Transocean Ltd. 2013 Form 10-K Summary
Business context and reporting period
Transocean is a Swiss-based global offshore contract drilling company focused on deepwater, ultra-deepwater and harsh-environment operations. The filing covers the fiscal year ended December 31, 2013; quarterly information includes the three months ended December 31, 2013. At year-end, the continuing-operations fleet comprised 79 rigs: 46 high-specification floaters, 22 midwater floaters and 11 high-specification jackups, with 12 additional units under construction or contracted for construction.
Operations are reported primarily through contract drilling services, with drilling management services treated as a smaller operating segment and subsequently discontinued following the February 2014 sale of Advanced Drilling Technology International Limited.
Financial performance and key metrics
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Operating revenues | $9.484 billion | $9.196 billion | +3% |
| Contract drilling revenues | $9.070 billion | $8.773 billion | +3% |
| Operating income | $2.224 billion | $1.581 billion | +41% |
| Operating margin | 23.5% | 17.2% | +6.3 percentage points |
| Income from continuing operations | $1.406 billion | $816 million | +72% |
| Net income attributable to controlling interest | $1.407 billion | $(219) million | Improved by $1.626 billion |
| Continuing-operations diluted EPS | $3.87 | $2.27 | +70% |
| Cash flow from operating activities | $1.918 billion | $2.708 billion | −29% |
| Capital expenditures | $2.238 billion | $1.303 billion | +72% |
| Debt | $10.702 billion | $12.459 billion | −14% |
| Cash and cash equivalents | $3.243 billion | $5.134 billion | −37% |
Net margin was approximately 14.8% in 2013, compared with a net loss margin in 2012. Revenue growth reflected higher dayrates, contributions from newbuild jackups and improved utilization, partly offset by lower revenue efficiency and more idle rigs. Operating and maintenance expense declined 5% to $5.791 billion, while depreciation declined 1% to $1.109 billion.
- Total fleet average daily revenue increased to $382,300 from $370,300.
- Total fleet revenue efficiency declined to 92% from 93%, while utilization improved to 79% from 78%.
- High-specification floater utilization increased to 86% from 83%; high-specification jackup utilization increased to 91% from 84%; midwater floater utilization declined to 61% from 66%.
- Contract backlog was $28.2 billion at December 31, 2013, down 4.1% from $29.4 billion at December 31, 2012. At February 18, 2014, backlog was $27.2 billion.
- At December 31, 2013, total assets were $32.546 billion and total equity was $16.685 billion. Property and equipment represented $21.707 billion, or approximately 67% of total assets.
Liquidity, debt and capital allocation
Cash declined primarily because operating cash flow, asset-sale proceeds and other sources were more than offset by capital expenditures, debt repayments, shareholder distributions and Macondo-related payments. Management estimated that approximately $1.5 billion of cash was required for working capital and operating needs and was not generally available for other uses.
- Debt fell by approximately $1.757 billion, including repayment of the TPDI credit facilities, 2013-maturity notes, callable bonds and remaining Series C convertible notes.
- The company had no borrowings outstanding under its $2.0 billion five-year revolving facility or $900 million secured revolving facility at December 31, 2013; approximately $2.0 billion and $900 million, respectively, were available at February 18, 2014, subject to conditions and covenants.
- The debt-to-tangible-capitalization ratio was 0.4 to 1.0 versus a maximum covenant ratio of 0.6 to 1.0.
- Financing activities used $2.151 billion, including $1.692 billion of debt repayments and $606 million of shareholder distributions.
- The board recommended a $3.00-per-share, approximately $1.1 billion, qualifying additional paid-in capital distribution for shareholder approval in May 2014. The recommendation was not yet approved at the filing date.
- 2014 capital expenditures were expected to be approximately $2.6 billion, including approximately $1.6 billion for major construction projects.
Material changes versus the prior comparable period
- Profitability improved materially: operating income rose 41% and continuing-operations income rose 72%, while 2012 included a $1.027 billion after-tax loss from discontinued operations.
- 2013 included only $81 million of continuing-operations impairment losses versus $140 million in 2012; 2012 also included a $118 million goodwill impairment and a $22 million drilling-management intangible impairment.
- Operating cash flow decreased $790 million, primarily due to $564 million of cash payments for initial Macondo settlement obligations and unfavorable working-capital changes.
- Capital spending increased substantially as the company expanded its newbuild program. Three high-specification jackups entered service during 2013; two ultra-deepwater drillships were expected to enter service in 2014.
- Macondo-related estimated loss-contingency liabilities declined to $464 million from $1.9 billion, while insurance recoverable assets declined to $10 million from $153 million.
- The company recognized $32 million of severance costs and $28 million of other costs associated with its organizational efficiency initiative, and expected approximately $5 million of additional costs in 2014.
- During 2013, Transocean sold the Deepwater Floater Transocean Richardson for $142 million of net proceeds and sold Shelf Drilling preference shares for $185 million, recognizing a $10 million loss on the latter transaction.
Guidance, outlook, risks and unusual items
Management expected 2014 revenue to exceed 2013 revenue, supported by partial-year operations of two new ultra-deepwater floaters, full-year operations of three jackups placed in service during 2013, fewer planned shipyard days and higher earned dayrates. Operating and maintenance expense was expected to be slightly lower, aided by lower activity in certain floater classes, optimization of rig-based spending and shore-based cost reductions.
Management expected near-term excess capacity and idle time in the global floater market, with pressure on utilization and dayrates, particularly for ultra-deepwater, deepwater and midwater floaters. As of February 18, 2014, uncommitted fleet rates were 24% for high-specification floaters, 33% for midwater floaters and 10% for high-specification jackups in 2014. Five high-specification jackups and two ultra-deepwater drillships under construction did not yet have drilling contracts.
- Macondo: Transocean agreed to $1.4 billion of DOJ fines, recoveries and civil penalties, excluding interest, payable through 2017. Remaining settlement obligations at December 31, 2013 were $840 million, excluding interest. Approximately 1,400 actions or claims remained pending, and further liabilities could exceed recorded amounts.
- Regulatory compliance: The company remains subject to a DOJ Consent Decree, probation through February 2018 and a five-year EPA Agreement. Enhanced well-control inspections, certifications and reporting may increase costs, downtime and permitting risk.
- Market cyclicality: Offshore drilling demand depends on oil and gas prices, customer capital spending, supply of new rigs, utilization and dayrates. Excess newbuild capacity could pressure margins and accelerate stacking of older rigs.
- Leverage and refinancing: Debt remains substantial, with approximately $9.898 billion of debt obligations scheduled at face value and $5.517 billion of associated interest included in contractual obligations. Rating downgrades could raise borrowing costs and restrict market access.
- Tax matters: A U.S. draft assessment related to transfer pricing for 2010 and 2011 could result in approximately $290 million of additional taxes, excluding interest and penalties. Norwegian and Brazilian tax disputes also remain unresolved.
- Capital commitments: Purchase obligations were $4.554 billion, primarily related to newbuilds, and the company had $22.485 billion of total contractual obligations, including debt, interest, settlement obligations, leases and purchase commitments.
- Concentration and indemnities: Chevron and BP represented approximately 12% and 10% of 2013 continuing-operations revenue. Shell and Chevron represented approximately 35% and 19% of backlog at February 18, 2014. Contractual indemnities, insurance recoveries and customer creditworthiness remain important uncertainties.
Important facts for investors to verify
- Reconcile 2014 revenue and expense guidance with actual fleet utilization, dayrates, idle or stacked rigs and newbuild delivery timing.
- Review the maturity schedule, covenant compliance, credit ratings and available revolver capacity, including the effect of future shareholder distributions and capital spending.
- Track Macondo litigation, insurance coverage, BP indemnity disputes, remaining settlement payments and any additional governmental or environmental claims.
- Assess whether the $27.2 billion backlog is converted into cash revenue, considering downtime, force majeure, customer termination rights and contract renegotiations.
- Evaluate the funding and returns of the newbuild program, particularly the seven uncontracted units and the $4.554 billion of purchase obligations.
- Monitor the $290 million U.S. transfer-pricing assessment and unresolved Norwegian and Brazilian tax matters.
- Verify the proposed $3.00-per-share distribution, its shareholder approval, Swiss-law constraints and impact on liquidity and debt reduction.
- Consider impairment sensitivity for the $21.7 billion property-and-equipment balance and $3.0 billion goodwill balance if dayrates or utilization weaken.