Transocean Ltd. 2011 Q3 Form 10-Q Summary
Business context and reporting period
Transocean is an international offshore contract drilling company focused on deepwater and harsh-environment drilling, with drilling management services and other operations. The unaudited report covers the three and nine months ended September 30, 2011; prior-period amounts were adjusted for discontinued operations and other reclassifications. At September 30, the company owned or partially owned and operated 133 mobile offshore drilling units.
Financial performance and key metrics
| Metric | Q3 2011 | Q3 2010 | 9M 2011 | 9M 2010 |
|---|---|---|---|---|
| Operating revenues | $2.242 billion | $2.281 billion | $6.720 billion | $7.339 billion |
| Operating income | $268 million | $634 million | $1.031 billion | $2.525 billion |
| Operating margin | 12.0% | 27.8% | 15.3% | 34.4% |
| Income from continuing operations | $(53) million | $363 million | $273 million | $1.758 billion |
| Net income attributable to controlling interest | $(71) million | $368 million | $394 million | $1.760 billion |
| Diluted EPS | $(0.22) | $1.15 | $1.22 | $5.47 |
| Cash flow from operating activities | $492 million | $709 million | $1.222 billion | $3.150 billion |
Q3 contract drilling revenue declined 6% and nine-month contract drilling revenue declined 11%. Revenue-earning days fell 12% in the quarter and 15% year to date, while average daily revenue increased 7% to $290,200 in Q3 and 4% to $298,100 year to date. Fleet utilization declined to 58% in Q3 and 56% for the nine-month period, versus 64% in both comparable 2010 periods.
Operating and maintenance expense increased 28% in Q3 and 18% year to date, driven primarily by shipyard, maintenance, repair, equipment-certification work, drilling management activity and newbuild operations. The company recorded a $3 million Q3 and $28 million nine-month impairment loss on assets held for sale. A $59 million Q3 repair and maintenance charge related to prior periods included approximately $50 million of costs previously capitalized in 2011.
At September 30, 2011, cash and cash equivalents were $3.286 billion, compared with $3.394 billion at December 31, 2010. Total debt was $11.100 billion, including $1.926 billion due within one year. Long-term debt was $9.174 billion, including debt of consolidated variable-interest entities. The company had $1.8 billion of available borrowing capacity under its former revolving credit facility and no borrowings under that facility at quarter-end. Letters of credit outstanding totaled $1.8 billion, including a $1.3 billion guarantee related to the Aker Drilling acquisition.
Capital expenditures were $670 million in the first nine months, compared with $969 million in the prior-year period. Investing cash use was $609 million, while financing cash use was $721 million, including $508 million of shareholder distributions. The company expected approximately $1.1 billion of capital expenditures for full-year 2011.
Material changes versus the prior comparable period
- Revenue, operating income and continuing-operations earnings declined materially because of lower utilization, fewer revenue-earning days, stacked or idle rigs and increased maintenance and certification downtime.
- Other revenues increased 58% year to date, primarily from higher drilling management services activity, partially offsetting the decline in contract drilling revenue.
- Other expense included a $78 million foreign-exchange loss on a forward contract associated with the Aker Drilling transaction.
- Prior-year results benefited from $560 million of insurance recoveries and a $267 million gain related to the loss of Deepwater Horizon; there was no comparable benefit in 2011.
- Transocean paid two of four installments of a shareholder-approved $3.16-per-share additional paid-in-capital distribution, totaling $508 million through September 30. The remaining unpaid distribution liability was $509 million.
- The company acquired a 13.7% interest in Aker Drilling during the quarter and completed the acquisition of 100% of Aker Drilling on October 4, 2011, for aggregate consideration of approximately $1.4 billion.
Guidance, outlook, commentary and risks
Management expected commodity prices to support customer exploration and production programs and stated that utilization and dayrates were improving across fleet classes. Contract backlog was $23.5 billion as of October 17, 2011, slightly below $23.6 billion as of July 13, 2011. Management expected 2011 revenue to be slightly below 2010, with higher 2012 revenue driven by fewer idle and out-of-service days, Aker Drilling rigs and newbuild deliveries.
Management expected 2011 operating and maintenance expense to increase because of shipyard, maintenance, certification, newbuild and drilling-management activity. Incremental 2011 Macondo-related operating costs were expected to be approximately $90 million to $110 million, primarily legal expenses net of expected insurance recoveries.
The principal risks include the continuing Macondo litigation and regulatory investigations, uncertainty over contractual indemnity from BP and insurance recoveries, potential liabilities exceeding insurance coverage, Gulf of Mexico regulatory requirements and related downtime, rig stacking and dayrate pressure, execution and integration risks from Aker Drilling, debt maturities and convertible-note repurchase rights, and tax disputes in the United States, Norway and Brazil.
At September 30, estimated Macondo-related liabilities were approximately $204 million, with $184 million of corresponding estimated insurance recoveries. The company also reported significant unresolved tax exposures, including $766 million of unrecognized tax benefits, U.S. assessments and potential adjustments, Norwegian assessments and guarantees, and Brazilian assessments, penalties and interest. Management stated that adverse outcomes could materially affect cash flows and, in some cases, financial position or results.
Subsequent events included replacement of the $2.0 billion revolving credit facility, completion of the sale of the Challenger Minerals assets for $50 million, and the filing of a motion for partial summary judgment against BP regarding contractual defense and indemnity obligations. The acquisition of Aker Drilling added approximately $1.8 billion of property and equipment, $1.8 billion of long-term debt and approximately $397 million of preliminary goodwill; it also added approximately $770 million of drillship construction purchase obligations.
Important facts for investors to verify
- Reconcile the reported debt and liquidity position after the October 2011 Aker Drilling acquisition and the replacement revolving credit facility.
- Assess the December 2011 and 2012 put rights on the Series B and Series C convertible notes and the resulting refinancing or cash requirements.
- Monitor utilization, dayrates, stacked rigs, certification-related downtime and backlog conversion, particularly for standard and midwater floaters.
- Track Macondo litigation, BP indemnification claims, insurance interpleader proceedings, regulatory penalties and the adequacy of recorded reserves and insurance recoveries.
- Evaluate the potential cash impact of U.S., Norwegian and Brazilian tax disputes, including guarantees and security requirements.
- Confirm the final purchase-price allocation, integration results and contract status of Aker Drilling’s two drillships under construction.
- Review the remaining shareholder distribution obligations and the company’s decisions regarding debt reduction, capital expenditures and share repurchases.