Transocean Ltd. 2015 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2015. The filing also provides unaudited fourth-quarter 2015 information. Transocean is a global offshore contract drilling company operating primarily on dayrate contracts. At year-end, it operated 60 mobile offshore drilling units and had 12 units under construction or contracted for construction. The company reports one global contract-drilling segment.
Financial results and key metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Operating revenues | $7.386 billion | $9.174 billion | Down 19% |
| Contract drilling revenues | $6.802 billion | $8.952 billion | Down 24% |
| Operating income (loss) | $1.380 billion | $(1.378) billion | Improved by $2.758 billion |
| Income from continuing operations | $824 million | $(1.946) billion | Improved by $2.770 billion |
| Net income attributable to controlling interest | $791 million | $(1.913) billion | Improved by $2.704 billion |
| Diluted EPS from continuing operations | $2.16 | $(5.23) | Improved |
| Cash provided by operating activities | $3.445 billion | $2.220 billion | Up 55% |
| Capital expenditures | $2.001 billion | $2.165 billion | Down 8% |
| Total debt | $8.490 billion | $10.051 billion | Down $1.561 billion |
| Cash and cash equivalents | $2.339 billion | $2.635 billion | Down $296 million |
Operating margins were materially affected by unusual items. Reported operating income included $1.867 billion of impairment losses, while operating and maintenance expense benefited from $788 million of Macondo-related insurance recoveries, reimbursements and liability reductions. Excluding the Macondo benefit, operating and maintenance expense declined primarily through rig sales, stacking and cost-reduction measures.
- Total fleet average daily revenue was $400,500, compared with $408,200 in 2014.
- Revenue efficiency improved to 96% from 95%.
- Fleet utilization declined to 71% from 76%; ultra-deepwater utilization declined to 65% from 82% and harsh-environment utilization to 64% from 91%.
- At December 31, 2015, property and equipment was $20.818 billion, or approximately 79% of total assets.
- Debt due within one year was $1.093 billion, and long-term debt was $7.397 billion.
- The $3.0 billion unsecured revolving credit facility had no borrowings or letters of credit outstanding at year-end and $3.0 billion of available capacity. The debt-to-tangible-capitalization ratio was 0.4 to 1.0 versus a 0.6 to 1.0 covenant maximum.
Fourth-quarter 2015
Fourth-quarter revenue was $1.851 billion, operating income was $750 million, income from continuing operations was $617 million, and net income attributable to controlling interest was $611 million. Fourth-quarter results included an aggregate $692 million impairment of assets held for sale and a $23 million net gain associated with debt retirement. The filing does not provide a clear adjusted fourth-quarter margin excluding these items.
Material changes versus the prior comparable period
- Revenue declined primarily because more rigs were idle or stacked, rigs were sold or classified as held for sale, and dayrates decreased. These effects were partly offset by lower shipyard and mobilization downtime, improved revenue efficiency and early-termination fees.
- Rig utilization deteriorated substantially as the offshore drilling market entered a severe cyclical downturn driven by weak oil and natural-gas prices, customer spending reductions and excess rig supply.
- Transocean recorded $1.175 billion of impairment losses on deepwater and midwater floater asset groups and an additional $692 million on rigs classified as held for sale. In 2014, impairment losses totaled $4.043 billion, including a $3.0 billion goodwill impairment.
- Contract backlog at December 31, 2015 was approximately $16.0 billion, down 29% from $22.5 billion at December 31, 2014. The continuing-operations backlog was $15.5 billion at February 11, 2016, with high uncommitted fleet rates for 2016-2020.
- Debt was reduced through the $904 million redemption of the remaining 4.95% Senior Notes and $468 million of cash payments for open-market repurchases of $503 million principal amount of debt securities.
- Cash distributions of qualifying additional paid-in capital totaled $381 million in 2015 versus $1.018 billion in 2014. Shareholders cancelled the third and fourth 2015 installments.
- Transocean sold 17 drilling units for scrap value during 2015 and had five additional rigs classified as held for sale at year-end.
- Three major credit-rating agencies downgraded the company’s senior unsecured debt to below investment grade during 2015. These downgrades increased borrowing costs and could restrict market access.
Guidance, outlook, risks and unusual items
- Management expected very few offshore drilling contracts to be awarded in 2016, with continued excess capacity and downward pressure on dayrates. Long-term prospects remained positive, particularly for high-specification assets, but the near- to medium-term outlook was described as especially challenging.
- Management projected approximately $1.4 billion of 2016 capital expenditures and other capital additions, including approximately $1.3 billion for major construction projects.
- The backlog is concentrated: Shell and Chevron represented approximately 51% and 21%, respectively, of total backlog as of February 11, 2016. Chevron and Shell represented approximately 14% and 10% of 2015 revenue.
- Customers early terminated or cancelled contracts for five rigs during 2015, generating $505 million of revenue and $400 million of cash proceeds. After year-end, six additional rigs received termination or cancellation notices.
- The company had approximately $16.549 billion of contractual obligations, including $7.918 billion of debt, $4.452 billion of debt interest, $2.964 billion of purchase obligations and $974 million of capital-lease payments.
- Macondo-related matters generated $788 million of income in 2015. The company retained a $250 million liability for probable and estimable Macondo loss contingencies, while the PSC settlement requiring $212 million plus up to $25 million of attorneys’ fees remained subject to court approval.
- Remaining Macondo risks included potential settlement-class opt-outs, appeals, wreck-removal exposure, insurance coverage disputes and reliance on BP indemnities. The company remained on probation through February 2018 under its DOJ plea agreement.
- Tax exposures included $405 million of unrecognized tax benefits, a potential U.S. transfer-pricing assessment of approximately $290 million excluding interest and penalties, and outstanding Brazilian and Norwegian civil tax matters. Norwegian criminal charges were subsequently dismissed in January 2016.
- Additional risks included further asset impairments, contract cancellations or renegotiations, customer credit deterioration, shipyard delays and cost overruns, regulatory and environmental liabilities, uninsured named-storm damage in the U.S. Gulf of Mexico, litigation, political and currency risks, and cybersecurity incidents.
Most important facts for investors to verify
- Whether the $15.5 billion continuing-operations backlog remains firm after subsequent contract termination notices and customer renegotiations.
- Liquidity after considering $1.093 billion of debt due within one year, approximately $1.3 billion of operating cash requirements, capital commitments and Macondo-related payments.
- The pace of 2016 rig stacking, retirements, contract awards, dayrate reductions and utilization declines by asset class.
- Whether further impairment charges are required for deepwater, midwater or other drilling assets under updated dayrate and utilization assumptions.
- The status and ultimate cash cost of the PSC settlement, Macondo opt-outs, insurance arbitration and BP indemnification obligations.
- Progress on debt refinancing and the effect of below-investment-grade ratings on interest costs, covenants and access to capital.
- Whether the five uncontracted high-specification jackups and two uncontracted ultra-deepwater drillships can obtain work before delivery.
- The outcome and timing of U.S., Brazilian and other tax disputes, including the potential $290 million U.S. transfer-pricing assessment.