Transocean Ltd. 2016 Third-Quarter Form 10-Q Summary
Business Context and Reporting Period
Transocean is an international offshore contract drilling company focused on deepwater and harsh-environment drilling. The unaudited report covers the three and nine months ended September 30, 2016, compared primarily with the corresponding 2015 periods. At September 30, 2016, the company owned or operated 58 mobile offshore drilling units and had five ultra-deepwater drillships and five high-specification jackups under construction or contract.
Key Financial Metrics
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Total operating revenues | $903 million | $1,608 million | $3,187 million | $5,535 million |
| Contract drilling revenues | $883 million | $1,569 million | $2,912 million | $5,346 million |
| Operating income | $225 million | $445 million | $793 million | $630 million |
| Operating margin | Approximately 24.9% | Approximately 27.7% | Approximately 24.9% | Approximately 11.4% |
| Net income attributable to controlling interest | $229 million | $321 million | $555 million | $180 million |
| Diluted earnings per share | $0.62 | $0.88 | $1.49 | $0.49 |
| Cash flow from operating activities | Not separately provided | Not separately provided | $1,278 million | $2,485 million |
| Capital expenditures | Not separately provided | Not separately provided | $1,072 million | $1,336 million |
At September 30, 2016, cash and cash equivalents were $2.534 billion, including $366 million of restricted cash reported separately. Total debt was $8.260 billion, consisting of $1.069 billion due within one year and $7.191 billion of long-term debt. The company had no borrowings or letters of credit outstanding under its $3.0 billion revolving credit facility, leaving the full facility available. Debt to tangible capitalization, as defined under the credit agreement, was 0.4 to 1.0 versus a maximum covenant of 0.6 to 1.0.
Material Changes Versus the Prior Comparable Period
- Third-quarter revenue declined 44%, primarily because of additional idle or stacked rigs, rig sales or assets held for sale, and lower dayrates. Nine-month revenue declined 42%.
- Rig utilization fell to 49% in both the quarter and nine-month period, compared with 70% and 75%, respectively, in the prior-year periods. Total fleet average daily revenue declined to $330,900 in the quarter from $385,300.
- Operating and maintenance expense declined substantially as the company reduced spending on idle and stacked rigs, optimized maintenance and shipyard costs, reduced personnel costs and lowered onshore costs.
- Nine-month operating income increased 26% despite the revenue decline, primarily because 2015 included $1.839 billion of impairment charges and $788 million of Macondo-related reimbursements, insurance recoveries and liability reductions. The 2016 period included $34 million of impairment charges.
- Net income benefited from $148 million of gains on debt retirement in the first nine months, including a $104 million gain on the 2016 tender offer and a $44 million gain on open-market repurchases.
- Operating cash flow declined by $1.207 billion, reflecting weaker operating activity and the absence of $663 million of prior-year insurance recoveries, partly offset by $349 million of customer payments for early contract terminations or cancellations.
- The company issued $1.25 billion of 9.00% senior unsecured notes in July 2016 and used most proceeds to fund a tender offer. It repurchased or retired additional debt during the period, reducing total debt by $230 million from December 31, 2015 on a carrying-value basis.
- Deepwater Thalassa and Deepwater Proteus entered service during the nine-month period. Capital expenditures remained significant, and construction work in progress was $2.843 billion at September 30, 2016.
Guidance, Outlook, Risks and Unusual Items
Management stated that the long-term outlook remains positive for high-specification offshore drilling assets, but customers continue to reduce exploration and development spending. The company expects limited new contract awards, falling utilization, continued pricing pressure, contract renegotiations, project delays and early terminations into 2017. As of October 24, 2016, contract backlog was $12.181 billion, down from $13.720 billion on July 21, 2016 and $15.507 billion on February 11, 2016. The October 2016 termination of the Discoverer India contract reduced reported ultra-deepwater backlog by approximately $760 million.
Uncommitted fleet rates for 2017 were high across the fleet, including 67% for ultra-deepwater floaters, 70% for harsh-environment floaters, 50% for deepwater floaters, 88% for midwater floaters and 76% for high-specification jackups. Management expects positive operating cash flow over the next year, but notes that deteriorating market conditions could reduce cash generation.
- Credit ratings were below investment grade and were further downgraded during the nine-month period. Downgrades increased interest rates on certain notes and the revolving facility margin and could restrict future market access.
- Macondo-related matters remain subject to litigation and settlements. The company recorded a $250 million liability for probable estimated loss contingencies, had $237 million deposited in escrow for the Plaintiffs’ Steering Committee settlement, and had a final $60 million Plea Agreement installment due by February 2017.
- Thirty-six claimants opted out of the Plaintiffs’ Steering Committee settlement. The company also continued to contest tax assessments in Brazil and Norway and other legal, environmental and regulatory matters.
- Potential future impairment losses remain a risk if dayrates, utilization, contract opportunities or rig values deteriorate further.
- The planned merger with Transocean Partners was expected to close in the fourth quarter of 2016, subject to unitholder approval and other conditions. Transocean expected to issue approximately 22.7 million shares.
- Subsequent to quarter-end, the company issued $600 million of 7.75% senior secured notes due 2024, receiving $583 million net proceeds, and was required to fund approximately $53 million into a debt service reserve.
Most Important Facts for Investors to Verify
- Whether the Transocean Partners merger closed and the resulting share issuance, ownership and financial reporting effects.
- Actual 2017 rig utilization, dayrates, contract awards, terminations and backlog conversion.
- Liquidity after scheduled debt maturities, the new secured notes, interest-rate increases and required debt-service payments.
- Whether operating cash flow can continue to fund capital expenditures, debt obligations and remaining Macondo payments.
- Potential additional impairments for idle, stacked or lower-specification rigs.
- Developments in the 36 Macondo settlement opt-out claims, insurance recovery disputes and Brazilian and Norwegian tax assessments.
- The extent to which 2016 earnings benefited from nonrecurring debt-retirement gains and early termination payments rather than recurring drilling operations.