Transocean Ltd. 2018 Q1 SEC Form 10-Q Summary
Business context and reporting period
Transocean provides global offshore contract drilling services, with a focus on ultra-deepwater and harsh-environment drilling. The filing covers the unaudited three months ended March 31, 2018, compared primarily with the three months ended March 31, 2017. At March 31, 2018, the company owned or operated 47 mobile offshore drilling units and was constructing two additional ultra-deepwater drillships.
Transocean completed its acquisition of Songa Offshore during the quarter, acquiring seven drilling units, including five harsh-environment floaters and two midwater floaters. Songa contributed $84 million of revenue and a $3 million net loss from the January 30 acquisition date through March 31, 2018.
Financial results and key metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Contract drilling revenue | $664 million | $738 million | Down 10% |
| Total revenue | $664 million | $785 million | Down 15% |
| Operating income (loss) | $(4) million | $169 million | Down $173 million |
| Net income (loss) | $(212) million | $95 million | Down $307 million |
| Net income (loss) attributable to controlling interest | $(210) million | $91 million | Down $301 million |
| Basic and diluted EPS | $(0.48) | $0.23 | Declined |
| Cash flow from operations | $103 million | $181 million | Down $78 million |
| Capital expenditures | $53 million | $122 million | Down $69 million |
Operating and maintenance expense increased 22% to $424 million, while depreciation declined 13% to $202 million. General and administrative expense rose 21% to $47 million, including $7 million of Songa acquisition costs. Interest expense increased to $147 million from $127 million. The company reported an income tax expense of $63 million despite a pretax loss, reflecting its international tax profile and taxes imposed on gross revenues in certain jurisdictions.
Fleet operating indicators weakened or remained mixed. Total fleet average daily revenue declined to $287,600 from $337,700, revenue efficiency declined to 92% from 98%, and operating days declined 2% to 2,153. Total fleet rig utilization improved to 52% from 43%, primarily reflecting fleet composition and fewer idle or stacked units in certain classes. Harsh-environment floater utilization increased to 84% from 70%, while ultra-deepwater floater utilization declined to 35% from 36%.
Liquidity, debt and balance sheet
- Cash and cash equivalents were $2.712 billion at March 31, 2018, compared with $2.519 billion at December 31, 2017.
- Unrestricted short-term investments were $150 million, and restricted cash and investments totaled approximately $491 million on the balance sheet.
- Total debt carrying value increased to $9.855 billion from $7.396 billion, primarily because of debt assumed and exchangeable bonds issued in the Songa acquisition.
- Debt due within one year was $1.879 billion, including $1.5 billion of Songa-related senior secured term loans and junior secured bonds classified as current because of change-of-control waivers expiring August 31, 2018 and the planned call of the junior secured bonds.
- The company had no borrowings under its $3.0 billion unsecured revolving credit facility, $7 million of letters of credit outstanding and $3.0 billion of available capacity at March 31, 2018.
- Net cash provided by operating activities, together with $376 million of investing cash inflows, exceeded $248 million of financing cash outflows, resulting in a $231 million increase in unrestricted and restricted cash during the quarter.
Material changes versus the prior comparable period
- Revenue declined because of approximately $100 million from lower dayrates, $80 million from more rigs being idle or stacked, $60 million from lower fleet activity, $45 million from lower revenue efficiency and $40 million from rigs sold or held for sale. These reductions were partly offset by Songa revenue, a newbuild entering service, rig reactivations, termination-related revenue and reimbursements.
- Operating profitability deteriorated sharply as revenue declined while operating and maintenance costs increased, including costs associated with Songa, rig reactivations and the newbuild drillship.
- The Songa transaction added seven rigs, approximately $3.7 billion of contract backlog at acquisition, 68.0 million shares and $863 million principal amount of 0.50% exchangeable bonds.
- Property and equipment increased to $19.671 billion from $17.402 billion, while goodwill of $460 million and contract intangible assets of $613 million were recognized in connection with Songa.
- Contract intangible amortization reduced revenue by $19 million in Q1 2018 and is expected to continue through March 2024.
- The company adopted new revenue recognition, income tax, restricted cash flow presentation, retirement benefit and goodwill impairment standards. Management reported no material effect from these adoptions.
Guidance, outlook, risks and unusual items
Management described its long-term outlook for offshore drilling as positive, particularly for harsh-environment and ultra-deepwater floaters. Brent crude prices had exceeded $70 per barrel, improving customer economics. Management observed improving utilization and dayrates for high-specification harsh-environment rigs, but continued excess supply and weak dayrates for ultra-deepwater floaters.
Contract backlog was $12.459 billion as of April 18, 2018, down from $12.839 billion on February 19, 2018 but up from $9.423 billion on October 26, 2017. The backlog includes $3.7 billion acquired with Songa. Approximately $112 million was removed after a reduced-rate and reduced-duration amendment to the Transocean Leader contract.
Key financial and operational risks include low utilization and dayrates, contract cancellations or renegotiations, prolonged stacking, customer credit risk, impairment of rigs or goodwill, construction delays and cost overruns, and the ability to refinance or retire the Songa-related debt before relevant waivers expire. Two uncontracted drillships are expected for delivery in the second half of 2020, with estimated completion costs of $810 million and $760 million, respectively. Construction on one uncontracted newbuild had paused, and interest capitalization had ceased.
Material contingencies include $219 million accrued for probable and reasonably estimable Macondo-related losses, Brazilian tax assessments of approximately $303 million in aggregate for the described matters, and litigation involving Global Marine's $300 million of 7.00% notes. The SEC and DOJ closed their respective investigations into allegations related to a Petrobras drilling contract without recommending enforcement action against Transocean.
Important facts for investors to verify
- Whether the company can refinance, restructure or retire the approximately $1.677 billion of Songa-related term loans and junior secured bonds classified as current, and the status of lender waivers expiring August 31, 2018.
- Future ultra-deepwater and harsh-environment utilization, dayrates and backlog conversion, including the effect of contract amendments, cancellations and downtime.
- The timing, cost and financing of the two uncontracted drillships and any further asset sales or impairments.
- The final purchase accounting for Songa, including potential adjustments to property and equipment, contract intangibles, goodwill, tax positions and contingencies.
- Cash generation relative to debt maturities, capital expenditures and the June 2019 expiration of the revolving credit facility.
- Outcomes and cash-flow effects of Macondo-related matters, Brazilian tax assessments, Global Marine litigation and other legal or regulatory proceedings.
- The sensitivity of results to oil prices, customer spending, interest rates, foreign exchange rates and the below-investment-grade debt rating.