Transocean Ltd. Form 10-Q Summary
Reporting period: Three months ended March 31, 2014; filed May 7, 2014. Transocean is an international offshore contract drilling provider focused on deepwater and harsh-environment drilling. Its continuing-operations fleet comprised 78 mobile offshore drilling units, including 46 high-specification floaters, 21 midwater floaters and 11 high-specification jackups.
Financial Performance and Position
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Operating revenues | $2.339 billion | $2.184 billion | +7% |
| Contract drilling revenues | $2.292 billion | $2.145 billion | +7% |
| Operating income | $672 million | $479 million | +40% |
| Income from continuing operations | $474 million | $318 million | +49% |
| Net income attributable to controlling interest | $456 million | $321 million | +42% |
| Diluted EPS | $1.25 | $0.88 | +$0.37 |
| Cash flow from operating activities | $136 million | $106 million | +$30 million |
| Capital expenditures | $1.131 billion | $488 million | +$643 million |
Margins: Operating margin was approximately 28.7%, compared with 21.9% in the prior-year quarter. Net income attributable to controlling interest represented approximately 19.5% of revenue, compared with 14.7% previously. The annual effective tax rate was 15.1%, versus 19.1% in Q1 2013; the reported effective rate on continuing-operations income before tax was 14.4%, compared with 5.9%.
Cash and liquidity: Cash and cash equivalents were $1.987 billion at March 31, 2014, down from $3.243 billion at year-end 2013. Management estimated approximately $1.3 billion of cash was required for working capital and operating needs. The company had $2.0 billion of undrawn capacity under its five-year revolving facility and $900 million under its secured revolving facility, with $20 million of letters of credit outstanding under the former.
Debt: Total debt was $10.470 billion, including $162 million due within one year and $10.308 billion of long-term debt. The company’s debt-to-tangible-capitalization ratio was 0.4 to 1.0, below its 0.6 to 1.0 covenant limit. ADDCL credit facilities with $163 million of borrowings were repaid and terminated in February 2014.
Operating indicators: Average daily revenue increased to $413,100 from $361,200. Revenue efficiency improved to 96% from 88%, while fleet utilization declined to 78% from 80%. Contract backlog was $26.1 billion as of April 17, 2014, down from $27.2 billion on February 18, 2014 and $29.8 billion on October 16, 2013.
Material Changes Versus Q1 2013 and Year-End 2013
- Revenue growth reflected approximately $175 million from improved revenue efficiency, $95 million from higher dayrates and $40 million from new high-specification jackups. These benefits were partly offset by idle rigs, shipyard and certification downtime, and asset dispositions.
- Operating and maintenance expense declined 6% to $1.269 billion. Excluding Macondo-related contingency costs, underlying operating and maintenance expense was described as broadly unchanged.
- Operating income increased despite a $65 million impairment loss on the Sedneth 701 and GSF Magellan, both classified as held for sale.
- Net interest expense declined by $31 million, primarily because of debt repayment and increased capitalized interest.
- Capital expenditures more than doubled, driven primarily by milestone payments for newbuild projects. Construction work in progress increased to $3.615 billion from $2.710 billion at year-end 2013.
- Cash declined by $1.256 billion during the quarter, principally because of capital expenditures, debt repayment and a $202 million final installment of the prior shareholder distribution.
- ADTI, the drilling management-services business, was sold in February 2014 and presented as discontinued operations. The sale generated $11 million of cash proceeds and an $11 million pretax loss.
- The company completed the sale of the GSF Monitor for $83 million of net proceeds and committed to sell the Sedneth 701 and GSF Magellan.
Guidance, Outlook, Risks and Unusual Items
- Management expected 2014 revenue to exceed 2013 revenue, supported by higher contractual dayrates, improved revenue efficiency, partial-year operations of two new ultra-deepwater floaters and full-year operations of three jackups placed in service during 2013.
- Management expected 2014 operating and maintenance expense to be below 2013 levels, reflecting lower activity, rig-based spending optimization, lower shore-based costs, lower legal costs and asset divestitures.
- Management expected approximately $2.6 billion of 2014 capital expenditures, including approximately $1.6 billion for major construction projects. The company planned to fund expenditures with cash, operating cash flow, asset sales and available credit.
- The global floater contracting environment was weakening, with excess capacity, slower tendering, increased competition, potential idling and pressure on dayrates. Midwater-floater demand was particularly weak in several regions, while high-specification jackup conditions remained comparatively supportive.
- Two new ultra-deepwater drillships were expected to begin operations in Q2 2014. The company also entered construction agreements for two additional drillships and held options for up to three more.
- Goodwill was not impaired at March 31, 2014, but the reporting unit’s estimated fair value exceeded carrying value by less than 10%, creating sensitivity to further declines in share price, dayrates or utilization.
- Macondo-related settlement payments during the quarter totaled $472 million, including $60 million under the Plea Agreement and $412 million under the Consent Decree. Remaining scheduled obligations at March 31, 2014 were $380 million, excluding interest.
- Macondo-related probable loss contingencies were $467 million, while the company had recognized only $10 million of probable insurance recoveries. Additional litigation, environmental, indemnity and insurance exposures remained uncertain.
- Tax contingencies included a U.S. draft assessment involving approximately $290 million of additional tax, Norwegian assessments and criminal proceedings, and a Brazilian assessment of approximately $304 million including penalties and interest. Management stated that unfavorable outcomes could materially affect cash flow and, in some cases, earnings or financial position.
- Management planned to form an MLP-type yield vehicle in mid-2014, subject to market conditions, board approval and SEC registration effectiveness, and intended to pursue the separation of eight U.K. North Sea midwater floaters into Caledonia Offshore Drilling Company.
Important Facts for Investors to Verify
- Whether the projected 2014 revenue growth and approximately $2.6 billion capital-expenditure plan were achieved.
- Changes in floater utilization, dayrates, backlog, idle or stacked rigs and contract renewals.
- Progress, cost and contract coverage of the newbuild fleet, including the two drillships scheduled for Q2 2014 operations.
- Cash generation after capital expenditures, shareholder distributions, debt service and Macondo-related payments.
- Macondo litigation developments, remaining settlement payments, insurance recoveries and potential additional liabilities.
- Resolution of the U.S., Norwegian and Brazilian tax matters, including the potential $290 million U.S. assessment.
- Goodwill and rig-asset impairment sensitivity if market dayrates or utilization deteriorate.
- Execution and funding of the proposed MLP-type vehicle and Caledonia separation.