Transocean Ltd. quarterly report, Q1 FY2012

Transocean Ltd. Form 10-Q Summary

Reporting period: Three months ended March 31, 2012; filed May 2, 2012. The unaudited statements cover Transocean Ltd. and subsidiaries. Transocean provides international offshore contract drilling, drilling management, engineering and project-management services. At March 31, 2012, it operated approximately 130 mobile offshore drilling units, including 50 high-specification floaters, 25 midwater floaters, nine high-specification jackups, 45 standard jackups and one swamp barge, with six units under construction.

Key Financial Metrics

Metric	Q1 2012	Q1 2011	Change
Operating revenues	$2.331 billion	$2.144 billion	9% increase
Contract drilling revenues	$2.203 billion	$1.950 billion	13% increase
Operating income	$270 million	$372 million	27% decrease
Operating margin	11.6%	17.4%	Down 5.8 percentage points
Income from continuing operations	$74 million	$164 million	55% decrease
Net income attributable to controlling interest	$42 million	$310 million	86% decrease
Basic and diluted EPS	$0.12	$0.96	Decrease
Net cash from operating activities	$540 million	$390 million	$150 million increase
Capital expenditures	$260 million	$240 million	$20 million increase

Contract drilling revenue growth reflected approximately $95 million from two Aker Drilling semisubmersibles, $75 million from a newbuild unit and $70 million from improved operating rates after the U.S. Gulf of Mexico drilling moratorium. Other revenue declined $67 million, primarily because of lower drilling management services activity.

Operating income was reduced by $227 million of impairment charges, including a $118 million incremental goodwill impairment, $92 million of drilling-management intangible impairments and a $17 million impairment of GSF Rig 136. Interest expense increased to $180 million from $145 million, primarily because of debt issued or assumed in late 2011. The effective annual tax rate was estimated at 25.5%, compared with 19.3% in the prior-year period.

Liquidity, Debt and Financial Position

Cash and cash equivalents were $3.982 billion at March 31, 2012, compared with $4.017 billion at December 31, 2011. Management estimated that approximately $1.0 billion of cash was needed for working capital and operating requirements.
Total debt was $13.456 billion, including $821 million attributable to consolidated variable-interest entities. Debt due within one year was $2.792 billion, including the assumed December 2012 repurchase of $1.722 billion principal amount of Series C convertible notes.
The $2.0 billion revolving credit facility had no borrowings, $24 million of letters of credit outstanding and full borrowing capacity available at March 31, 2012. The debt-to-tangible-capitalization ratio under the facility was 0.5 to 1.0, below the 0.6 to 1.0 covenant maximum.
Letters of credit totaled $653 million and surety bonds totaled $12 million. Restricted cash investments totaled approximately $913 million.
Net cash used in investing activities was $207 million, while net cash used in financing activities was $368 million, including the $278 million final installment of the approved $3.16-per-share distribution of additional paid-in capital.
Assets totaled $34.715 billion and total equity was $15.723 billion at March 31, 2012.

Material Changes Versus Q1 2011

Revenue, utilization and daily revenue improved: revenue-earning days increased 10% to 7,335, utilization rose to 61% from 55%, and fleet average daily revenue increased 3% to $300,300.
Revenue growth did not translate into higher operating profit because operating and maintenance costs increased 4%, impairment charges totaled $227 million, and the prior-year period included an $8 million disposal gain compared with a $4 million loss in 2012.
Net income attributable to controlling interest fell to $42 million from $310 million. The comparison was also affected by a $176 million gain from discontinued operations in Q1 2011 versus a $15 million loss in Q1 2012.
Operating cash flow increased despite lower reported earnings, supported by noncash impairment and depreciation charges and lower working-capital cash usage.
Debt increased materially from the Aker Drilling acquisition and late-2011 financing, contributing to higher interest expense. The company redeemed the remaining $30 million of Series B convertible notes in February 2012.
Quantum exercised its put option over its 50% TPDI interest and elected to exchange the interest for Transocean shares, although it could change its election to cash before closing.

Outlook, Commentary and Unusual Items

Management expected commodity prices and customer exploration programs to support improved contracting opportunities, utilization and dayrates through 2012 and into 2013. Contract backlog was $20.6 billion at April 18, 2012, down from $21.4 billion at February 14, 2012.
Management expected 2012 revenue to exceed 2011 revenue, driven by fewer idle and out-of-service days, Aker Drilling additions and newbuild deliveries. Operating and maintenance expenses were also expected to exceed 2011 levels because of additional rigs, higher personnel costs and increased drilling activity.
Management projected approximately $1.2 billion of 2012 capital expenditures, including approximately $205 million for major construction projects. Remaining estimated costs for disclosed major projects totaled approximately $1.449 billion after March 31, 2012.
Uncommitted fleet rates for the remainder of 2012 were 17% for high-specification floaters, 42% for midwater floaters, 24% for high-specification jackups and 35% for standard jackups. Contract backlog and dayrates remain subject to customer options, downtime, contract termination and market conditions.
The Macondo well incident remains the principal contingency. At March 31, 2012, Transocean had accrued $1.2 billion for probable and estimable loss contingencies and recorded a $222 million insurance recovery asset. Additional reasonably possible losses could not be estimated and may exceed recorded amounts.
The Macondo-related trial was stayed after the announced BP/Plaintiff Steering Committee partial settlement. Key indemnity, environmental, civil penalty, insurance and government claims remain unresolved.
Significant tax matters remain pending, including U.S. assessments relating to 2006-2009, Norwegian assessments and criminal proceedings, and Brazilian assessments. The company reported $764 million of unrecognized tax benefits including interest and penalties.
A Brazilian lawsuit related to the Frade field incident sought approximately $11.0 billion in damages and broad operating injunctions. The company stated that Chevron contractual indemnity provisions may apply.
Subsequent to quarter-end, Transocean completed certain asset sales, prepaid $115 million of Aker term-loan borrowings, completed the sale of Challenger Minerals Inc. and classified GSF Adriatic II as held for sale.

Most Important Facts to Verify

Whether Macondo liabilities materially exceed the $1.2 billion accrued amount and whether insurance recoveries, BP indemnity rights or litigation outcomes change the company’s net exposure.
Whether the Series C convertible notes are repurchased in December 2012 and how that obligation affects cash, debt refinancing and liquidity.
Whether projected improvements in utilization and dayrates offset higher operating costs, regulatory-related downtime and newbuild spending.
The status and potential cash impact of U.S., Norwegian and Brazilian tax disputes, including possible security requirements in Norway.
The closing terms of Quantum’s TPDI interest exchange and whether the consideration is paid in shares or cash.
Whether backlog converts to revenue at stated contractual dayrates, given customer options, force majeure provisions, downtime and possible contract cancellations.
The carrying values of goodwill, drilling-management intangibles and drilling units, as additional impairment charges remain possible if market conditions or projected cash flows weaken.