Transocean Ltd. 2021 Q3 Form 10-Q Summary
Business context and reporting period
Transocean provides offshore contract drilling services, principally for ultra-deepwater and harsh-environment drilling, in a single global operating segment. As of September 30, 2021, it operated 37 mobile offshore drilling units, including 27 ultra-deepwater floaters and 10 harsh-environment floaters, and had two ultra-deepwater drillships under construction. The filing covers the three and nine months ended September 30, 2021, compared with the corresponding 2020 periods.
Financial performance and key metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Contract drilling revenue | $626 million | $773 million | $1.935 billion | $2.462 billion |
| Operating income (loss) | $0 million | $4 million | $(69) million | $(459) million |
| Net income (loss) | $(130) million | $359 million | $(331) million | $(529) million |
| Loss attributable to controlling interest | $(130) million | $359 million | $(332) million | $(530) million |
| Diluted EPS | $(0.20) | $0.51 | $(0.53) | $(0.86) |
| Net cash from operating activities | Not provided for quarter | Not provided for quarter | $390 million | $120 million |
- Revenue declined 19% in Q3 and 21% for the first nine months. Operating days fell 22% in Q3 and 24% for the nine months, while rig utilization declined to 53% from 65% in Q3 2020 and to 53% from 64% for the nine months.
- Average daily revenue improved to $367,100 in Q3 from $343,500 and to $370,100 for the nine months from $321,800. Revenue efficiency was 98% in both the Q3 and nine-month periods, compared with 97% and 96%, respectively, in the prior-year periods.
- Approximate operating margin was 0% in Q3 2021 versus 0.5% in Q3 2020, and negative 3.6% for the first nine months versus negative 18.6% in the prior-year period. The nine-month improvement primarily reflects the absence of 2020 impairment charges.
- Q3 net loss included $110 million of net interest expense and $27 million of income tax expense. The prior-year quarter benefited from $449 million of debt restructuring and retirement gains.
- Nine-month operating and maintenance expense decreased 17% to $1.267 billion; depreciation and amortization decreased 6% to $558 million; and general and administrative expense decreased 11% to $118 million.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $390 million, compared with $120 million in 2020. Capital expenditures were $137 million, down from $218 million, and investing cash outflow was $162 million.
- Financing cash outflow was $312 million, including $423 million of debt repayments and $141 million of net proceeds from the at-the-market equity offering. Unrestricted and restricted cash decreased from $1.560 billion at year-end 2020 to $1.476 billion at September 30, 2021, including $900 million of unrestricted cash and $576 million of restricted cash.
- Total debt principal was $7.002 billion, with a carrying amount of $7.348 billion, versus $7.376 billion and $7.807 billion, respectively, at December 31, 2020. Debt due within one year had a carrying amount of $575 million.
- Debt maturities and related contractual installments totaled $586 million during the twelve months ending September 30, 2022, including $510 million of principal and $76 million of other installments. Total debt-related contractual installments, including interest on previously restructured debt, were $7.426 billion.
- The $1.3 billion secured revolving credit facility had no borrowings, $20 million of letters of credit, and $1.3 billion of available capacity at September 30, 2021. The facility expires June 22, 2023 and includes minimum liquidity and leverage-related covenants.
- The company expects approximately $370 million of Shipyard Loan borrowings upon delivery of Deepwater Atlas and approximately $90 million upon delivery of Deepwater Titan. No Shipyard Loan borrowings were outstanding at September 30, 2021.
Material changes versus the prior comparable period
- Revenue pressure reflected higher idle time, cold-stacked rigs, sold rigs, shipyard days and lower COVID-19-related customer reimbursements. These factors more than offset higher average daily revenue.
- The nine-month revenue comparison was also negatively affected by approximately $200 million of 2020 revenue from a customer dispute settlement and early termination payments that did not recur.
- Operating results benefited from the absence of $597 million of 2020 impairment charges, including $556 million related to assets held for sale and $31 million related to a midwater floater asset group.
- Transocean recognized a $60 million loss on the 2021 sale of the harsh-environment floater Leiv Eiriksson and related assets, compared with $61 million of disposal losses in the 2020 nine-month period.
- Debt principal declined through scheduled repayments, open-market repurchases and a February 2021 exchange of $323 million principal amount of 0.50% exchangeable bonds for $294 million of new 4.00% exchangeable bonds plus an $11 million cash payment. The transaction produced a $51 million gain.
- Shares issued under the ATM program totaled 31.7 million in the first nine months, generating $141 million of net proceeds. Shares outstanding increased from 615.1 million at December 31, 2020 to 651.2 million at September 30, 2021.
- Contract backlog was $7.069 billion at October 25, 2021, down from $7.345 billion at July 21, 2021 and $7.842 billion at February 12, 2021. Backlog comprised $5.626 billion for ultra-deepwater floaters and $1.443 billion for harsh-environment floaters.
Guidance, outlook, commentary and risks
- No formal quantitative revenue, earnings or cash flow guidance was provided. Management expressed cautious optimism that improving oil and gas fundamentals, customer activity, fleet attrition and limited availability of high-specification rigs could support a materially better offshore drilling environment in 2022 and beyond.
- Management expects demand for hydrocarbons may return to or exceed pre-pandemic levels within the next one to two years and anticipates accelerated recovery in the North Sea harsh-environment market during 2022–2023.
- Uncommitted fleet rates remained high: 48% for ultra-deepwater floaters and 40% for harsh-environment floaters for the remainder of 2021, rising substantially in later years. These rates indicate meaningful future utilization risk despite the backlog.
- Key risks include COVID-19 and variants, oil and gas price volatility, customer contract cancellations or renegotiations, lower dayrates, idle and stacked rigs, operational performance, shipyard delays, capital requirements, below-investment-grade debt ratings, refinancing and covenant risk, and restricted access to debt or equity markets.
- Brazilian tax assessments remained under appeal at September 30, 2021, totaling approximately $136 million equivalent, including $116 million of corporate income tax and $20 million of indirect tax. An unfavorable outcome could materially affect financial position, results or cash flows.
- Whitebox appealed a favorable court ruling concerning alleged debt defaults and the 2020 debt exchange transactions. Management did not expect a material adverse effect from the matter. Asbestos, environmental, regulatory and other ordinary-course claims were also disclosed, with no material adverse effect expected based on current information.
- Subsequent to quarter-end, Transocean repurchased $28 million principal amount of debt for $28 million and issued 4.3 million shares for $17 million of net ATM proceeds.
Important facts for investors to verify
- Whether improving offshore drilling demand converts into higher utilization, dayrates and contract awards, particularly given the high uncommitted fleet rates after 2021.
- The timing, final cost and customer commencement of Deepwater Atlas and Deepwater Titan, together with the approximately $460 million of expected Shipyard Loan borrowings.
- Liquidity relative to the $586 million of debt-related installments due in the next twelve months and the company’s ability to refinance or repay maturities.
- The effect of continued ATM share issuance and potential exchangeable-bond conversions on share count and per-share value.
- Exposure to customer contract terminations, lower dayrates, rig reactivation or stacking costs, and further asset impairments or disposal losses.
- Developments in the Brazilian tax assessments, debt-related litigation and other contingencies.