Transocean Ltd. 2018 Form 10-K Summary
Business context and reporting period
Transocean Ltd. is a Swiss-based offshore contract drilling company focused on ultra-deepwater and harsh-environment drilling. The filing covers the fiscal year ended December 31, 2018; the requested “2018 Q4” information is presented within this annual filing, including unaudited fourth-quarter results.
- At December 31, 2018, the company operated 50 mobile offshore drilling units: 32 ultra-deepwater, 14 harsh-environment and four midwater floaters.
- At February 11, 2019, the fleet comprised 49 operating units, excluding five rigs under construction.
- Transocean completed the Songa acquisition in 2018 and acquired Ocean Rig on December 5, 2018.
Financial performance and key metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Operating revenues | $3.018 billion | $2.973 billion | 2% increase |
| Operating loss | $1.251 billion | $2.505 billion | 50% improvement |
| Net loss | $2.003 billion | $3.097 billion | 35% improvement |
| Net loss attributable to controlling interest | $1.996 billion | $3.127 billion | Improved |
| Loss per share | $4.27 | $8.00 | Improved |
| Cash provided by operating activities | $558 million | $1.170 billion | 52% decrease |
| Capital expenditures | $184 million | $497 million | 63% decrease |
| Total debt at year-end | $10.094 billion principal; $9.978 billion carrying amount | $7.484 billion principal; $7.396 billion carrying amount | Increased |
- Contract drilling revenue increased 11% to $3.018 billion, primarily from acquired operations, newbuilds entering service, contract termination payments, rig reactivations and reimbursements. These benefits were partly offset by lower dayrates, more idle or stacked rigs, asset disposals and lower revenue efficiency.
- Operating and maintenance expense increased 30% to $1.799 billion, while depreciation declined 2% to $818 million and general and administrative expense increased 21% to $188 million.
- The company recorded $1.464 billion of impairment losses, including $999 million on rigs classified as held for sale and $462 million from full goodwill impairment.
- Average daily revenue declined to $296,200 from $321,300. Total fleet revenue efficiency declined to 95% from 96%, while utilization improved to 59% from 48%.
- Year-end unrestricted cash and cash equivalents were $2.160 billion; restricted cash and investments totaled approximately $552 million. The company reported $1.0 billion of available capacity under its secured revolving credit facility at December 31, 2018.
- Fourth-quarter 2018 revenue was $748 million, operating loss was $25 million and net loss attributable to controlling interest was $242 million, or $0.48 per diluted share.
Material changes versus the prior comparable period
- Revenue modestly increased despite continued low dayrates, primarily because the Songa and Ocean Rig acquisitions contributed to 2018 results.
- Rig utilization improved materially, reflecting acquired contracted rigs and reactivations, but the fleet remained exposed to substantial idle and stacked capacity.
- Debt increased by approximately $2.6 billion at principal value, reflecting acquisition-related debt and new senior secured and unsecured note issuances. Interest expense rose to $620 million from $491 million.
- Operating loss narrowed substantially because 2017 included a $1.6 billion loss on disposal of high-specification jackups and related construction contracts. However, 2018 still included significant asset and goodwill impairments.
- Cash flow from operations fell by $612 million, partly because 2017 included $408 million of customer termination and cancellation payments that did not recur.
- Share count increased significantly from approximately 391 million weighted-average shares in 2017 to 468 million in 2018, mainly from shares issued in the Songa and Ocean Rig acquisitions.
Guidance, outlook, risks and unusual items
- Management expects customer investment and offshore project sanctioning to continue improving in 2019, supported by better offshore economics, structural efficiency gains and improved oil prices.
- Harsh-environment markets showed stronger utilization and dayrate improvement because of limited specialized-rig supply. Excess ultra-deepwater supply continued to delay meaningful dayrate recovery.
- Backlog was approximately $12.2 billion at February 11, 2019, compared with $11.5 billion at October 22, 2018 and $12.5 billion at December 31, 2018 as reported in the business discussion. Backlog remains subject to downtime, force majeure, customer liquidity, renegotiation and termination risk.
- Uncommitted fleet rates at February 11, 2019 were 56% for ultra-deepwater floaters, 31% for harsh-environment floaters and 34% for midwater floaters for 2019, increasing substantially in later years.
- Management expects operating cash flow to remain positive over the next year, but liquidity depends on operating performance, asset sales, financing access and customer payments.
- Subsequent to year-end, Transocean issued $550 million of 6.875% senior secured notes, completed tenders involving $521 million of debt repayments and expected an approximately $18 million first-quarter 2019 loss on debt retirement.
- In February 2019, the company committed to sell the Ocean Rig Paros and Eirik Raude for scrap value; the assets had a combined carrying amount of $12 million at year-end.
- Material risks include prolonged offshore market weakness, low utilization and dayrates, customer contract cancellations or renegotiations, substantial leverage and below-investment-grade debt ratings, shipyard delays, impairment of rigs and goodwill, environmental liabilities, tax disputes, litigation, cybersecurity and geopolitical exposure.
- Significant concentration exists among customers: Shell, Chevron and Equinor represented approximately 26%, 21% and 18% of 2018 operating revenues, respectively.
- Outstanding contingencies include Global Marine litigation, an approximately $80 million Nigerian customer receivable subject to potential arbitration, Brazilian tax assessments of approximately $251 million and $514 million of unrecognized tax benefits including interest and penalties.
Most important facts for investors to verify
- Whether improving backlog and harsh-environment demand translate into higher utilization and sustainable dayrate recovery.
- The timing and funding of approximately $3.0 billion of projected remaining costs for major newbuild projects through 2021.
- Debt maturities, interest burden, secured collateral requirements and compliance with the secured credit facility’s minimum liquidity and leverage covenants.
- The extent to which additional rig impairments or scrap dispositions may be required if market recovery is delayed.
- Customer concentration, counterparty credit quality and the realizability of the reported backlog.
- Final acquisition accounting for Ocean Rig, including fair-value adjustments, contract intangibles and potential goodwill or asset impairment effects.
- Outcomes of the Brazilian tax assessments, Global Marine litigation, Nigerian collection and arbitration matters, and other unresolved contingencies.
- The effect of substantial share issuance in the Songa and Ocean Rig acquisitions on per-share value and future dilution.