Transocean Ltd. 2010 Q2 Form 10-Q Summary
Business context and reporting period
Transocean provides worldwide offshore contract drilling services, primarily on a dayrate basis, with a focus on deepwater and harsh-environment operations. At June 30, 2010, the company owned, partially owned or operated 139 mobile offshore drilling units and had three ultra-deepwater floaters under construction. The filing covers the three and six months ended June 30, 2010; financial statements are unaudited and presented in millions of U.S. dollars except per-share data.
Key financial metrics
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Operating revenues | $2,505 | $2,882 | $5,107 | $6,000 |
| Operating income | $957 | $1,121 | $1,883 | $2,440 |
| Net income attributable to controlling interest | $715 | $806 | $1,392 | $1,748 |
| Diluted EPS | $2.22 | $2.49 | $4.31 | $5.42 |
| Cash flow from operating activities | $1,269 | $1,576 | $2,441 | $3,017 |
- Q2 operating revenue declined 13%; six-month revenue declined 15%.
- Q2 operating margin was approximately 38.2%, compared with 38.9% in the prior-year quarter. Six-month operating margin was approximately 36.9%, compared with 40.7%.
- Fleet utilization fell to 64% in Q2 and 65% for the first six months, from 84% and 87%, respectively. Average daily revenue increased to $284,200 in Q2 and $291,300 for the first six months.
- Cash and cash equivalents were $2,888 at June 30, 2010, up from $1,130 at December 31, 2009. Total debt was $11,426, down from $11,717; debt due within one year totaled $1,662, including consolidated variable-interest-entity debt.
- The company had no borrowings under its $2.0 billion revolving credit facility and $104 million of commercial paper outstanding at June 30, 2010. Letters of credit totaled $479 million.
- Capital expenditures were $679 million in the first six months. Management expected approximately $1.4 billion of capital expenditures for 2010.
Material changes versus the prior comparable period
- Revenue pressure primarily reflected lower utilization, 36 stacked or idle rigs versus 18 in the comparable 2009 period, greater shipyard, maintenance and repair downtime, and the loss of Deepwater Horizon revenue.
- Higher average daily revenue and approximately $480 million of revenue from newbuilds partially offset lower activity.
- Operating and maintenance expense increased 4% for the six-month period, despite lower utilization, due to newbuild operations, higher maintenance and shipyard costs, increased other-operations activity and Macondo-related costs.
- The company recognized a $267 million gain on the loss of Deepwater Horizon after receiving $560 million of insurance proceeds. The gain materially affected reported operating income and was not representative of recurring operating performance.
- The prior-year six-month period included $288 million of impairment losses, principally relating to two rigs held for sale and a drilling-management intangible asset. The 2010 period included a $2 million goodwill impairment.
- Shares repurchased totaled 2.86 million for $240 million through June 30, 2010. The company also recorded an approximately $1.0 billion payable for an approved shareholder distribution of CHF 3.44 per issued share, subject to Swiss registration requirements.
Guidance, outlook, commentary and risks
- Management expected 2010 revenue to decline from 2009 because of stacked and idle rigs, termination of the Deepwater Horizon contract and lower integrated-services activity. Newbuild operations and increased other-operations activity were expected to provide partial offsets.
- Management expected 2010 operating and maintenance expense to increase, including approximately $180 million of additional Macondo-related expense: approximately $70 million of insurance deductibles, $30 million of higher insurance premiums, $36 million of legal expenses net of recoveries and $44 million of investigation-related costs.
- As of July 15, 2010, contract backlog was $27.6 billion, down from $28.9 billion at March 31, 2010 and $34.0 billion at June 30, 2009. Approximately $7.6 billion related to 14 rigs in the U.S. Gulf of Mexico, of which approximately $2.1 billion could be at risk if customers exercise contractual termination rights.
- The revised U.S. Gulf of Mexico drilling moratorium was scheduled through November 30, 2010. Management disputed that the moratorium constituted force majeure under the affected contracts, but acknowledged uncertainty regarding standby rates, contract extensions, terminations, utilization and dayrates.
- Macondo-related exposure remained the principal uncertainty. The company recorded an approximately $80 million liability for probable and estimable losses at June 30, 2010, while acknowledging that final losses could be materially greater. BP had reserved its rights regarding contractual indemnification.
- As of June 30, 2010, 206 Macondo-related actions or claims had been filed; by August 2, 2010, the company reported 249. Investigations by U.S. federal agencies, including the Department of Justice, were ongoing.
- Transocean carried $950 million of commercial excess liability coverage, generally retained liability above $1.0 billion, and had a $65 million expected deductible for Macondo-related excess-liability claims. Insurance availability could be reduced if claims by the operator were paid.
- Significant tax contingencies included unrecognized tax benefits of $666 million, potential U.S. assessments and adjustments, Norwegian assessments with possible financial-security requirements of up to $898 million, and Brazilian assessments totaling $109 million plus penalties and interest. Management believed its positions were correct but noted potential material cash-flow effects.
- Additional risks included offshore drilling cyclicality, oversupply from newbuilds, impairment of $22.5 billion of property and equipment and $8.1 billion of goodwill, regulatory and safety changes, insurance limitations, access to capital markets, and ongoing FCPA, sanctions and other regulatory investigations.
Investor verification checklist
- Reconcile recurring operating performance excluding the $267 million Deepwater Horizon insurance gain and assess the sustainability of utilization and dayrates.
- Monitor the U.S. Gulf of Mexico moratorium, force-majeure assertions, contract terminations, standby rates and the potentially exposed $2.1 billion of backlog.
- Review subsequent disclosures regarding Macondo litigation, indemnification by BP, insurance recoveries, investigations, penalties and any changes to the $80 million recorded liability.
- Verify near-term debt maturities, including potential repurchases of Series A, B and C convertible notes, against cash balances, operating cash flow and revolving-credit availability.
- Track the timing and legal authorization of the approximately $1.0 billion shareholder distribution and any further share repurchases, particularly given the company’s voluntary 30-day notice commitment to the DOJ.
- Assess developments in the U.S., Norwegian and Brazilian tax disputes and the potential effect on liquidity and cash taxes.