Transocean Ltd. 2009 Form 10-K Summary
Business context and reporting period
Transocean is an international offshore contract drilling company focused on deepwater, ultra-deepwater and harsh-environment drilling. It operated 138 mobile offshore drilling units as of December 31, 2009, with five additional ultra-deepwater floaters under construction. The filing covers the fiscal year ended December 31, 2009; fourth-quarter information is unaudited.
The company reports contract drilling services as its primary segment and combines drilling management services and oil and gas properties in other operations. The financial statements were prepared under U.S. GAAP and received an unqualified audit opinion. Management and the independent auditors concluded that internal control over financial reporting was effective as of December 31, 2009.
Financial results and key metrics
| Metric | 2009 | 2008 | Change |
|---|---|---|---|
| Operating revenues | $11.556 billion | $12.674 billion | Down 9% |
| Operating income | $4.400 billion | $5.357 billion | Down 18% |
| Net income attributable to controlling interest | $3.181 billion | $4.031 billion | Down 21% |
| Diluted EPS | $9.84 | $12.53 | Down 21% |
| Cash provided by operating activities | $5.598 billion | $4.959 billion | Up $639 million |
| Capital expenditures | $3.052 billion | $2.208 billion | Up $844 million |
| Cash and cash equivalents | $1.130 billion | $963 million | Up $167 million |
| Total debt | $11.717 billion | $13.557 billion | Down $1.840 billion |
Approximate 2009 operating margin was 38.1%, compared with 42.3% in 2008. Approximate net margin attributable to controlling interest was 27.5%, compared with 31.8% in 2008. The filing reports an annual fleet utilization rate of 80%, down from 90%, while average daily revenue increased 13% to approximately $271,400.
Fourth-quarter 2009 operating revenue was $2.733 billion, operating income was $1.003 billion, net income attributable to controlling interest was $723 million, and diluted EPS was $2.24. Fourth-quarter fleet utilization was 69%, compared with 90% in the fourth quarter of 2008, while average daily revenue increased to approximately $295,700 from $251,500.
Material changes versus the prior comparable period
- Revenue declined primarily because lower utilization and stacked rigs outweighed higher dayrates and contributions from newbuilds. Contract drilling revenue declined 1%, contract drilling intangible revenue declined 59%, and other revenue declined 46%.
- Thirty-six rigs were stacked, including one held for sale, at December 31, 2009, compared with two stacked rigs at December 31, 2008.
- Contract backlog declined to $31.171 billion at December 31, 2009 from $39.753 billion, a decrease of approximately 22%. High-specification floater backlog remained the majority at $25.704 billion.
- Impairment losses totaled $334 million, including $279 million related to two midwater floaters held for sale and $55 million related to drilling-management customer relationships and trade name assets.
- The company repaid the $2.0 billion Term Loan and repurchased $901 million principal amount of Series A convertible notes for $865 million in cash.
- Property and equipment increased to $23.018 billion from $20.861 billion, reflecting substantial newbuild and capital-lease activity. Petrobras 10000 was accepted under a capital lease, creating a $716 million non-cash addition to property and equipment and debt.
Guidance, outlook, risks and unusual items
- Management expected 2010 revenue to decline slightly from 2009 because of stacked and idle rigs and lower integrated-services activity. Full-year operations of 2009 newbuilds, four additional expected newbuild deliveries and increased other-operations activity were expected to offset part of the decline.
- Management expected 2010 operating and maintenance costs to be broadly in line with 2009, although shipyard, maintenance, newbuild and activity levels could cause variation. Planned 2010 capital expenditures were approximately $1.3 billion.
- High-specification floaters were relatively well positioned: the ultra-deepwater fleet was fully contracted for 2010, but uncommitted capacity increased materially for later years. Jackups and midwater floaters faced weaker utilization and dayrate conditions.
- Liquidity included $1.130 billion of cash, no borrowings under the five-year revolving credit facility, and $281 million of commercial paper outstanding at December 31, 2009. The revolving facility required a maximum debt-to-tangible-capitalization ratio of 0.6-to-1.0; the reported ratio was 0.49-to-1.0.
- Contractual obligations totaled $18.409 billion, including $11.392 billion of debt, $1.454 billion of capital leases, $4.487 billion of interest and $902 million of purchase obligations. Debt maturities and holder put rights create significant refinancing and liquidity requirements beginning in 2010.
- The company was conducting DOJ and SEC investigations concerning possible Foreign Corrupt Practices Act issues involving customs brokers and agents, and self-reported a potential OFAC sanctions issue involving shipments routed through Iran. The ultimate outcomes and possible penalties were not determinable.
- Tax contingencies included Norwegian assessments and proposed assessments, potential security requirements of up to $736 million, and Brazilian assessments totaling $114 million plus penalties and interest. Management expected no material effect on financial position or earnings but acknowledged possible material cash-flow effects.
- Insurance includes substantial deductibles and exclusions, including generally no commercial coverage for named windstorms in the U.S. Gulf of Mexico, war perils worldwide and most revenue loss. The company retains significant operational, environmental and well-control risk.
- The board recommended a shareholder-approved par-value reduction distribution of approximately $1.0 billion, or about $3.11 per share, payable in four installments, and authorized implementation of a share repurchase program of up to CHF3.5 billion. Neither action was completed as of December 31, 2009.
Most important facts for an investor to verify
- Backlog conversion, customer cancellations or renegotiations, and the timing and dayrates of new contracts.
- Utilization and dayrate trends by fleet class, particularly stacked jackups and midwater floaters.
- Near-term debt maturities, convertible-note holder put rights, commercial paper refinancing and compliance with credit covenants.
- Actual 2010 capital spending, newbuild delivery dates, cost overruns and contract commencement timing.
- Outcomes and potential financial effects of the DOJ, SEC and OFAC investigations.
- Resolution of Norwegian and Brazilian tax disputes, including possible collateral or cash-security requirements.
- Exposure from litigation, environmental claims, self-insured deductibles and insurance exclusions.
- Approval and funding of the proposed shareholder distribution and any share repurchases, including restrictions under Swiss law and debt agreements.