Transocean Ltd. 2012 Q3 Form 10-Q Summary
Business context and reporting period
Transocean is an international offshore contract drilling company focused on deepwater, ultra-deepwater and harsh-environment operations. The filing covers the unaudited three and nine months ended September 30, 2012, compared with the corresponding 2011 periods. At September 30, 2012, continuing operations included 82 mobile offshore drilling units: 48 high-specification floaters, 25 midwater floaters and nine high-specification jackups.
Financial performance and liquidity
| Metric | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Total revenue | $2,440 million | $1,991 million | $6,918 million | $5,972 million |
| Contract drilling revenue | $2,310 million | $1,827 million | $6,498 million | $5,396 million |
| Operating income | $803 million | $298 million | $954 million | $1,035 million |
| Operating margin | 32.9% | 15.0% | 13.8% | 17.3% |
| Income from continuing operations | $526 million | $(16) million | $326 million | $329 million |
| Net income attributable to controlling interest | $(381) million | $(32) million | $(675) million | $411 million |
| EPS from continuing operations | $1.47 | $(0.08) | $0.90 | $0.92 |
| Net cash from operating activities | $786 million | $492 million | $1,785 million | $1,222 million |
Q3 contract drilling revenue increased 26%, driven by 25% more revenue-earning days, contributions from Aker Drilling rigs and newbuilds, and higher dayrates. Continuing-operations operating income benefited from higher revenue and a $50 million net gain on asset disposals. Nine-month operating income declined 8% because of $210 million of continuing-operations impairments and materially higher operating and maintenance costs.
The reported net loss was dominated by discontinued operations, including $878 million of Q3 impairment losses and $913 million for the nine-month period. Q3 continuing-operations income represented an approximate 21.6% margin on total revenue; the filing does not present a comparable consolidated net margin that excludes discontinued operations.
Cash and cash equivalents were $6.0 billion at September 30, 2012, compared with $4.0 billion at December 31, 2011. Management estimated approximately $1.0 billion of cash was required for working capital and operating needs. Total debt was $14.1 billion, including $2.7 billion due within one year, compared with $13.5 billion at year-end 2011. The $2.0 billion five-year revolving credit facility had no borrowings and $2.0 billion of available capacity, subject to applicable conditions and covenants. A separate $900 million secured revolving facility was added after quarter-end.
Material changes versus the prior comparable period
- Continuing-operations revenue rose 23% in Q3 and 16% for the first nine months, while utilization increased to 77% in Q3 from 63% and to 72% for the nine months from 63%.
- Q3 average daily revenue increased to $395,100 from $388,800; the nine-month average was essentially flat at $396,700 versus $397,200.
- Operating income increased sharply in Q3 but decreased for the nine months due to impairments, higher Macondo-related accruals and increased interest expense.
- Interest expense increased to $180 million in Q3 and $543 million for the nine months, principally reflecting debt assumed in the Aker Drilling acquisition, partly offset by debt repayments.
- Transocean issued $1.5 billion of senior notes in September 2012 and repaid $333 million under the Aker term loan during the nine months.
- The company completed the exchange of Quantum’s 50% TPDI interest for 8.7 million Transocean shares, making TPDI wholly owned; a final $72 million cash settlement was paid in August 2012.
- The company corrected previously reported errors related primarily to insurance recoveries. The filing states the errors were immaterial to prior years, but 2011 comparative amounts were adjusted.
Guidance, outlook, risks and unusual items
- Management expected 2012 revenue to exceed 2011 revenue and 2013 revenue to exceed 2012 revenue, supported by higher utilization, newbuild commencements, fewer idle and out-of-service days and higher dayrates.
- Management expected operating and maintenance expense to increase in both 2012 and 2013 because of additional rigs, newbuild activity, personnel costs and shipyard work.
- Continuing-operations contract backlog increased to $29.7 billion as of October 17, 2012, from $21.4 billion as of July 18, 2012. The Q3 backlog additions included approximately $7.6 billion from four 10-year ultra-deepwater newbuild contracts and approximately $700 million from a three-year Deepwater Invictus contract.
- Uncommitted fleet rates for 2013 were 16% for high-specification floaters, 41% for midwater floaters and 12% for high-specification jackups. Management cited improving demand but noted slower tendering outside the U.K. and Norway, particularly in Brazil.
- The company committed to discontinue Standard Jackup and swamp barge operations. It agreed to sell 37 Standard Jackups and one swamp barge to Shelf Drilling for approximately $1.1 billion, including $855 million of net cash and $195 million of seller financing, subject to closing and other adjustments. The remaining nine Standard Jackups were also targeted for sale.
- Discontinued-operation impairments totaled $744 million for long-lived assets and $112 million for allocated goodwill in Q3, plus $29 million of additional impairments during the nine months.
- Macondo-related probable loss contingencies were $1.9 billion at September 30, 2012, versus $1.2 billion at December 31, 2011. The company also carried a $179 million insurance-recoverable asset. Additional reasonably possible losses cannot be reliably estimated.
- Transocean was discussing a potential $1.5 billion DOJ settlement related to Macondo but had not reached agreement. Litigation, appeals and trial phases remained unresolved.
- Other material exposures included U.S., Norwegian and Brazilian tax disputes, the Brazil Frade field litigation and regulatory matters. The filing states that unfavorable outcomes could materially affect financial position, results or cash flows.
- Purchase obligations totaled $3.5 billion, primarily for newbuilds. Estimated total costs for listed major construction projects were $5.2 billion, and 2012 capital expenditures were expected to be approximately $1.5 billion.
Most important facts for an investor to verify
- Whether the planned Shelf Drilling transactions closed on the expected terms and generated the anticipated cash proceeds and seller financing.
- The ultimate amount and timing of Macondo liabilities, insurance recoveries, DOJ settlement obligations and related litigation outcomes.
- Whether the $2.7 billion of debt due within one year, including the potential December 2012 repurchase of $1.7 billion of Series C convertible notes, was refinanced or repaid.
- Newbuild delivery schedules, total construction costs, contract commencement dates and exposure to shipyard delays or cost overruns.
- Actual utilization and dayrate trends, particularly for midwater floaters and high-specification jackups, and the effect of enhanced offshore drilling regulations.
- The outcome of U.S., Norwegian and Brazilian tax investigations and the potential cash impact beyond recorded liabilities.
- The effect of the discontinued-operation strategy and related asset sales on future revenue, fleet composition, margins and impairment risk.