Transocean Ltd. 2015 First-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 filing covers the three months ended March 31, 2015, compared with the three months ended March 31, 2014. At March 31, 2015, the company operated or partially owned 66 mobile offshore drilling units, including 42 high-specification floaters, 14 midwater floaters and 10 high-specification jackups.
Financial performance and key metrics
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Operating revenues | $2.043 billion | $2.339 billion | Down 13% |
| Contract drilling revenues | $2.000 billion | $2.292 billion | Down 13% |
| Operating income (loss) | $(321) million | $672 million | Down $993 million |
| Net income (loss) | $(469) million | $466 million | Down $935 million |
| Net income (loss) attributable to controlling interest | $(483) million | $456 million | Down $939 million |
| Basic and diluted EPS | $(1.33) | $1.25 | Down $2.58 |
| Cash flow from operating activities | $526 million | $136 million | Up $390 million |
| Capital expenditures | $201 million | $1.131 billion | Down $930 million |
- Operating margin was approximately negative 15.7% in Q1 2015 versus 28.7% in Q1 2014. Net margin was approximately negative 22.9% versus 19.9%.
- Operating and maintenance expense decreased 15% to $1.084 billion, while depreciation increased 7% to $291 million. General and administrative expense decreased 19% to $46 million.
- The company recorded $936 million of impairment losses, including $507 million on the Deepwater Floater asset group and $429 million on rigs classified as held for sale. These charges were the primary driver of the quarterly loss.
- Average daily revenue declined to $398,300 from $413,100, while revenue efficiency remained 96%. Total fleet utilization increased to 79% from 78%, although high-specification floater utilization declined to 73% from 84%.
- At March 31, 2015, cash and cash equivalents were $2.682 billion, including approximately $1.3 billion estimated to be required for working capital and operating needs. Current assets were $5.843 billion versus current liabilities of $3.173 billion.
- Total debt was $10.020 billion, including $1.024 billion due within one year; long-term debt was $8.996 billion. The $3.0 billion unsecured revolving credit facility was undrawn and fully available.
- Debt-to-tangible-capitalization ratio under the revolving credit facility was 0.4 to 1.0 versus a maximum covenant of 0.6 to 1.0. Outstanding letters of credit totaled $305 million and surety bonds totaled $6 million.
Material changes versus the prior comparable period
- Revenue fell primarily because of rigs sold or classified as held for sale and additional idle or stacked rigs; the effect was partially offset by full-quarter operations from two newbuild ultra-deepwater drillships.
- Operating and maintenance costs benefited from reduced activity, lower maintenance spending and lower personnel costs, partly offset by the newbuild drillships entering service.
- Capital spending fell substantially because of the timing of milestone payments for major construction projects.
- Operating cash flow improved due primarily to working-capital changes and lower scheduled Macondo-related cash payments.
- The company paid the final $272 million installment of the previously approved $3.00-per-share qualifying additional paid-in-capital distribution. The board recommended a new $0.60-per-share distribution, subject to shareholder approval and other limitations.
- Two credit rating agencies downgraded the company’s senior unsecured debt to below-investment-grade ratings. As a result, certain debt interest rates and revolving-credit facility fees increased or were scheduled to increase.
- The fleet was reduced through asset sales and planned scrap disposals. Six rigs were committed for sale for scrap value during the quarter, and an additional rig, GSF Explorer, was committed for sale after quarter-end.
Guidance, outlook, commentary, risks and unusual items
- Management expects 2015 total revenue to be below 2014 levels because of increased idle and stacked time, lower dayrates on new contracts and asset disposals, partly offset by a full year of operations from two newbuild ultra-deepwater floaters.
- Management expects 2015 operating and maintenance expense to be below 2014 levels, primarily due to idle and stacked rigs, cost reductions and asset divestitures.
- The near- to medium-term offshore drilling market is expected to remain challenging because of weak commodity prices, customer capital discipline, delayed exploration programs, excess capacity and newbuild deliveries. Contract backlog declined to $19.924 billion as of April 16, 2015 from $21.240 billion as of February 17, 2015.
- Uncommitted fleet rates as of April 16, 2015 were 35% for high-specification floaters, 34% for midwater floaters and 28% for high-specification jackups for the remainder of 2015. Management expects pressure on dayrates, utilization and contract awards.
- Management projected 2015 capital expenditures of approximately $1.7 billion, including approximately $1.3 billion for major construction projects. Total estimated costs to complete the listed major construction projects were approximately $6.940 billion.
- Subsequent to quarter-end, the company expected to recognize a $100 million to $120 million after-tax impairment loss in the second quarter for GSF Explorer.
- Macondo-related obligations remain material. The company paid $264 million during the quarter toward settlement obligations, including $204 million under the Consent Decree and $60 million under the Plea Agreement. A $426 million liability for probable and estimable Macondo loss contingencies remained recorded, with a $10 million insurance recoverable asset.
- Approximately 1,405 Macondo-related actions or claims were pending at March 31, 2015. The company continues to rely on contractual indemnity from BP for certain compensatory damages, but appeals and other litigation remain unresolved.
- Tax matters include U.S. transfer-pricing issues involving approximately $290 million of potential additional taxes, Norwegian tax proceedings, Brazilian assessments and a potential Petrobras-related withholding-tax exposure of approximately BRL 283 million, excluding penalties and interest.
- The company froze benefits under certain U.S. defined-benefit pension plans effective January 1, 2015. No material changes to internal control over financial reporting were reported.
Most important facts for investors to verify
- Whether offshore drilling demand, utilization and dayrates deteriorate further and lead to additional rig impairments or scrap disposals.
- The pace of backlog reductions, contract awards and customer decisions regarding fixed-price extension options.
- The company’s ability to fund approximately $1.7 billion of 2015 capital expenditures while meeting debt maturities, Macondo payments and shareholder distributions.
- Liquidity after considering the approximately $1.3 billion operating cash requirement, below-investment-grade ratings and potential restrictions on capital-market access.
- Future Macondo litigation, appeals, indemnity enforcement, insurance recoveries and potential liabilities beyond the $426 million accrued amount.
- The outcome of U.S., Norwegian and Brazilian tax proceedings and any resulting cash requirements.
- The timing, cost and contract status of the remaining newbuild program, particularly the units without drilling contracts.