Transocean Ltd. 2010 Form 10-K Summary
Business context and reporting period
Transocean is a Swiss-based international offshore contract drilling company specializing in deepwater and harsh-environment services. Its primary business is contracting mobile offshore drilling units, equipment and crews, generally on a dayrate basis. The filing covers the fiscal year ended December 31, 2010; quarterly data are provided but this is an annual report, not a quarterly filing.
- At December 31, 2010, the company owned, partially owned or operated 139 mobile offshore drilling units, including 47 high-specification floaters, 25 midwater floaters, 10 high-specification jackups, 54 standard jackups and three other rigs.
- One ultra-deepwater floater and three high-specification jackups were under construction.
- Operations are reported in contract drilling services and other operations. BP represented approximately 10% of 2010 operating revenue.
Financial performance and liquidity
| Metric | 2010 | 2009 | Change |
|---|---|---|---|
| Operating revenues | $9.576 billion | $11.556 billion | Down 17% |
| Operating income | $1.866 billion | $4.400 billion | Down 58% |
| Net income attributable to controlling interest | $961 million | $3.181 billion | Down 70% |
| Diluted EPS | $2.99 | $9.84 | Down 70% |
| Cash flow from operations | $3.946 billion | $5.598 billion | Down 30% |
| Capital expenditures | $1.411 billion | $3.052 billion | Down 54% |
| Cash and cash equivalents | $3.394 billion | $1.130 billion | Up $2.264 billion |
- Operating margin was approximately 19.5% in 2010 versus 38.1% in 2009. Net margin attributable to controlling interest was approximately 10.0% versus 27.5%.
- Revenue earning days declined 19% to 31,713 and utilization declined to 63% from 80%, while average daily revenue increased 4% to $282,700.
- Contract drilling revenue fell 15% to $8.967 billion. Reductions were attributed primarily to more idle or stacked rigs, additional shipyard and maintenance downtime, lower U.S. Gulf of Mexico standby rates and the loss of Deepwater Horizon revenue.
- Operating and maintenance expense was broadly unchanged at $5.119 billion, despite lower activity, because newbuild operating costs, shipyard and maintenance expense and Macondo-related costs offset activity-related savings.
- The company recognized a $1.012 billion impairment charge, primarily for the Standard Jackup asset group, reflecting projected declines in dayrates and utilization. It also recognized a $267 million gain on insurance recoveries related to the loss of Deepwater Horizon.
- Total debt was $11.221 billion at December 31, 2010, compared with $11.717 billion at December 31, 2009. Debt due within one year was $2.012 billion, including consolidated variable-interest-entity debt.
- The company had a $2.0 billion revolving credit facility, with $1.9 billion of available capacity at December 31, 2010 and no borrowings outstanding. Commercial paper outstanding was $88 million at year-end.
- Debt to tangible capitalization was 0.48 to 1.0 versus a 0.60 to 1.0 maximum covenant. Contractual obligations totaled $17.705 billion, including debt, interest, leases and purchase obligations.
Material changes versus the prior comparable period
- Revenue, operating income, net income and operating cash flow all declined materially, driven mainly by lower utilization, rig stacking and idling, downtime, lower standby rates and the Macondo incident.
- Contract backlog declined to $24.6 billion at December 31, 2010 from $31.2 billion at December 31, 2009. It declined further to $24.0 billion as of February 10, 2011.
- Fleet utilization declined particularly in high-specification floaters, high-specification jackups and standard jackups. As of February 10, 2011, 26 of 54 standard jackups were stacked.
- Capital spending fell sharply as the company completed nine of 13 newbuild projects during 2010. Management expected approximately $1.1 billion of 2011 capital expenditures, including approximately $440 million for major construction projects.
- The company issued $2.0 billion of senior notes in September 2010 and repurchased $1.288 billion principal amount of Series A convertible notes, $520 million of Series B notes and $478 million of Series C notes during 2010.
- Transocean repurchased 2.863 million shares for $240 million under its share repurchase program. The 2010 shareholder-approved par-value distribution was not completed after Swiss authorities rejected registration of the first installment.
Guidance, outlook, risks and unusual items
- Management expected 2011 revenue to increase primarily from newbuilds entering service and lower planned out-of-service time, partly offset by lower dayrates and reduced activity from stacked and idle rigs. Operating and maintenance expense was expected to increase because of higher activity, shipyard and maintenance costs.
- Management expected utilization to remain steady or improve for high-specification jackups and midwater floaters, but did not expect near-term tendering activity to produce corresponding dayrate increases. Standard jackup dayrates were expected to decline.
- The U.S. Gulf of Mexico drilling moratorium was lifted on October 12, 2010, but enhanced permitting, inspection, well-control certification and emergency-response requirements continued to delay activity. Of $6.6 billion of backlog associated with 12 contracted Gulf of Mexico rigs as of February 10, 2011, $2.2 billion could be lost if customers exercise termination rights.
- Macondo-related incremental operating costs were $137 million in 2010, including insurance deductibles, higher premiums, legal expenses and investigation costs. Management expected approximately $100 million of incremental costs in 2011.
- Deepwater Horizon was declared a total loss, terminating approximately $590 million of remaining contract backlog. The company received $560 million of insurance proceeds and recorded a $267 million gain, but recorded a $135 million estimated liability and a $94 million insurance receivable for other Macondo-related contingencies.
- As of December 31, 2010, 304 Macondo-related actions or claims were pending against Transocean entities and other defendants. The DOJ filed a civil lawsuit alleging violations of the Oil Pollution Act and Clean Water Act and asserted joint and several liability.
- Transocean believes it is entitled to contractual defense and indemnity from the well operator for specified liabilities, but the operator reserved its rights and had not accepted the company’s indemnity demand. Insurance coverage is subject to deductibles, aggregate limits and a generally retained risk above $1.0 billion.
- The company settled certain FCPA matters with the SEC and DOJ in November 2010, paid approximately $27 million in penalties, interest and disgorgement, and entered into a three-year deferred prosecution agreement.
- Significant tax contingencies include U.S., Norwegian and Brazilian assessments. The company reported $720 million of unrecognized tax benefits, including interest and penalties, and stated that Norwegian authorities might require financial security of up to $1.0 billion.
- Credit rating agencies downgraded the company’s senior unsecured debt and assigned negative outlooks following Macondo-related uncertainty, potentially affecting future financing costs and market access.
- Management and Ernst & Young reported effective internal control over financial reporting and issued unqualified audit opinions on the financial statements and internal controls.
Most important facts for an investor to verify
- Current status, ultimate liability exposure, insurance recoveries and contractual indemnity enforceability related to Macondo and Deepwater Horizon.
- Actual realization of the $24.0 billion backlog reported as of February 10, 2011, including Gulf of Mexico termination rights and customer credit risk.
- Utilization, dayrates and reactivation or disposal plans for stacked standard and high-specification jackups.
- Debt maturities and potential convertible-note repurchases, particularly the Series B notes due for possible repurchase in December 2011 and the $2.012 billion of debt due within one year at year-end.
- Availability of the revolving credit facility, covenant compliance and the effect of credit-rating changes on financing costs and liquidity.
- Outcome of U.S., Norwegian and Brazilian tax disputes, including any required security or cash payments.
- Whether additional impairments of rigs or goodwill are required if dayrates, utilization or long-term cash-flow expectations weaken.
- Approval and timing of the proposed approximately $1 billion dividend from qualifying additional paid-in capital, including the required rescission of the disputed 2010 distribution.