Transocean Ltd. Form 10-Q Summary
Business context and reporting period
Transocean provides offshore contract drilling services, primarily on a dayrate basis, with a focus on ultra-deepwater and harsh-environment operations. As of June 30, 2020, the company operated 39 mobile offshore drilling units, including 27 ultra-deepwater and 12 harsh-environment floaters, and was constructing two ultra-deepwater drillships. This unaudited filing covers the three and six months ended June 30, 2020, compared with the corresponding 2019 periods.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Contract drilling revenue | $930 million | $758 million | $1.689 billion | $1.512 billion |
| Operating loss | $264 million | $27 million | $463 million | $40 million |
| Net loss attributable to controlling interest | $497 million | $208 million | $889 million | $379 million |
| Loss per diluted share | $0.81 | $0.34 | $1.45 | $0.62 |
| Cash flow from operating activities | Not separately reported | Not separately reported | $39 million | $102 million |
- Q2 operating margin was approximately negative 28%, and net margin was approximately negative 53%, primarily reflecting impairment charges and other unusual items.
- Six-month operating margin was approximately negative 27%, and net margin was approximately negative 53%.
- At June 30, 2020, cash and cash equivalents were $1.511 billion, restricted cash and investments were $437 million, and total current assets were $3.284 billion.
- Total debt principal was $9.142 billion, including $590 million due within one year; debt carrying value was $9.058 billion. The company had $1.3 billion available under its secured revolving credit facility, with no borrowings and $25 million of letters of credit outstanding at June 30.
- Six-month investing cash use was $156 million, including $153 million of capital expenditures. Financing cash use was $284 million, reflecting $743 million of debt issuance proceeds and $1.009 billion of debt repayments.
- Unrestricted and restricted cash declined by $401 million during the first six months, to $1.948 billion at June 30, 2020.
Material changes versus the prior comparable period
- Revenue increased 23% in Q2 and 12% for the first six months. The increase included $177 million from a customer dispute settlement, approximately $35 million from reactivating two Brazil ultra-deepwater floaters in Q2, and approximately $21 million from a customer contract termination payment.
- Revenue growth was partly offset by lower activity, stacked or idle rigs, reduced revenue efficiency, and rigs sold or classified as held for sale.
- Rig utilization improved to 66% in Q2 from 56% in the prior-year quarter and to 63% for the first six months from 56%. However, total fleet revenue efficiency declined to 97% in Q2 from 98% and to 96% for the first six months from 98%.
- Operating and maintenance expense increased 3% in Q2 and 5% for the first six months, including COVID-19 personnel costs, litigation and settlement costs, severance, reactivation costs, and expenses from a newly operating harsh-environment floater.
- Operating loss materially worsened because of $429 million of Q2 impairment charges and $597 million of six-month impairment charges, compared with $1 million in the corresponding 2019 periods.
- Net loss increased by $291 million in Q2 and $511 million for the first six months. The six-month result included a $59 million impairment of the Orion equity-method investment and a $53 million net loss on debt retirements.
- Debt principal declined from $9.361 billion at December 31, 2019 to $9.142 billion at June 30, 2020. The company issued $750 million of 8.00% senior notes and redeemed its $714 million of 9.00% senior notes, including a $65 million loss on redemption.
- Contract backlog declined to $8.890 billion as of July 15, 2020, from $9.598 billion on April 16, 2020 and $10.163 billion on February 14, 2020.
Guidance, outlook, risks and unusual items
- Management reported that COVID-19, lower commodity prices, and production disputes among major oil-producing countries interrupted the improving offshore drilling market and created significant oversupply. Customers reduced capital expenditures and delayed or cancelled offshore projects for the remainder of 2020.
- Management stated that the duration of reduced customer spending and project delays remains unclear. Longer term, it expects the market for high-specification offshore floaters to improve if oil prices recover and stabilize.
- Uncommitted fleet rates for the remainder of 2020 were 47% for ultra-deepwater floaters and 35% for harsh-environment floaters. Rates rise substantially in later years, indicating significant future availability risk.
- The company recognized $556 million of impairment charges on six rigs classified as held for sale or intended for environmentally responsible retirement, plus a $31 million impairment of a midwater floater asset group and $10 million of other asset impairments.
- A June 2020 customer settlement resulted in recognition of $177 million of revenue. The customer agreed to pay $185 million in four installments through January 15, 2023, creating collection and timing exposure.
- Two drillships under construction had estimated total completion costs of approximately $2.255 billion, with $136 million of expected spending during the remainder of 2020 and $1.205 billion projected for 2021. Actual costs and timing may vary.
- Debt maturities total $590 million in the twelve months ending June 30, 2021 and $1.793 billion in the following twelve-month period. Total contractual debt principal and interest obligations were $13.339 billion.
- Liquidity is exposed to further deterioration in drilling activity, customer defaults or contract cancellations, credit-rating downgrades, restricted capital-market access, and potential inability to maintain required credit-facility covenants.
- The company is contesting Brazilian tax assessments totaling approximately BRL 732 million, or approximately $134 million, including penalties and interest. An unfavorable outcome could materially affect cash flows and potentially financial results.
- The filing identifies ongoing asbestos, tax, regulatory, environmental and other legal matters, but management does not expect the currently evaluated exposures to have a material adverse effect. The filing states that outcomes remain uncertain.
Most important facts for investors to verify
- Whether the $8.890 billion backlog remains firm and collectible amid COVID-19-related customer delays, cancellations, renegotiations and potential force majeure claims.
- Whether operating cash flow can remain positive while utilization, dayrates, revenue efficiency and customer capital spending remain under pressure.
- The company’s ability to refinance or repay the $590 million due within one year and subsequent large maturities without materially increasing financing costs or using excessive cash.
- The recoverability of rig assets and the potential for additional impairments or accelerated retirements if market conditions remain oversupplied.
- Actual completion costs, financing requirements and customer commitments for Deepwater Atlas and Deepwater Titan.
- The collectibility and timing of the $185 million customer settlement payments through January 2023.
- The outcome and cash-flow impact of the approximately $134 million Brazilian tax assessment and other unresolved contingencies.