Transocean Ltd. annual report, FY2011

Transocean Ltd. — 2011 Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2011. The filing also presents unaudited fourth-quarter results for the three months ended December 31, 2011. Transocean is a Swiss-based offshore contract drilling company operating globally, with 135 mobile offshore drilling units at year-end, including 50 high-specification floaters, 25 midwater floaters, nine high-specification jackups, 50 standard jackups and one swamp barge.

Financial performance and key metrics

Metric	2011	2010	Change
Operating revenues	$9.142 billion	$9.466 billion	Down 3%
Operating income (loss)	$(4.776) billion	$1.857 billion	Down $6.633 billion
Income (loss) from continuing operations	$(5.829) billion	$954 million	Down $6.783 billion
Net income (loss)	$(5.632) billion	$988 million	Down $6.620 billion
Net income (loss) attributable to controlling interest	$(5.725) billion	$961 million	Down $6.686 billion
Basic loss per share	$(17.79)	$2.99	Unfavorable change
Cash from operating activities	$1.785 billion	$3.946 billion	Down $2.161 billion
Capital expenditures	$1.020 billion	$1.391 billion	Down $371 million
Cash and cash equivalents	$4.017 billion	$3.394 billion	Up $623 million
Total debt	$13.536 billion	$11.221 billion	Up $2.315 billion
Total equity	$15.691 billion	$21.375 billion	Down $5.684 billion

Calculated annual operating margin was approximately (52.2)% and net margin was approximately (61.6)%, heavily affected by non-cash goodwill impairment and Macondo-related loss contingencies.

Contract drilling revenue declined 6% to $8.335 billion. Other revenue increased 59% to $762 million, primarily from drilling management services.
Average daily revenue increased 5% to $297,400, but utilization declined to 57% from 63%, and revenue-earning days fell 11% to 28,020.
Operating and maintenance expense increased 37% to $6.956 billion, including approximately $1.0 billion of Macondo-related loss contingencies and approximately $700 million of shipyard, maintenance, repair and equipment recertification costs.
Goodwill impairment was approximately $5.2 billion, compared with a $1.0 billion standard-jackup impairment in 2010.
Fourth-quarter 2011 revenue was $2.422 billion, compared with $2.127 billion in fourth-quarter 2010. Fourth-quarter operating loss was $5.807 billion versus a $668 million loss in the prior-year quarter, primarily due to the $5.2 billion goodwill impairment and $1.0 billion Macondo contingency charge.

Liquidity, debt and capital allocation

Cash and cash equivalents were $4.017 billion; management estimated approximately $1.0 billion was required for working capital and operating needs.
The company generated $1.785 billion of operating cash flow, used $1.896 billion in investing activities and generated $734 million from financing activities.
In December 2011, Transocean issued $2.5 billion of net senior-note proceeds, consisting of $1.0 billion of 5.05% notes due 2016, $1.2 billion of 6.375% notes due 2021 and $300 million of 7.35% notes due 2041.
The company repurchased $1.7 billion of Series B Convertible Senior Notes in December 2011; the remaining $30 million was redeemed in February 2012.
A $2.0 billion five-year revolving credit facility was established in November 2011. At February 22, 2012, it had $2.0 billion of available borrowing capacity, no borrowings and $24 million of letters of credit outstanding.
Shareholders approved a $3.16-per-share distribution of qualifying additional paid-in capital. Three installments totaling $763 million were paid in 2011, with $278 million payable at February 22, 2012.
The company issued 29.9 million shares in December 2011 for net proceeds of $1.2 billion.
Total contractual obligations were $22.565 billion, including $12.039 billion of debt, $6.587 billion of interest, $1.311 billion of purchase obligations and $1.273 billion of capital-lease payments.

Material changes versus the prior comparable period

Revenue declined modestly, but profitability deteriorated sharply because of the $5.2 billion goodwill impairment and the $1.0 billion Macondo-related contingency charge.
Cash flow from operations fell 55%, reflecting lower earnings and higher working-capital requirements.
Debt increased substantially, primarily because of debt assumed in the Aker Drilling acquisition and the December 2011 senior-note issuance, despite the Series B note repurchase.
Transocean completed the Aker Drilling acquisition in October 2011, adding two harsh-environment ultra-deepwater semisubmersibles operating under long-term Norwegian contracts and two ultra-deepwater drillships under construction for expected delivery in 2014. Approximately $100 million of 2011 revenue came from Aker operations.
Contract backlog declined to approximately $22.5 billion at December 31, 2011 from $24.6 billion at December 31, 2010. It was approximately $21.4 billion at February 14, 2012.
On December 31, 2011, customers issued notice terminating the Deepwater Expedition contract, representing approximately $470 million of backlog.
Discontinued operations generated $197 million of after-tax income in 2011, including gains from the sale of the Caspian Sea operation and Challenger Minerals assets.

Guidance, outlook, risks and unusual items

Management expected 2012 revenue to exceed 2011 revenue, driven by fewer expected out-of-service and idle days, the Aker acquisition and newbuild deliveries. Operating and maintenance expense was also expected to increase because of additional rigs, higher personnel costs and increased activity.
Management expected utilization and dayrates to improve across most asset classes through 2012 and into 2013, supported by oil prices, exploration success and customer capital budgets.
At February 14, 2012, uncommitted fleet rates were 18% for high-specification floaters, 43% for midwater floaters, 24% for high-specification jackups and 45% for standard jackups for the remainder of 2012. Nineteen of 49 standard jackups were stacked.
The Macondo well incident remained the most significant contingency. Transocean had recorded a $1.2 billion liability and a $220 million insurance-recovery asset at year-end, but stated that the ultimate exposure could not be estimated. The company estimated that the incident had caused more than $3.0 billion of cumulative effects through lost backlog, lost revenue, incremental costs and recognized contingencies.
Subsequent to year-end, the MDL Court ruled that Transocean was not liable under OPA for below-surface discharges as a responsible party and was not liable as vessel owner under the Clean Water Act, but left unresolved potential liability as an operator of the well facility and potential removal-cost liability. The court also ruled that BP must indemnify Transocean for certain compensatory third-party pollution damages, while excluding punitive damages and Clean Water Act civil penalties.
The Brazil Frade field incident exposed Transocean to threatened civil and criminal claims and a claimed 20 billion Brazilian real civil action. Management stated that Chevron contractual indemnities were available and that it intended to defend the claims.
Other risks include high leverage, potential credit-rating downgrades, cyclical offshore drilling demand, dayrate and utilization pressure, customer contract cancellations, regulatory and certification costs, shipyard delays, tax disputes, environmental liabilities, insurance limitations and international political or compliance risks.
Management reported effective internal control over financial reporting, although Aker Drilling, representing approximately 9% of consolidated assets and liabilities and 1% of revenue, was excluded from the 2011 internal-control assessment due to the timing of the acquisition.

Investor verification points

Reconcile the final goodwill impairment measurement with the preliminary $5.2 billion estimate and assess whether any additional impairment was recorded after filing.
Track the ultimate resolution of Macondo litigation, indemnification rights, insurance recoveries, civil penalties, removal costs and the remaining $1.2 billion recorded liability.
Review near-term debt maturities, including the assumed December 2012 put option on the $1.7 billion Series C Convertible Senior Notes, and the company’s ability to fund maturities from cash flow and available credit.
Validate backlog conversion against actual dayrates, utilization, downtime, contract cancellations and the $470 million Deepwater Expedition termination.
Monitor the execution, cost and delivery timing of the six newbuild projects and the approximately $1.3 billion 2012 capital-expenditure outlook.
Assess exposure from the Brazil Frade incident, U.S., Norwegian and Brazilian tax disputes, OFAC inquiries and other environmental or regulatory proceedings.
Consider the effect of customer concentration: BP accounted for approximately 10% of 2011 revenue and had approximately $2.7 billion of backlog as of February 14, 2012.