Transocean Ltd. quarterly report, Q2 FY2019

Transocean Ltd. 2019 Q2 Form 10-Q Summary

Business context and reporting period

Transocean is an international offshore contract drilling company focused on ultra-deepwater and harsh-environment drilling. As of June 30, 2019, it owned or operated 47 mobile offshore drilling units and was constructing four ultra-deepwater drillships and one harsh-environment semisubmersible. This unaudited Form 10-Q covers the three and six months ended June 30, 2019, compared with the corresponding 2018 periods.

Key financial metrics

Metric	Three months ended June 30, 2019	Three months ended June 30, 2018	Six months ended June 30, 2019	Six months ended June 30, 2018
Contract drilling revenue	$758 million	$790 million	$1.512 billion	$1.454 billion
Operating loss	$(27) million	$(917) million	$(40) million	$(921) million
Net loss attributable to controlling interest	$(208) million	$(1.135) billion	$(379) million	$(1.345) billion
Loss per diluted share	$(0.34)	$(2.46)	$(0.62)	$(2.99)
Net cash provided by operating activities	Not provided for the quarter	Not provided for the quarter	$102 million	$106 million

Approximate operating margins were negative 3.6% for the second quarter and negative 2.6% for the first six months of 2019, compared with approximately negative 116.1% and negative 63.4%, respectively, in the comparable 2018 periods. The 2018 results included substantial impairment charges.

Operating and maintenance expense increased 18% in the quarter and 19% for the six months, primarily from Ocean Rig operations, higher maintenance, reactivations and reimbursable costs.
Interest expense was $168 million in the quarter and $334 million for the six months, up from $148 million and $295 million, respectively, due primarily to debt issued after June 30, 2018.
At June 30, 2019, cash and cash equivalents were $2.243 billion and restricted cash and investments were $610 million.
Total debt had a $9.843 billion principal amount and a $9.727 billion carrying amount; $361 million of principal was scheduled to mature during the following 12 months.
The secured revolving credit facility was increased to $1.36 billion at June 30 and subsequently to $1.37 billion in July 2019. There were no borrowings outstanding at June 30, $22 million of letters of credit, and approximately $1.34 billion of available capacity.
Total assets were $25.624 billion and total equity was $12.757 billion at June 30, 2019.

Material changes versus the prior comparable period

Second-quarter revenue declined 4%, principally because of approximately $50 million from rigs sold or held for sale, $40 million of prior-year contract termination revenue, and approximately $20 million from lower dayrates. These effects were partly offset by approximately $65 million from Ocean Rig operations and $10 million of higher customer reimbursables.
First-half revenue increased 4%, supported by approximately $155 million from the Ocean Rig and Songa acquisitions, higher revenue efficiency, increased activity, rig reactivations and a newbuild drillship. Offsetting factors included rigs sold or held for sale, prior-year termination revenue and lower dayrates.
The 2018 periods included $1.014 billion of impairment charges, consisting primarily of $548 million related to assets held for sale and $463 million of goodwill impairment. The 2019 impairment charge was $1 million.
Revenue efficiency improved to 98% from 97% in the quarter and to 98% from 95% for the first six months. Total fleet utilization was 56% versus 57% in the quarter and 55% for the first six months of 2018.
Average daily revenue increased to $314,900 from $308,300 in the quarter and to $310,700 from $298,600 for the first six months.
Operating cash flow was broadly stable at $102 million versus $106 million despite the improved reported net loss, which was materially affected by the prior-year impairment charges.
Transocean issued $550 million of 6.875% senior secured notes in February and $525 million of 5.375% senior secured notes in May. It also retired $510 million of notes through tender offers and repurchased $130 million of debt in the open market.
The company completed sales of seven rigs and related assets during the first half, receiving $37 million of net proceeds and recognizing a net loss of less than $1 million on those rig disposals.

Guidance, outlook, risks and unusual items

Management described the long-term offshore floater outlook as positive, particularly for high-specification units. Contracting activity and terms were reported to be gradually improving, with limited supply supporting harsh-environment rigs and expected gradual improvement in ultra-deepwater utilization. Contract backlog was $11.4 billion as of July 25, 2019, down from $12.1 billion on April 17, 2019.

Uncommitted fleet rates for the remainder of 2019 were 44% for ultra-deepwater floaters, 24% for harsh-environment floaters and 67% for midwater floaters; rates rise materially in later years, indicating substantial future re-contracting exposure.
Management expected operating cash flows to remain positive over the next year, but identified deterioration in the drilling market, poor operational performance, reactivation or stacking costs and customer failures as potential causes of reduced or negative cash flow.
Major capital projects had estimated completion costs of approximately $3.040 billion, including two Ocean Rig drillships without drilling contracts, an unnamed ultra-deepwater drillship without a contract and Deepwater Titan.
Transocean had $14.548 billion of contractual debt principal and interest obligations, including $989 million due during the following 12 months.
A Brazilian tax assessment remained outstanding at approximately BRL 662 million, or approximately $172 million, including penalties and interest. The company is contesting the assessment.
Macondo-related probable loss contingencies were $157 million, with $157 million remaining in settlement escrow at June 30, 2019.
The Ocean Rig acquisition purchase-price allocation remained incomplete and could require material adjustments as fair values, tax positions and contingencies are finalized.
Key industry risks include commodity prices, rig supply and demand, utilization, dayrates, contract cancellations or renegotiations, customer credit, construction delays, leverage, interest rates, tax disputes, litigation, environmental matters and access to capital markets.
In July 2019, the Global Marine trustee litigation was dismissed with prejudice, and the majority holder of the related notes waived alleged existing or past defaults. Transocean Inc. subsequently guaranteed Global Marine’s obligations under the notes.

Important facts for investors to verify

Whether improving contracting activity and dayrates offset the high uncommitted fleet rates and substantial future re-contracting requirements.
The timing and funding of the approximately $3.040 billion of remaining major construction commitments, especially for rigs without contracts.
Debt maturities, refinancing access, covenant compliance and the company’s ability to maintain liquidity while operating cash flow remains modest.
Progress on rig disposals, stacking, reactivations and utilization improvements.
The ultimate outcome and cash-flow impact of the Brazilian tax assessment and other tax proceedings.
Final purchase-price accounting for Ocean Rig and the potential for further impairment or valuation changes.
The status and cash requirements of Macondo-related contingencies, legal proceedings and environmental claims.