Transocean Ltd. 2017 Q1 Form 10-Q Summary
Business context and reporting period
Transocean provides offshore contract drilling services globally, primarily on a dayrate basis, with a focus on deepwater and harsh-environment drilling. At March 31, 2017, it operated or partially owned 56 mobile offshore drilling units and had nine units under construction or contracted for construction. The filing covers the unaudited three months ended March 31, 2017, compared with the three months ended March 31, 2016.
Key financial metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Operating revenues | $785 million | $1.341 billion | Down 41% |
| Contract drilling revenues | $738 million | $1.111 billion | Down 34% |
| Operating income | $173 million | $424 million | Down 59% |
| Income from continuing operations | $95 million | $242 million | Down 61% |
| Net income attributable to controlling interest | $91 million | $235 million | Down 61% |
| Diluted earnings per share | $0.23 | $0.64 | Down $0.41 |
| Net cash provided by operating activities | $184 million | $631 million | Down $447 million |
| Capital expenditures | $122 million | $368 million | Down $246 million |
| Cash and cash equivalents at period-end | $3.093 billion | $2.574 billion | Up $519 million |
Operating margin was approximately 22.0% in Q1 2017 versus 31.6% in Q1 2016. The decline in operating income reflected the sharp revenue reduction, partly offset by lower operating and maintenance costs. Interest expense increased to $127 million from $89 million. The reported Q1 2017 tax benefit of $40 million was materially affected by a $77 million net discrete tax benefit; the effective tax rate based on reported pretax income was negative 73.0%.
Total debt was $8.395 billion at March 31, 2017, including $1.458 billion due within one year, compared with total debt of $8.464 billion at December 31, 2016. The company had $3.0 billion of undrawn capacity under its unsecured revolving credit facility, which expires June 28, 2019. Debt to tangible capitalization, as defined under the facility, was 0.35 to 1.0 versus a 0.6 to 1.0 maximum covenant.
Material changes versus the prior comparable period
- Operating days declined 22% to 2,187, average daily revenue declined 15% to $337,700, and total fleet utilization declined to 43% from 51%.
- Contract drilling revenue decreased primarily because of approximately $300 million from additional idle or stacked rigs, $130 million from rigs sold or held for sale, and $75 million from lower dayrates. These reductions were partly offset by approximately $115 million from three newbuild ultra-deepwater drillships and $20 million from improved revenue efficiency.
- Other revenues declined $183 million, principally because early contract termination and cancellation revenue declined $172 million.
- Operating and maintenance expense declined 48% to $343 million, reflecting more idle or stacked rigs, asset dispositions, lower shipyard activity and lower onshore costs.
- Capital expenditures fell substantially because of the timing of milestone payments, while construction work in progress increased to $2.234 billion from $2.171 billion at year-end 2016.
- Revenue efficiency improved to 98% from 95%, but backlog declined to $10.753 billion as of April 24, 2017, from $12.181 billion as of October 24, 2016 and $11.251 billion as of February 9, 2017.
Guidance, outlook, commentary and risks
Management stated that its long-term view of the offshore drilling market remains positive, particularly for high-specification assets, but expects customers to continue limiting offshore exploration and development spending in 2017. Near-term risks include project delays, contract renegotiations, contract cancellations, falling utilization, lower dayrates and additional rig stacking. As of April 24, 2017, uncommitted fleet rates for the remainder of 2017 were 65% for ultra-deepwater floaters, 73% for harsh-environment floaters, 33% for deepwater floaters, 83% for midwater floaters and 82% for high-specification jackups.
The company expects to fund capital requirements, working capital and debt obligations through cash balances, operating cash flow, asset sales, its revolving facility and potentially additional financing. Management expected operating cash flow to remain positive over the next year, but warned that market deterioration, credit-rating downgrades and limited access to capital markets could reduce liquidity flexibility. Certain debt coupon rates increased or were scheduled to increase following credit-rating downgrades.
Transocean was negotiating with Borr Drilling to sell 10 high-specification jackups and novate construction contracts for five additional jackups. If completed on acceptable terms and classified as held for sale, management expected an impairment loss of approximately $1.5 billion. Four uncontracted newbuilds had ceased interest capitalization because construction progress was paused.
Macondo-related matters remained significant. The company carried $242 million of probable and estimable remaining loss contingencies at March 31, 2017. It made the final $60 million installment under its criminal plea agreement during the quarter. The PSC settlement was approved in February 2017, while 30 claimants opted out and other claims remained pending. Insurance recoveries beyond amounts received could not be assured.
Brazilian tax assessments included approximately $265 million and $45 million assessments relating to income tax matters, plus a separate Rio de Janeiro assessment of approximately $164 million, including interest and penalties. A Norwegian tax matter had been decided in Transocean's favor by an appeals court but remained subject to a tax-authority appeal to the Supreme Court.
The company disclosed a material weakness in internal control over financial reporting related to income tax accounting, including deferred-tax measurement and valuation allowances. Disclosure controls and procedures were therefore ineffective as of March 31, 2017. Management was implementing additional tax personnel, training, documentation and manual mitigating controls.
Most important facts for an investor to verify
- Whether utilization, dayrates, backlog and contract awards stabilize or continue to deteriorate in subsequent fleet-status reports.
- The timing and economic terms of the proposed Borr Drilling transaction and whether the approximately $1.5 billion potential impairment is recognized.
- Liquidity relative to the $1.458 billion of debt due within one year, upcoming coupon-rate increases and continued negative offshore-market conditions.
- Progress in remediating the material weakness in tax accounting and whether future tax adjustments or valuation allowances are required.
- Outcomes of remaining Macondo claims, insurance arbitration and Brazilian, Norwegian and other tax contingencies.
- Actual capital spending, construction progress and contract coverage for the nine rigs under construction or contracted for construction.