Transocean Ltd. quarterly report, Q1 FY2022

Transocean Ltd. Form 10-Q Summary

Reporting period: Three months ended March 31, 2022, compared with the three months ended March 31, 2021. Transocean provides offshore contract drilling services and operated 37 mobile offshore drilling units at quarter-end, including 27 ultra-deepwater and 10 harsh-environment floaters. Two ultra-deepwater drillships were under construction.

Financial performance and liquidity

Metric	Q1 2022	Q1 2021	Change
Contract drilling revenue	$586 million	$653 million	Down $67 million, or 10%
Operating loss	$50 million	$67 million	Improved by $17 million
Net loss attributable to controlling interest	$175 million	$99 million	Loss increased $76 million
Loss per share	$0.26	$0.16	Loss increased
Cash flow from operating activities	$(1) million	$96 million	Declined $97 million
Capital expenditures	$106 million	$59 million	Increased $47 million
Total debt carrying amount	$7.011 billion	$7.170 billion at Dec. 31, 2021	Down $159 million

Operating loss margin was approximately 8.5% of revenue, compared with approximately 10.3% in the prior-year quarter. Net loss margin was approximately 29.9%, compared with approximately 15.0% in Q1 2021.

Cash and cash equivalents were $911 million and restricted cash was $315 million at March 31, 2022, for total unrestricted and restricted cash of $1.226 billion.
Current assets were $2.279 billion versus current liabilities of $1.352 billion.
The $1.33 billion secured revolving credit facility had no borrowings, $14 million of letters of credit and approximately $1.32 billion of available capacity at March 31, 2022. The facility matures June 22, 2023 and includes a $500 million minimum-liquidity covenant.
Debt principal due within the next 12 months was $570 million, with scheduled principal and other installments totaling $646 million.
Transocean issued 20.2 million shares under its at-the-market program for $103 million of net proceeds during the quarter.

Operational indicators and material changes

Operating days decreased to 1,753 from 1,773, while average daily revenue declined 10% to $334,500 from $373,700.
Total fleet revenue efficiency decreased to 94.9% from 97.4%, while utilization was broadly stable at 52.7% versus 52.6%.
Ultra-deepwater average daily revenue decreased to $305,600 from $371,600. Harsh-environment average daily revenue increased to $399,100 from $377,800.
Revenue declined primarily because of lower contractual dayrates, lower revenue efficiency, the absence of a prior-year early termination fee and lower COVID-19 and other reimbursements.
Operating and maintenance expense declined 5% to $412 million, primarily due to lower reimbursable costs and the sale of a rig in 2021. General and administrative expense increased 8% to $42 million.
Q1 2021 included a $60 million loss on the sale of the Leiv Eiriksson and related assets. The absence of that loss improved Q1 2022 operating results.
Interest expense declined to $102 million from $115 million, primarily due to scheduled debt repayment and capitalization of interest related to newbuild projects. Q1 2021 also benefited from a $51 million gain on debt retirement that did not recur.
Contract backlog was $6.121 billion as of April 25, 2022, down from $7.403 billion a year earlier and $6.466 billion on February 14, 2022.
Construction work in progress increased to $1.099 billion from $1.017 billion at December 31, 2021. Estimated total completion costs for Deepwater Atlas and Deepwater Titan were $2.275 billion.

Outlook, commentary and risks

Management stated that the offshore drilling outlook was improving, citing stronger global hydrocarbon demand, constrained supply, higher oil prices, increased energy-security focus and customer interest in deepwater and harsh-environment projects. Tendering activity improved in Brazil, West Africa, Asia and Australia, and management expects further dayrate improvement as high-specification rig supply remains limited.

Management expected the Norwegian harsh-environment market to remain challenging in 2022, followed by recovery from 2023 through 2026.
Uncommitted fleet rates for the remainder of 2022 were 53% for ultra-deepwater floaters and 36% for harsh-environment floaters; rates rise materially in later years based on the filing’s contract status.
Deepwater Atlas was expected to be delivered in Q2 2022 and to begin operations in the second half of 2022. Deepwater Titan was expected to be delivered in the second half of 2022 and begin operations in the first half of 2023.
Management expected approximately $370 million of shipyard financing upon delivery of Atlas and approximately $90 million upon delivery of Titan. No borrowings under the shipyard loans were outstanding at March 31, 2022.
Management said it expected operating cash flow to remain positive over the next year, but noted that COVID-19 effects, deterioration in the drilling market, poor operating performance, reactivation or stacking costs and limited capital-market access could reduce liquidity.
Key risks include commodity-price and customer-spending volatility, contract cancellations or renegotiations, low utilization, newbuild cost and delivery delays, below-investment-grade debt ratings, refinancing requirements, interest-rate and currency risk, environmental and regulatory matters, and litigation.
Brazilian tax assessments totaled approximately $160 million, comprising approximately $136 million of corporate income tax and $24 million of indirect tax. Transocean is contesting the assessments.
The company disclosed ongoing asbestos claims and other litigation, generally stating that material adverse effects were not expected, while noting that outcomes remain uncertain. A Department of Justice enforcement matter concerning alleged Clean Water Act permit violations could require corrective actions and an immaterial monetary penalty based on management’s current assessment.

Most important facts to verify

Whether improving offshore demand and dayrates convert into higher utilization, revenue efficiency and cash flow.
The timing, final cost and operating commencement of Deepwater Atlas and Deepwater Titan, including the related shipyard financing.
Sources of funding for the $570 million of debt principal due within 12 months and the company’s ability to refinance or repay maturities.
Whether operating cash flow returns to positive levels after the Q1 2022 near break-even result.
The effect of continued ATM share issuance on dilution and liquidity.
The resolution and potential cash impact of Brazilian tax assessments, environmental matters, Clean Water Act proceedings and asbestos litigation.
Changes in contract backlog, rig utilization and uncommitted fleet rates as customer tenders and contract awards develop.