Transocean Ltd. 2011 First-Quarter Form 10-Q Summary
Business context and reporting period
Transocean is an international provider of offshore contract drilling services, focused on deepwater and harsh-environment operations. For the quarter ended March 31, 2011, the company owned or partially owned and operated 137 mobile offshore drilling units, including 47 high-specification floaters, 25 midwater floaters, nine high-specification jackups, 53 standard jackups and three other rigs. The unaudited results are presented under U.S. GAAP and include reclassifications for discontinued operations.
Financial performance and liquidity
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Operating revenues | $2.144 billion | $2.579 billion | Down 17% |
| Operating income | $372 million | $942 million | Down 61% |
| Operating margin | 17.3% | 36.5% | Down 19.2 percentage points |
| Income from continuing operations | $164 million | $683 million | Down 76% |
| Net income | $340 million | $685 million | Down 50% |
| Net income attributable to controlling interest | $310 million | $677 million | Down 54% |
| Basic and diluted EPS | $0.96 | $2.10/$2.09 | Down approximately 54% |
| Operating cash flow | $390 million | $1.172 billion | Down 67% |
- Contract drilling revenue declined 20% to $1.950 billion. Revenue reductions included approximately $255 million from higher out-of-service time, $255 million from reduced activity caused by stacked or idle rigs and $45 million from the lost Deepwater Horizon contract. Newbuild activity added approximately $70 million.
- Other revenue increased 52% to $184 million, principally because of higher drilling-management-services activity.
- Operating and maintenance expense increased 15% to $1.359 billion, driven by higher shipyard and maintenance costs, increased drilling-management activity and newbuild operating costs. Depreciation and amortization declined 5% to $354 million.
- Net income included $176 million from discontinued operations, including a $173 million gain on the sale of the Caspian Sea business. Excluding discontinued operations, controlling-interest earnings were approximately $134 million, or $0.42 per diluted share.
- Cash and cash equivalents increased to $3.812 billion from $3.394 billion at December 31, 2010. Investing cash flow was positive $26 million, reflecting $259 million of proceeds from the Caspian Sea disposal, partly offset by $240 million of capital expenditures.
- Total debt was $11.241 billion at March 31, 2011, including $2.060 billion due within one year. Long-term debt, including debt of consolidated variable-interest entities, was $9.181 billion. The company had $1.9 billion available under its $2.0 billion revolving credit facility, no borrowings under that facility and $139 million of commercial paper outstanding.
- Letters of credit totaled $641 million, and surety bonds totaled $24 million. The reported debt-to-tangible-capitalization ratio was 0.45 to 1.0, compared with a 0.6 to 1.0 covenant limit.
Material changes versus the prior comparable period
- Fleet utilization fell to 55% from 66%, revenue-earning days decreased 18% to 6,664, and average daily revenue declined 2% to $292,600.
- High-specification floater utilization declined to 69% from 83%; midwater floater utilization declined to 60% from 67%; and standard jackup utilization declined to 43% from 53%. High-specification jackup utilization improved to 40% from 31%.
- Contract backlog was $24.554 billion as of April 14, 2011, up from $23.980 billion as of February 10, 2011 but below $25.921 billion as of October 14, 2010.
- Transocean sold the Trident 20 and discontinued Caspian Sea operations, receiving $259 million in net proceeds. It also sold Transocean Mercury for $10 million of net proceeds and recognized a $9 million gain.
- The company completed construction of one ultra-deepwater newbuild, which was awaiting customer acceptance at March 31, 2011. Three additional high-specification jackups and one ultra-deepwater floater were under construction.
- Capital expenditures were $240 million versus $369 million in the prior-year quarter. The company expected approximately $1.1 billion of 2011 capital expenditures.
Guidance, outlook, risks and unusual items
- Management expected 2011 revenue to be slightly higher than 2010, supported by newbuilds, lower planned out-of-service time and increased drilling-management activity, partly offset by lower dayrates and reduced activity from stacked or idle rigs.
- Management expected 2011 operating and maintenance expense to increase because of newbuild activity, shipyard and maintenance costs and drilling-management activity. Incremental 2011 Macondo-related operating costs and expenses were estimated at approximately $100 million, primarily legal expenses net of insurance recoveries.
- Management expected favorable commodity prices to support contracting opportunities and anticipated stable or improving utilization and dayrates. However, uncommitted fleet rates were high for several classes, including 40% for high-specification floaters in 2013 and 67% in 2014, indicating future contract-renewal exposure.
- U.S. Gulf of Mexico regulatory requirements following the drilling moratorium caused additional inspections, certification requirements and out-of-service time. Backlog for 12 Gulf of Mexico rigs was approximately $6.3 billion, of which $1.5 billion could be lost if customers exercise contractual termination rights.
- The Macondo litigation and investigations remained the principal contingent risk. At March 31, 2011, the company recorded an estimated liability of approximately $170 million and an estimated insurance recovery of approximately $130 million. The company asserted contractual indemnity and contribution claims against BP and other parties, while BP and other defendants asserted claims against Transocean.
- The company faced substantial unresolved tax exposures, including U.S. assessments and potential adjustments, Norwegian assessments for which financial security of up to $1.1 billion could be required, and Brazilian assessments totaling $119 million plus penalties and interest. Unrecognized tax benefits, including interest and penalties, were $745 million.
- In April 2011, Transocean repaid $166 million of 6.625% notes due April 15, 2011. The company also proposed a shareholder-approved dividend of approximately $1 billion, contingent on rescission of the disputed 2010 distribution and other legal and shareholder approvals.
- Management reported no impairment indicators for long-lived assets during the quarter, but noted that the company had recognized a $1.0 billion impairment loss on standard jackups in the fourth quarter of 2010 and could incur additional impairment losses if contracting conditions deteriorate.
Most important facts for investors to verify
- Whether Macondo-related claims, indemnities, insurance recoveries and government investigations result in liabilities materially exceeding the $170 million recorded estimate.
- The status and cash-flow impact of U.S., Norwegian and Brazilian tax disputes, including potential security requirements and the $745 million of unrecognized tax benefits.
- Actual utilization, dayrates and contract awards for stacked rigs and rigs exposed to U.S. Gulf of Mexico regulatory delays.
- Whether the $24.6 billion backlog converts to revenue at contracted dayrates, particularly the $1.5 billion of Gulf of Mexico backlog subject to possible termination.
- The company’s ability to fund approximately $1.1 billion of 2011 capital expenditures, near-term debt maturities and any proposed $1 billion shareholder distribution while preserving liquidity.
- Potential further impairments of the $21.2 billion property-and-equipment balance and $8.1 billion goodwill balance if utilization or dayrates weaken.