Transocean Ltd. quarterly report, Q2 FY2022

Transocean Ltd. 2022 Q2 SEC Filing Summary

Business Context and Reporting Period

Transocean provides offshore contract drilling services, focusing on ultra-deepwater and harsh-environment operations. As of June 30, 2022, it operated 37 mobile offshore drilling units: 27 ultra-deepwater floaters and 10 harsh-environment floaters, with two ultra-deepwater drillships under construction. This unaudited Form 10-Q covers the three and six months ended June 30, 2022, compared with the corresponding 2021 periods.

Financial Performance and Key Metrics

Metric	Q2 2022	Q2 2021	Six months 2022	Six months 2021
Contract drilling revenue	$692 million	$656 million	$1.278 billion	$1.309 billion
Operating income (loss)	$28 million	$(2) million	$(22) million	$(69) million
Net loss attributable to controlling interest	$(68) million	$(103) million	$(243) million	$(202) million
Loss per share	$(0.10)	$(0.17)	$(0.36)	$(0.33)
Cash flow from operations	Not separately provided	Not separately provided	$40 million	$249 million

Q2 operating margin was approximately 4.0%, compared with approximately negative 0.3% in Q2 2021. Six-month operating margin was approximately negative 1.7%, compared with approximately negative 5.3% in the prior-year period.
Q2 operating days increased 4% to 1,925, while average daily revenue declined 3% to $358,100. Revenue efficiency was 97.8% and total fleet utilization was 58.2%.
Six-month average daily revenue declined 7% to $346,800, while utilization improved to 55.4% from 53.8%; revenue efficiency declined to 96.4% from 97.7%.
At June 30, 2022, unrestricted cash was $729 million and restricted cash was $432 million, for total unrestricted and restricted cash of $1.161 billion.
Total debt principal was $6.949 billion, with $847 million classified as current debt and $6.376 billion recorded as long-term debt carrying value. The estimated fair value of total debt was $5.548 billion.
Capital expenditures were $221 million for the first six months, including $193 million for the newbuild program. Construction work in progress increased to $1.496 billion.

Material Changes Versus the Prior Comparable Period

Q2 revenue increased $36 million, primarily from approximately $30 million of higher fleet utilization and approximately $5 million of improved revenue efficiency.
Six-month revenue declined $31 million, mainly due to lower contractual dayrates, lower reimbursement revenue and the absence of a 2021 early termination fee, partly offset by higher utilization.
Operating loss improved by $47 million for the first six months, principally because the prior-year period included a roughly $60 million loss on the sale of the Leiv Eiriksson and related assets.
Net loss worsened by $42 million for the first six months because the prior-year period included a $51 million gain from retiring exchangeable debt and a larger discrete tax benefit.
Operating cash flow fell $209 million to $40 million, primarily due to reduced customer collections, higher employee payments and unfavorable changes in operating assets and liabilities.
Net cash used in investing increased to $236 million from $126 million, driven mainly by higher newbuild capital expenditures.
The company issued 44.8 million shares under its at-the-market program for $206 million of net proceeds during the first six months, compared with $66 million from 15.2 million shares in the prior-year period.
In June 2022, Transocean borrowed $349 million under the Deepwater Atlas shipyard loan and made a $46 million final milestone payment. The borrowing resulted in approximately $300 million of non-cash capital additions.

Guidance, Outlook, Risks and Unusual Items

Management did not provide quantitative earnings guidance in the filing. Management described the offshore drilling outlook as positive, citing stronger energy demand, underinvestment in reserve replacement, reduced high-specification rig supply and increased tendering activity. Contract backlog was $6.166 billion as of July 25, 2022, consisting of $5.135 billion for ultra-deepwater floaters and $1.031 billion for harsh-environment floaters.

Uncommitted fleet rates were 54% for ultra-deepwater floaters and 39% for harsh-environment floaters for the remainder of 2022, increasing substantially in later years.
Deepwater Atlas was expected to commence operations in the fourth quarter of 2022 following mobilization, readiness testing and customer acceptance. Deepwater Titan was expected to be delivered in the fourth quarter of 2022 and commence operations in the second quarter of 2023.
Supply-chain constraints could delay customer projects and were expected by management to persist to some degree for 12 to 18 months.
The secured credit facility was amended in July 2022. Its maturity was extended to June 2025, but borrowing capacity was reduced from $1.33 billion to $774 million through June 2023 and then to $600 million.
The facility requires minimum liquidity of $500 million. Management stated that Transocean must obtain at least $330 million of additional liquidity within the 12-month period following issuance of the financial statements, which it plans to obtain through secured financing for Deepwater Titan. Management stated that achieving this financing was probable but not assured.
Debt maturities and related installments total $857 million during the twelve months ending June 30, 2023, and total scheduled debt and interest obligations are $9.575 billion.
Other risks include oil and gas price volatility, customer contract cancellations or renegotiations, rig downtime, shipyard delays, capital cost overruns, interest-rate and currency exposure, below-investment-grade debt ratings, COVID-19 impacts, litigation and tax assessments.
Brazilian tax assessments remaining at June 30, 2022 totaled approximately $145 million, including approximately $124 million of corporate income tax and $21 million of indirect tax. Transocean is contesting the assessments.
The company was engaged in settlement discussions with the U.S. Department of Justice regarding alleged Clean Water Act permit violations involving seven drillships. Management expected a monetary penalty that would be immaterial, although future expenditures could exceed accrued amounts.
Management reported no material changes to previously disclosed risk factors and concluded that disclosure controls and procedures were effective as of June 30, 2022.

Most Important Facts for Investors to Verify

Whether Transocean secures the required minimum $330 million of additional liquidity and remains compliant with the secured credit facility covenant.
The timing, financing and operating commencement of Deepwater Atlas and Deepwater Titan, including final construction and upgrade costs.
Whether improving offshore dayrates and backlog convert into higher utilization, revenue efficiency and sustainable positive operating cash flow.
The schedule and refinancing requirements for the $857 million of debt and related installments due in the twelve months ending June 30, 2023.
The effect of continued ATM share issuance on dilution, liquidity and capital structure.
Developments in the Brazilian tax assessments, Clean Water Act matter and other litigation or regulatory contingencies.