Business Context and Reporting Period
Transocean Ltd. is an international offshore contract drilling provider focused on ultra-deepwater and harsh-environment drilling. The company operated 41 mobile offshore drilling units at September 30, 2018, and was constructing two ultra-deepwater drillships and one harsh-environment semisubmersible. This unaudited Form 10-Q covers the three and nine months ended September 30, 2018.
Financial Performance and Liquidity
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Total revenue | $816 million | $808 million | $2.270 billion | $2.344 billion |
| Contract drilling revenue | $816 million | $699 million | $2.270 billion | $2.142 billion |
| Operating loss | $(305) million | $(1.147) billion | $(1.226) billion | $(2.520) billion |
| Net loss attributable to controlling interest | $(409) million | $(1.417) billion | $(1.754) billion | $(3.016) billion |
| Loss per share | $(0.88) | $(3.62) | $(3.86) | $(7.72) |
| Operating margin | Approximately (37.4%) | Approximately (142.0%) | Approximately (54.0%) | Approximately (107.5%) |
| Net margin | Approximately (50.1%) | Approximately (175.0%) | Approximately (77.5%) | Approximately (128.0%) |
Operating and maintenance expense was $447 million in Q3 and $1.302 billion for the first nine months, up 38% and 30%, respectively, year over year. Interest expense, net of capitalized amounts, was $160 million in Q3 and $455 million for the first nine months.
- Operating cash flow was $320 million for the first nine months, down from $926 million in the prior-year period.
- Investing activities provided $371 million, including $450 million of net proceeds from short-term investment maturities; capital expenditures were $140 million.
- Financing activities used $791 million, reflecting $2.015 billion of debt repayments partly offset by $1.319 billion of debt issuance proceeds.
- Unrestricted cash and cash equivalents were $2.307 billion at September 30, 2018; restricted cash and investments totaled approximately $568 million.
- Total debt principal was $9.434 billion, including $385 million due within one year. Total debt carrying value was $9.327 billion.
- The company had no borrowings under its $1.0 billion secured revolving credit facility and had $1.0 billion of available capacity, subject to covenants; letters of credit totaled $24 million.
Material Changes Versus Prior Comparable Period
- Q3 contract drilling revenue rose 17% to $816 million, primarily from the Songa acquisition, two newbuild drillships entering operation, 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.
- For the first nine months, total revenue declined 3% despite a 6% increase in contract drilling revenue because 2017 included $202 million of separately reported other revenue, primarily termination and reimbursement amounts.
- Fleet operating days increased 18% in Q3 and 11% for the first nine months. Total rig utilization improved to 65% in Q3 and 58% for the first nine months, versus 52% and 46%, respectively, in the prior-year periods.
- Total fleet average daily revenue declined to $295,000 in Q3 from $319,000, and to $297,300 for the first nine months from $328,800. Revenue efficiency declined to 95% from 97% in both comparisons.
- The Songa acquisition contributed approximately $137 million of Q3 revenue and $356 million of nine-month revenue. Songa became wholly owned during March 2018.
- The company recognized $981 million of impairment losses on rigs classified as held for sale and $462 million of goodwill impairment during the first nine months. These non-cash charges were lower than the $1.4 billion of held-for-sale impairments and $1.6 billion of disposal losses recorded in the comparable 2017 period, contributing to the lower reported net loss.
- Debt increased materially following the Songa acquisition and new secured note issuances, although the company repaid approximately $1.6 billion of debt assumed in the acquisition during the nine months.
Guidance, Outlook, Risks and Unusual Items
Management described the long-term offshore drilling outlook as positive, particularly for ultra-deepwater, citing oil prices generally above $70 per barrel during 2018 and improving customer economics. Harsh-environment rig supply remains limited and dayrates are improving, while excess ultra-deepwater supply continues to constrain dayrates.
- Contract backlog was $11.5 billion as of October 22, 2018, down from $11.7 billion at July 23 and $12.5 billion at April 18.
- Uncommitted fleet rates remained high for much of the fleet, including 51% for ultra-deepwater floaters and 36% for harsh-environment floaters in 2019.
- Transocean agreed to acquire Ocean Rig for approximately 147.7 million Transocean shares plus approximately $1.17 billion in cash. The transaction was expected to close before December 31, 2018, subject to customary conditions and shareholder and regulatory approvals.
- On October 25, 2018, after quarter-end, the company issued $750 million of 7.25% senior unsecured notes and received $735 million of net proceeds, intended partly to fund the Ocean Rig cash consideration.
- Future obligations included $385 million of scheduled debt principal maturities in the twelve months ending September 30, 2019, $591 million of related interest payments, and approximately $203 million of operating lease obligations in total.
- Management expects additional investments of $50 million in January 2019 and $33 million in January 2020 for the Transocean Norge project, which is expected to begin operations in July 2019.
- Material risks include weak or delayed offshore drilling recovery, low dayrates, idle or stacked rigs, contract cancellations, execution and integration risks from the Ocean Rig acquisition, high leverage and interest expense, capital project delays, and restricted access to debt markets.
- Contingencies include a $217 million accrued liability for probable and estimable Macondo-related claims, a $234 million Brazilian tax assessment under appeal, Global Marine litigation concerning $300 million of notes, and an approximately $80 million overdue Nigerian customer receivable subject to planned arbitration.
- The company stated that its disclosure controls and procedures were effective as of September 30, 2018, with no material changes to internal control over financial reporting during the quarter.
Investor Verification Items
- Verify completion, financing, dilution and integration results of the Ocean Rig acquisition, including the planned cash payment and issuance of approximately 147.7 million shares.
- Assess whether backlog converts into cash revenue at the reported contractual dayrates, given high uncommitted fleet rates and potential downtime, renegotiations or cancellations.
- Monitor liquidity against scheduled debt maturities, interest costs, credit-facility covenants and below-investment-grade debt ratings.
- Reconcile reported revenue growth with declining average daily revenue and revenue efficiency, and determine whether utilization improvements are sustainable.
- Evaluate the recoverability of rigs, goodwill and contract intangible assets, particularly under prolonged low dayrates or weak commodity prices.
- Track the Brazilian tax assessment, Macondo escrow releases and liability balance, Global Marine litigation, and collection of the Nigerian receivable.
- Review post-quarter-end debt issuance and its effect on leverage, interest expense and funding for Ocean Rig.