Transocean Ltd. 2020 Form 10-K Summary
Business context and reporting period
Transocean Ltd. is a Swiss-based provider of offshore contract drilling services, operating primarily high-specification ultra-deepwater and harsh-environment floaters on dayrate contracts. The filing covers the fiscal year ended December 31, 2020; it is an annual 10-K rather than a standalone fourth-quarter filing. As of February 16, 2021, the company operated 37 mobile offshore drilling units and had two ultra-deepwater drillships under construction.
Financial performance and key metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Contract drilling revenue | $3.152 billion | $3.088 billion | Up 2% |
| Operating loss | $493 million | $721 million | Improved $228 million |
| Net loss | $568 million | $1.257 billion | Improved $689 million |
| Net loss attributable to controlling interest | $567 million | $1.255 billion | Improved $688 million |
| Loss per share | $0.92 | $2.05 | Improved |
| Cash flow from operations | $398 million | $340 million | Up $58 million |
| Capital expenditures | $265 million | $387 million | Down $122 million |
| Total debt | $7.8 billion | $9.3 billion | Down $1.5 billion |
| Unrestricted cash and equivalents | $1.154 billion | $1.790 billion | Down $636 million |
| Restricted cash and equivalents | $406 million | $558 million | Down $152 million |
Operating performance reflected 9,169 operating days versus 9,872 in 2019, average daily revenue of $327,500 versus $313,400, total revenue efficiency of 96% versus 97%, and total fleet utilization of 62% versus 58%. The revenue increase included a $177 million customer dispute settlement, approximately $37 million of COVID-19 reimbursement revenue, approximately $30 million of early termination revenue, and higher comparable-fleet dayrates. These benefits were partly offset by stacked rigs, lower activity, asset sales and reduced non-COVID reimbursements.
The company reported a $493 million operating loss despite lower operating and maintenance expense of $2.0 billion, depreciation and amortization of $781 million, and general and administrative expense of $183 million. The 2020 results included $597 million of impairment losses and $84 million of net disposal losses. Interest expense was $575 million. The effective tax rate was negative 5.1%, affected by jurisdictional tax regimes and discrete items including a $28 million U.S. CARES Act benefit.
Liquidity, debt and capital structure
- Net cash provided by operating activities was $398 million. Investing activities used $257 million and financing activities used $930 million, resulting in a $789 million decrease in unrestricted and restricted cash.
- The $1.3 billion secured revolving credit facility was undrawn at year-end and had $1.3 billion of available capacity as of February 16, 2021, subject to covenants. It expires June 22, 2023; minimum liquidity under the facility is $500 million.
- Total debt principal was $7.376 billion and carrying-value debt was $7.807 billion at December 31, 2020. Scheduled debt maturities were $449 million in 2021, $448 million in 2022 and $1.055 billion in 2023, excluding other installments.
- Debt restructuring and retirement transactions reduced principal obligations but generated a $533 million net gain in 2020. The company issued $750 million of 8.00% notes for net cash proceeds of $743 million, redeemed $714 million of 9.00% notes for $767 million, and completed additional tender offers and open-market repurchases.
- Contractual obligations totaled $13.268 billion, including $7.866 billion of debt, $2.763 billion of debt interest, $611 million of finance lease liabilities, $934 million of purchase obligations and $903 million of service agreement obligations.
Material changes versus the prior comparable period
- Revenue rose modestly, but operating days declined 7% because of stacking, reduced customer activity and asset disposals.
- Operating and maintenance expense declined $140 million, depreciation and amortization declined $74 million, and general and administrative expense declined $10 million.
- Net loss improved substantially, primarily due to lower operating costs, lower interest expense, a $533 million net gain on debt restructuring and retirement, and lower impairment expense.
- Debt declined from $9.3 billion to $7.8 billion, while cash and restricted cash declined from $2.349 billion combined to $1.560 billion combined.
- Contract backlog was approximately $8.1 billion at December 31, 2020, down 22% from $10.4 billion at December 31, 2019. It was approximately $7.8 billion as of February 12, 2021, with 61% of ultra-deepwater floater days and 32% of harsh-environment floater days uncommitted for 2021.
- The company sold seven drilling units during 2020 and received $20 million of net proceeds, recognizing a $61 million net loss on the rig disposals and $556 million of impairments on assets held for sale.
Guidance, outlook, risks and unusual items
Management expected subdued offshore contract activity to continue through at least the first half of 2021, with a potential recovery in the second half as customers restart delayed projects. Management cited improving deepwater economics, reduced rig supply and expected industry consolidation as potential drivers of higher utilization and dayrates, particularly for high-specification assets. This outlook depends on COVID-19 recovery, oil prices, customer capital spending and regulatory developments.
- COVID-19 caused lower industry activity, additional personnel and logistics costs, travel restrictions, supply-chain risks and potential rig downtime or contract termination.
- Sixteen rigs were uncontracted, stacked or idle as of February 12, 2021. Seven operating contracts were scheduled to expire before December 31, 2021.
- Backlog may not be fully realized because of downtime, force majeure, customer liquidity problems, early termination, renegotiation, cancellation or repudiation.
- Customer concentration is significant: Shell, Equinor and Chevron represented approximately 28%, 27% and 14% of 2020 revenue, respectively, and approximately 53%, 23% and 13% of backlog as of February 12, 2021.
- Debt ratings were below investment grade, limiting access to capital and increasing borrowing costs. The company remains exposed to refinancing, covenant, collateral and debt-maturity risk.
- The company recognized a $59 million impairment of its Orion investment and expected to contribute an additional $33 million to Orion in the first half of 2021.
- Debt exchange litigation brought by Whitebox and related purported notices of default were largely addressed through amendments and internal reorganizations. A court ruling favored Transocean, but Whitebox appealed. Management did not expect a material adverse effect.
- All significant Macondo-related litigation was reported as resolved by December 31, 2020. Tax, asbestos, environmental and other litigation remained subject to uncertainty.
- Brazilian tax assessments totaled approximately $141 million, including interest and penalties, and an unfavorable outcome could materially affect cash flows.
- As a Swiss corporation, the company faces restrictions under Swiss law regarding share issuance, distributions, share repurchases and capital management. No shares were repurchased during October through December 2020.
Most important facts an investor should verify
- Whether operating cash flow remains positive while $449 million of debt principal and other debt-related installments are due in 2021.
- The timing and terms of refinancing or liability-management actions for 2022 and 2023 maturities.
- Actual utilization, dayrates and contract awards for the 16 uncontracted rigs, compared with the reported backlog and uncommitted fleet rates.
- Whether the anticipated second-half 2021 offshore recovery occurs and supports higher dayrates for ultra-deepwater assets.
- The collectability and timing of the remaining $133 million receivable from the customer settlement.
- The outcome of the Whitebox appeal and other debt-related litigation, tax disputes, including the Brazilian assessments, and remaining asbestos and environmental claims.
- Funding requirements and completion risk for the two drillships under construction, including the conditional customer commitment for Deepwater Atlas.