Transocean Ltd. Form 10-Q Summary
Business Context and Reporting Period
Unaudited results for the three and nine months ended September 30, 2009. Transocean is an international offshore contract drilling company focused on deepwater and harsh-environment drilling. At September 30, 2009, it owned, partially owned or operated 135 mobile offshore drilling units and had eight ultra-deepwater floaters under construction. The company reports contract drilling services and other operations.
Key Financial Metrics
| Metric | Q3 2009 | Q3 2008 | 9M 2009 | 9M 2008 |
|---|---|---|---|---|
| Operating revenues | $2,823 million | $3,192 million | $8,823 million | $9,404 million |
| Operating income | $957 million | $1,383 million | $3,397 million | $4,273 million |
| Operating margin | 33.9% | 43.3% | 38.5% | 45.4% |
| Net income attributable to controlling interest | $710 million | $1,063 million | $2,458 million | $3,277 million |
| Net margin | 25.2% | 33.3% | 27.9% | 34.8% |
| Diluted EPS | $2.19 | $3.30 | $7.61 | $10.19 |
| Cash flow from operations | $1,406 million | $1,270 million | $4,423 million | $3,763 million |
At September 30, 2009, cash and cash equivalents were $886 million, short-term investments were $180 million, total debt was $11.922 billion and debt due within one year was $702 million. Long-term debt was $11.220 billion, compared with $12.893 billion at December 31, 2008. Total assets were $36.018 billion and total equity was $19.706 billion.
Capital expenditures were $2.195 billion during the first nine months, while net cash used in investing activities was $2.026 billion and net cash used in financing activities was $2.474 billion. Cash decreased by $77 million from year-end 2008.
Fleet utilization declined to 75% in Q3 2009 from 89% in Q3 2008 and to 83% for the first nine months from 89%. Average daily revenue increased to $283,800 in Q3 from $242,200 and to $264,500 for the first nine months from $236,500.
Material Changes Versus Prior Comparable Period
- Q3 revenue decreased 12% and nine-month revenue decreased 6%, primarily because of lower utilization, reduced non-drilling activity, lower contract intangible revenue and fewer revenue-earning days.
- Q3 contract drilling revenue declined 4%, despite higher dayrates and newbuild activity. Nine-month contract drilling revenue increased 2% to $8.061 billion.
- Operating income declined 31% in Q3 and 21% for the nine-month period. Net income attributable to controlling interest declined 33% and 25%, respectively.
- Twenty-nine rigs were stacked during the third quarter, including one held for sale, reflecting weaker demand for midwater floaters and jackups.
- The company recorded $46 million of impairment loss in Q3 and $334 million for the nine months. The nine-month charge included $279 million for GSF Arctic II and GSF Arctic IV and $55 million for drilling-management-service intangibles.
- Debt declined by $1.635 billion from December 31, 2008, reflecting repayment of the $2.0 billion Term Loan and repurchases of $615 million principal amount of Series A convertible notes. A further $151 million principal amount of Series A notes was repurchased after quarter-end.
- Operating cash flow increased $660 million year over year, notwithstanding lower earnings, largely because of impairment charges, amortization and favorable working-capital changes.
- Construction work in progress rose to $5.9 billion from $4.5 billion at December 31, 2008. Petrobras 10000 was delivered under a 20-year capital lease, adding approximately $716 million to property and equipment and debt on a non-cash basis.
Guidance, Outlook, Risks and Unusual Items
Management expected total revenue to be lower in 2009 than in 2008 and lower again in 2010, primarily because of stacked and idle rigs, reduced non-drilling activity and declining recognition of contract intangibles. Management expected 2009 operating and maintenance costs to decline, while 2010 costs remained uncertain.
Contract backlog was $32.694 billion at September 30, 2009, down from $33.975 billion at June 30 and $40.778 billion at September 30, 2008. Subsequent to quarter-end, backlog was reported at $32.2 billion as of November 2, 2009. High-specification floaters remained relatively well contracted, while midwater floaters and jackups faced lower dayrates, utilization and additional stacking.
Management expected dayrates to remain below 2008 highs through at least the first half of 2010. Two ultra-deepwater contracts were awarded in the third quarter, and three of five recently completed ultra-deepwater newbuilds had commenced contracts by November 2, 2009. Expected 2009 capital expenditures were approximately $3.9 billion, including approximately $3.0 billion of cash expenditures and $716 million of non-cash Petrobras 10000 capital costs.
- Liquidity risks include $702 million of debt due within one year, commercial paper borrowings, substantial newbuild commitments and the expiration of the $1.08 billion 364-Day Revolving Credit Facility in November 2009. Management expected that facility to expire.
- Customer liquidity problems, contract cancellations, subletting, weaker commodity prices and continued economic weakness could reduce backlog, dayrates and cash flow.
- The company had 23 stacked jackups and six stacked midwater floaters as of November 2, 2009, and expected additional stacking.
- Material tax contingencies included Norwegian assessments and potential security requirements of up to $740 million, Brazilian tax assessments totaling $286 million plus penalties and interest, and a U.S. transfer-pricing matter involving approximately $79 million of proposed adjustments before interest.
- Brazilian customs litigation involving Sedco 710 had an assessment of approximately $260 million including penalties and interest; the company had accrued its estimated liability under a potential amnesty program, but the ultimate outcome remained uncertain.
- The company was cooperating with DOJ, SEC and OFAC investigations involving alleged FCPA and sanctions-related matters. Potential fines, penalties, legal fees and management costs could not be predicted.
- Insurance exclusions and large self-insured retentions expose the company to significant losses from certain hurricane, war, physical damage, well-control and liability events.
- Management concluded that disclosure controls and procedures were effective as of September 30, 2009, with no material changes to internal control over financial reporting.
Investor Verification Checklist
- Verify the sustainability of the $4.423 billion nine-month operating cash flow after adjusting for impairment, amortization and working-capital benefits.
- Assess liquidity against scheduled debt maturities, commercial paper borrowings, convertible-note put dates and remaining newbuild capital commitments.
- Track utilization, stacking and dayrates by rig class, particularly midwater floaters and jackups.
- Reconcile the $32.694 billion backlog with actual contract commencements, customer credit quality, termination provisions and subsequent awards.
- Review the valuation assumptions supporting the $334 million impairment charge and the carrying values of rigs held for sale.
- Monitor Norwegian, Brazilian and U.S. tax proceedings, including potential cash collateral or settlement requirements.
- Follow the DOJ, SEC and OFAC investigations and assess potential penalties, compliance costs and operational consequences.
- Confirm the timing and cost of ultra-deepwater newbuild deliveries and the company’s ability to fund approximately $3.9 billion of 2009 capital expenditures.