Transocean Ltd. quarterly report, Q2 FY2012

Transocean Ltd. 2012 Q2 Form 10-Q Summary

Business context and reporting period

Transocean is an international offshore contract drilling company focused on deepwater and harsh-environment drilling. It operated 129 mobile offshore drilling units as of July 18, 2012, including 50 high-specification floaters, 25 midwater floaters, 10 high-specification jackups, 43 standard jackups and one swamp barge. The filing covers the unaudited three and six months ended June 30, 2012, compared with the corresponding 2011 periods.

Key financial metrics

Metric	Q2 2012	Q2 2011	Six months 2012	Six months 2011
Operating revenues	$2.575 billion	$2.334 billion	$4.912 billion	$4.478 billion
Contract drilling revenue	$2.390 billion	$2.096 billion	$4.610 billion	$4.056 billion
Operating income (loss)	$(163) million	$355 million	$56 million	$709 million
Net income (loss) attributable to controlling interest	$(304) million	$124 million	$(294) million	$443 million
Diluted EPS	$(0.86)	$0.39	$(0.83)	$1.38
Cash flow from operations	$459 million	$340 million	$999 million	$730 million

Q2 operating margin was approximately negative 6.3%; the six-month operating margin was approximately 1.1%.
Q2 net loss attributable to controlling interest included approximately $0.8 billion of additional Macondo-related loss contingencies recognized during the quarter and six-month period.
Six-month operating and maintenance expense increased 31% to $3.820 billion, primarily because of Macondo contingencies, acquired rigs, shipyard and maintenance activity, and newbuild operations.
Six-month impairment losses were $239 million, including a $118 million incremental goodwill impairment and $92 million of drilling-management-services intangible-asset impairments.
Utilization improved to 66% in Q2 2012 from 55% in Q2 2011; average daily revenue declined to $305,400 from $312,100. Six-month utilization was 64% versus 55%.

Liquidity, debt and capital resources

Cash and cash equivalents were $3.964 billion at June 30, 2012, compared with $4.017 billion at December 31, 2011. Management estimated approximately $1.0 billion was required for working capital and operating needs.
Total debt was $12.839 billion, including $2.800 billion due within one year. Scheduled debt maturities for the twelve months ending June 30, 2013 totaled approximately $2.820 billion.
The company had no borrowings and $2.0 billion of available capacity under its Five-Year Revolving Credit Facility, subject to covenants; $24 million of letters of credit were outstanding.
Six-month capital expenditures were $496 million. Management expected 2012 capital expenditures of approximately $1.2 billion, including major construction projects with estimated total completion costs of $2.402 billion.
Operating cash flow of $999 million exceeded capital expenditures, but financing activities used $783 million, including debt repayments, short-term borrowing reductions and the $278 million final installment of the previously approved capital distribution.

Material changes versus the prior comparable period

Revenue increased 10% in both the quarter and six-month period, driven by greater revenue-earning days, the Aker Drilling acquisition, newbuilds and rig reactivations. Other revenue declined 22% in Q2 and 28% for the six-month period, primarily due to weaker drilling-management-services revenue.
Profitability deteriorated sharply: Q2 shifted from $124 million of controlling-interest net income to a $304 million loss, while six-month results shifted from $443 million of income to a $294 million loss.
Interest expense increased 24% in both the quarter and six-month period, reflecting debt issued in November 2011 and debt assumed in the Aker Drilling acquisition, partly offset by debt repayments.
The company completed the exchange of Quantum Pacific Management Limited’s 50% TPDI interest for 8.7 million Transocean shares. TPDI became wholly owned, and the transaction extinguished $148 million of TPDI notes payable to Quantum.
The company completed sales of several standard jackups for $179 million of six-month net proceeds and recognized a $64 million gain on those disposals. It also completed the sale of Challenger Minerals Inc. and received additional proceeds related to Challenger Minerals (North Sea).
The filing corrected previously reported errors, including insurance-recovery assets that were not probable of recovery. The corrections reduced first-quarter 2012 controlling-interest income by $32 million and reduced reported 2011 controlling-interest income by $29 million.

Guidance, outlook, commentary and risks

Management expected total 2012 revenue to exceed 2011 revenue, supported by fewer out-of-service and idle days, Aker Drilling rigs and newbuilds. It also expected operating and maintenance expense to be higher because of added rigs, personnel costs and newbuild activity.
Management reported contract backlog of $22.9 billion as of July 18, 2012, up from $20.6 billion as of April 18, 2012. Uncommitted fleet rates remained highest for standard jackups and midwater floaters in 2013 through 2015.
Management expected utilization and dayrates to continue improving into 2013, but enhanced post-Macondo regulations could increase certification, maintenance and out-of-service costs.
The company recognized a $2.0 billion Macondo-related liability at June 30, 2012, up from $1.2 billion at December 31, 2011, and a $235 million estimated insurance-recovery asset. Management stated that additional reasonably possible losses could not be estimated and could increase recognized liabilities.
Macondo-related matters included extensive litigation, government investigations, potential civil and criminal penalties, insurance disputes and contractual indemnity disputes with BP. The first phase of the MDL trial was scheduled for January 14, 2013, subject to further developments.
Subsequent to quarter-end, a Brazilian court panel granted a preliminary injunction related to the Frade field incident that could restrict Brazilian operations if finalized and upheld; management stated this could materially affect future results and cash flows.
Other significant exposures included U.S. tax assessments, Norwegian tax investigations and assessments, Brazilian tax assessments, regulatory matters and various environmental and asbestos claims. Total unrecognized tax benefits, including interest and penalties, were $631 million.
The company’s disclosure controls were reported effective. Management identified an immaterial internal-control deficiency related to evaluating insurance recoveries and initiated improvements; it did not classify the matter as a material weakness.

Most important facts for investors to verify

Whether the $2.0 billion Macondo liability and $235 million insurance-recovery asset adequately reflect eventual litigation, regulatory, settlement and insurance outcomes.
The timing and funding of approximately $2.8 billion of debt maturities in the twelve months after June 30, 2012, including the potential December 2012 repurchase of $1.7 billion of Series C convertible notes.
Whether the expected improvement in utilization, dayrates and the $22.9 billion backlog converts into cash flow without significant cancellations, downtime or force majeure effects.
Whether enhanced offshore-drilling regulations, customer requirements and shipyard work produce further operating-cost increases or delays.
Whether additional goodwill, rig or drilling-management-services impairments become necessary if market conditions, dayrates or projected cash flows weaken.
The ultimate outcome of U.S., Norwegian and Brazilian tax proceedings and whether related cash payments, penalties or security requirements become material.
The final effect of the Brazilian Frade field injunction and related civil and criminal proceedings on Transocean’s ability to operate in Brazil.