Floater asset group and $664 million for assets held for sale. The comparable 2014 period included $2.833 billion of impairments, including approximately $2.0 billion of goodwill.
- Debt declined through the redemption of $893 million of senior notes and open-market repurchases of $292 million principal amount of debt for $274 million in cash.
- Operating cash flow increased $831 million year to date, substantially aided by $663 million of Macondo-related insurance and settlement recoveries and changes in working capital.
- The 2015 shareholder distribution was reduced to the first two installments, totaling $109 million; shareholders subsequently approved cancellation of the third and fourth installments.
Outlook, commentary, risks and unusual items
- Management described the near- to medium-term offshore drilling market as especially challenging because of weak commodity prices, customer spending constraints, excess rig capacity, lower utilization and lower dayrates. It did not expect drilling contract awards to increase in 2016.
- Contract backlog was $16.937 billion at October 26, 2015, down from $18.557 billion at July 15, 2015 and $21.240 billion at February 17, 2015. The backlog includes only firm commitments and may not equal future realized revenue.
- Uncommitted fleet rates at October 26, 2015 were 37% for ultra-deepwater floaters, 43% for harsh-environment floaters, 33% for deepwater floaters, 42% for midwater floaters and 30% for high-specification jackups for the remainder of 2015.
- The company recognized $788 million of Macondo-related income, including $538 million of insurance recoveries, $125 million of BP legal-cost reimbursement and $125 million from reductions in estimated liabilities. A $212 million deposit was placed in escrow for the PSC settlement, which remained subject to court approval at quarter end.
- At September 30, 2015, estimated probable Macondo loss contingencies were $285 million. Approximately 1,398 related actions or claims remained pending, including potential settlement opt-outs and other government, environmental and securities claims.
- The company had $120 million remaining under the DOJ plea agreement at September 30, 2015. The Consent Decree obligations had been satisfied. Subsequent to quarter end, the company paid $35 million under a settlement with certain states.
- Three credit rating agencies had downgraded the company’s senior unsecured debt below investment grade, increasing borrowing costs and potentially limiting capital-market access.
- Additional risks include further rig impairments, contract cancellations, inability to secure contracts for newbuilds, construction delays, tax assessments, litigation and insurance disputes. A U.S. tax transfer-pricing assessment could involve approximately $290 million of additional tax, excluding interest and penalties.
Important facts for investors to verify
- Whether the Macondo PSC settlement received court approval and whether remaining opt-outs or appeals create additional cash exposure.
- The recurring earnings and cash-flow impact after excluding the $788 million Macondo benefit and other unusual items.
- Utilization, dayrates, stacking activity and contract awards across each rig class, particularly ultra-deepwater units.
- Funding requirements for approximately $7.330 billion of estimated costs to complete listed major construction projects, including projects without drilling contracts.
- Debt maturities, refinancing capacity, covenant compliance and the effect of below-investment-grade ratings on interest costs.
- Potential additional impairments if dayrates, utilization, commodity prices or asset-sale values deteriorate further.
- Outstanding tax, environmental, insurance and litigation contingencies, including the U.S., Norway and Brazil matters.