Transocean Ltd. 2013 Q1 Form 10-Q Summary
Business context and reporting period
Transocean is an international offshore contract drilling provider focused on deepwater and harsh-environment operations. The company operated 83 mobile offshore drilling units at March 31, 2013, including 48 high-specification floaters, 25 midwater floaters and 10 high-specification jackups. The filing covers the unaudited three months ended March 31, 2013, compared primarily with the three months ended March 31, 2012.
Financial performance and key metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Operating revenues | $2.197 billion | $2.110 billion | 4% |
| Contract drilling revenues | $2.145 billion | $2.014 billion | 7% |
| Operating income | $473 million | $371 million | 27% |
| Operating margin | 21.5% | 17.6% | Improved |
| Income from continuing operations | $313 million | $154 million | More than doubled |
| Net income attributable to controlling interest | $321 million | $10 million | Increased materially |
| Diluted earnings per share | $0.88 | $0.03 | Increased materially |
| Net cash provided by operating activities | $106 million | $540 million | Down $434 million |
| Capital expenditures | $488 million | $238 million | Up $250 million |
Net margin was approximately 14.2% in Q1 2013 versus 0.9% in Q1 2012. The prior-year period included a $140 million impairment loss in continuing operations and a $136 million loss from discontinued operations. Q1 2013 included a $68 million increase in operating and maintenance costs associated with Macondo-related loss contingencies.
- Total fleet average daily revenue was $361,200, compared with $358,100 in Q1 2012.
- Average revenue efficiency was 88%, down from 90%.
- Average rig utilization was 80%, up from 74%.
- Cash and cash equivalents were $3.689 billion at March 31, 2013, down from $5.134 billion at December 31, 2012.
- Total debt was $11.231 billion, including $264 million due within one year. Long-term debt, including debt of consolidated variable-interest entities, was $10.967 billion.
- Total equity was $16.027 billion, compared with $15.730 billion at December 31, 2012.
- The company had $2.0 billion available under its five-year revolving credit facility and $900 million available under its three-year secured revolving credit facility, with no borrowings outstanding under either facility at March 31, 2013.
Material changes versus the prior comparable period
- Contract drilling revenue increased primarily because of approximately $165 million from higher rig utilization, partly offset by approximately $40 million from lower revenue efficiency.
- Operating and maintenance expenses rose 11%, driven by higher shipyard, maintenance and repair costs, Macondo-related contingencies and costs for newly operating rigs.
- Interest expense declined by $23 million, reflecting debt repayments and higher capitalized interest, partly offset by interest on debt issued after Q1 2012.
- The company completed construction of the Transocean Siam Driller, which commenced operations in March 2013.
- Transocean sold three standard jackups during the quarter for net proceeds of $63 million and recognized a $15 million net gain. These assets were reported in discontinued operations.
- Q1 2013 cash flow was significantly weaker because of working-capital uses, including the initial $400 million Macondo Consent Decree payment, higher capital expenditures and $1.190 billion of debt repayments.
- The company repaid $250 million of 5% notes, $500 million of 5.25% senior notes, $62 million of Series C convertible notes and approximately $273 million of Aker callable bonds during the quarter.
Guidance, outlook, management commentary, risks and unusual items
- Management expected 2013 revenue to exceed 2012 revenue, supported by higher dayrates, fewer expected out-of-service and idle days, increased drilling activity and newbuild deliveries.
- Management expected 2013 operating and maintenance expenses to exceed 2012 levels after adjusting for 2012 loss contingencies, reflecting restructuring, inflation, increased activity and shipyard costs.
- Expected 2013 capital expenditures were approximately $2.4 billion, including approximately $1.3 billion for major construction projects. Estimated total costs for listed major construction projects were approximately $5.481 billion.
- Contract backlog for continuing operations was $28.5 billion at April 18, 2013, down from $28.8 billion at February 14, 2013 and $29.7 billion at October 17, 2012.
- Uncommitted fleet rates at April 18, 2013 were 15% for high-specification floaters, 35% for midwater floaters and 14% for high-specification jackups for the remainder of 2013. Management expected continued demand but noted near-term dayrate pressure and increased competition, particularly for high-specification floaters.
- The Macondo resolution requires $1.4 billion of fines, recoveries and civil penalties, plus interest, through 2017. At March 31, 2013, remaining settlement obligations were $1.0 billion, excluding interest.
- Macondo-related probable and estimable loss contingencies declined to $505 million from $1.9 billion at December 31, 2012. Additional reasonably possible losses may still arise, and the ultimate exposure cannot be reliably estimated.
- The company continued to face multidistrict litigation, government claims, potential punitive damages and contractual indemnity disputes related to Macondo. The first phase of the MDL trial began in February 2013, and a second phase was scheduled for September 2013.
- Material tax contingencies included a U.S. assessment involving approximately $363 million of asserted additional taxes, Norwegian assessments and criminal proceedings, and Brazilian tax assessments. Unrecognized tax benefits, including interest and penalties, totaled $543 million at March 31, 2013.
- Brazil Frade field litigation included potential claims of approximately $10 billion; the company stated that the preliminary injunction against its Brazilian operations had been suspended, while related civil proceedings remained unresolved.
- The company recommended a $2.24-per-share distribution from additional paid-in capital, approximately $807 million in aggregate. A shareholder group led by Carl Icahn proposed a $4.00-per-share distribution, approximately $1.4 billion, subject to shareholder approval.
- Enhanced offshore drilling regulations and customer-required inspections may increase maintenance costs, downtime and out-of-service time.
Most important facts for an investor to verify
- Whether backlog converts into revenue at expected dayrates and whether utilization and revenue efficiency recover from Q1 levels.
- The timing and final cost of the approximately $2.4 billion 2013 capital program and the remaining newbuild commitments.
- Liquidity after Macondo payments, scheduled debt maturities, capital expenditures and any shareholder distribution approved in May 2013.
- Potential additional Macondo liabilities, including punitive damages, environmental claims, insurance recoveries and indemnity outcomes.
- Progress and outcomes of the U.S., Norway and Brazil tax matters, including the $543 million unrecognized-tax-benefit balance.
- Whether weaker midwater and deepwater market conditions result in lower dayrates, contract cancellations, stacking or asset impairments.
- The final shareholder decision on the proposed capital distribution and any effect on debt reduction, capital investment and liquidity.