Transocean Ltd. quarterly report, Q2 FY2023

Business Context and Reporting Period

Transocean Ltd. is an international offshore contract drilling company focused on ultra-deepwater and harsh-environment drilling. As of June 30, 2023, it operated 37 mobile offshore drilling units: 28 ultra-deepwater floaters and nine harsh-environment floaters. This unaudited Form 10-Q covers the three and six months ended June 30, 2023, compared with the corresponding 2022 periods.

Financial Performance and Liquidity

Metric	Q2 2023	Q2 2022	Six months 2023	Six months 2022
Contract drilling revenue	$729 million	$692 million	$1.378 billion	$1.278 billion
Operating income (loss)	$(42) million	$28 million	$(199) million	$(22) million
Net loss attributable to controlling interest	$(165) million	$(68) million	$(630) million	$(243) million
Loss per share	$(0.22)	$(0.10)	$(0.85)	$(0.36)
Cash flow from operations	Not separately provided	Not separately provided	$110 million	$40 million

Q2 revenue increased 5%; six-month revenue increased 8%. Calculated operating margins were approximately negative 5.8% in Q2 and negative 14.4% for the six-month period. Calculated net margins were approximately negative 22.6% and negative 45.7%, respectively.
Revenue benefited from the entry into service of Deepwater Atlas and Deepwater Titan, higher dayrates, early termination revenue and higher reimbursements. These benefits were partly offset by lower utilization, primarily among harsh-environment floaters.
Operating and maintenance expense increased 12% in Q2 and 6% for the six-month period, driven by newbuilds, rig reactivations and contract preparation, inflation, maintenance and reimbursable costs.
Q2 included a $53 million impairment loss on the Paul B. Loyd, Jr. and Transocean Leader, which were classified as held for sale. Six-month results also included a $169 million loss on the non-cash contribution of Ocean Rig Olympia and related assets to Global Sea Mineral Resources NV.
Interest expense increased to $168 million in Q2 and $417 million for the six-month period, including a $46 million Q2 and $179 million six-month fair-value adjustment related to the bifurcated compound exchange feature of the 4.625% exchangeable bonds.
At June 30, 2023, unrestricted cash was $821 million and restricted cash was $213 million. Total current assets were $2.235 billion versus current liabilities of $1.141 billion.
Total debt had a $6.945 billion principal amount and a $7.447 billion carrying amount, including the exchange feature and other debt-related adjustments. Debt due within one year was $293 million. The secured revolving credit facility had $592 million of available capacity and no borrowings outstanding, aside from $8 million of letters of credit.
Six-month investing cash use was $163 million, including $157 million of capital expenditures. Financing cash flow was positive $96 million, reflecting $1.665 billion of net debt issuance proceeds offset by $1.568 billion of debt repayments.

Material Changes Versus the Prior Comparable Period

Revenue increased, but lower fleet utilization and materially higher operating, interest and unusual costs drove the company from Q2 2022 operating income of $28 million to a Q2 2023 operating loss of $42 million.
Fleet utilization declined to 54.7% in Q2 2023 from 58.2%; revenue efficiency remained high at 97.2% versus 97.8%. Average daily revenue increased to $367,000 from $358,100.
Six-month rig utilization declined to 53.3% from 55.4%, while average daily revenue increased to $365,600 from $346,800 and revenue efficiency improved to 97.5% from 96.4%.
Transocean issued $525 million of 8.375% senior secured notes and $1.175 billion of 8.75% senior secured notes in January 2023. It used proceeds, in part, to retire $1.38 billion of debt, resulting in a $32 million loss on retirement.
In April 2023, an affiliate of a director exchanged $213 million of exchangeable bonds for 34.6 million Transocean shares and immaterial cash consideration. Shares outstanding increased to 766.7 million at June 30, 2023 from 721.9 million at December 31, 2022.
Contract backlog increased to $9.239 billion as of July 19, 2023, from $8.589 billion on April 18, 2023. The increase was concentrated in harsh-environment floaters, whose backlog rose to $2.075 billion from $1.505 billion.

Guidance, Outlook, Commentary and Risks

Management described the offshore drilling outlook as positive, citing increasing hydrocarbon demand, reserve replacement needs, underinvestment in exploration and limited availability of high-specification floating rigs.
Management reported improved tendering activity in 2023, particularly in Brazil, West Africa, North America and Australia, and expects dayrate improvement to continue in deepwater markets. It expects Norwegian harsh-environment demand to accelerate after 2023 and extend through at least 2027.
Uncommitted fleet rates as of July 19, 2023 were 44% for ultra-deepwater floaters and 11% for harsh-environment floaters for the remainder of 2023, increasing substantially in later years.
Management expects operating cash flows to remain positive over the next year, but noted that poor operating results, market deterioration, rig reactivation or stacking costs could reduce or reverse cash generation. No formal revenue or earnings guidance was provided.
Scheduled debt and other installments totaled $7.234 billion, including $314 million due in the twelve months ending June 30, 2024 and $2.074 billion due in the twelve months ending June 30, 2027. Contractual interest payments totaled $2.528 billion.
Key risks include commodity-price and customer-spending volatility, contract cancellations or renegotiations, lower utilization, operational downtime, shipyard and newbuild delays, inflation, interest rates, below-investment-grade credit ratings, restricted access to capital markets, tax assessments and litigation.
Brazilian tax assessments remained outstanding at approximately $158 million, consisting of $143 million of corporate income tax and $15 million of indirect tax. An unfavorable outcome could materially affect cash flows.
Ongoing asbestos matters, environmental matters and a U.S. Department of Justice enforcement matter concerning alleged Clean Water Act permit violations were not expected by management to have a material adverse effect, although outcomes and costs remain uncertain.

Important Facts for Investors to Verify

Whether higher dayrates and backlog convert into cash earnings as utilization improves, particularly for ultra-deepwater rigs.
The timing, terms and funding of the $314 million of debt and other installments due through June 30, 2024, and larger maturities thereafter.
The effect of high-cost 8.375% and 8.75% secured debt, exchangeable-bond fair-value changes and future refinancing requirements on interest expense and liquidity.
Completion and remaining costs for Deepwater Atlas, Deepwater Titan and the expected third-quarter 2023 delivery of Deepwater Aquila.
Proceeds and closing status of the planned sales of Paul B. Loyd, Jr. and Transocean Leader, as well as the strategic and financial outcome of the GSR investment.
Potential cash exposure from the Brazilian tax assessments, Clean Water Act matter, asbestos litigation and other contingencies.
Whether management exercises the authorized share repurchase program, which had approximately $3.62 billion of remaining authorization at June 30, 2023, while the company continues to carry substantial debt.