Transocean Ltd. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2013; filed November 6, 2013. Transocean is an international offshore contract drilling company focused on deepwater and harsh-environment operations. The continuing-operations fleet comprised 80 mobile offshore drilling units, including 46 high-specification floaters, 23 midwater floaters and 11 high-specification jackups at September 30, 2013.
Financial performance and liquidity
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Total operating revenues | $2,558 million | $2,431 million | $7,152 million | $6,870 million |
| Contract drilling revenues | $2,402 million | $2,310 million | $6,868 million | $6,498 million |
| Operating income | $742 million | $811 million | $1,817 million | $1,040 million |
| Operating margin | 29.0% | 33.4% | 25.4% | 15.1% |
| Income from continuing operations | $544 million | $533 million | $1,178 million | $384 million |
| Net income attributable to controlling interest | $546 million | $(381) million | $1,174 million | $(675) million |
| Diluted EPS | $1.50 | $(1.06) | $3.23 | $(1.90) |
| Cash flow from operations | $623 million | $786 million | $1,145 million | $1,785 million |
Q3 operating income declined despite higher revenue, primarily because operating and maintenance expense increased 13% to $1,491 million, including higher shipyard costs, drilling-management activity, newbuild costs and $29 million of additional Macondo-related contingency expense. The nine-month improvement in operating income primarily reflects lower Macondo-related charges and lower impairment losses in the comparable period.
- Balance sheet: Cash and cash equivalents were $3.559 billion versus $5.134 billion at December 31, 2012. Total assets were $32.601 billion and total equity was $16.259 billion.
- Debt: Total debt was $10.728 billion, including $220 million due within one year, versus $12.459 billion at year-end 2012. Long-term debt, including consolidated variable-interest-entity debt, was $10.508 billion. The company had no borrowings under its $2.0 billion five-year revolver or $900 million secured revolver and had $2.9 billion of total available borrowing capacity, subject to conditions.
- Cash uses: Nine-month capital expenditures were $1.290 billion; debt repayments were $1.673 billion; Macondo settlement payments totaled $564 million; and shareholder distributions totaled $404 million.
- Capital structure: The company estimated that approximately $1.5 billion of cash was required for working capital and operating needs and therefore was not generally available for other uses.
Operating indicators and material changes
- Q3 average daily revenue increased 4% to $392,400, while total fleet revenue efficiency was 94% versus 95% in Q3 2012 and utilization improved to 83% from 80%.
- For the first nine months, average daily revenue rose 3% to $379,000, utilization increased to 81% from 78%, and revenue efficiency declined to 92% from 93%.
- Contract backlog increased to $29.8 billion at October 16, 2013 from $27.3 billion at July 17, 2013. High-specification floaters represented $24.445 billion of backlog.
- Contract drilling revenue increased 6% for the first nine months, driven by higher utilization, improved dayrates and newbuild jackups. Other revenue declined 24% because of reduced drilling-management activity.
- The company completed the Transocean Siam Driller and Transocean Andaman newbuilds during the period; Transocean Ao Thai entered service in October 2013. Six ultra-deepwater drillships and one high-specification jackup were under construction or contract at September 30, 2013.
- The company completed or agreed to dispose of additional non-strategic and lower-specification assets, including the Transocean Richardson and several Standard Jackups.
- Debt reduction included repayment of the $735 million TPDI Credit Facilities, the $250 million 5% Notes, the $500 million 5.25% Senior Notes, the $273 million aggregate redemption of Aker callable bonds and the remaining $62 million of Series C Convertible Senior Notes.
Guidance, outlook, risks and unusual items
- Management expected 2013 revenue to exceed 2012 revenue and 2014 revenue to exceed 2013 revenue, supported by higher dayrates, newbuild additions and increased activity. Full-year 2013 capital expenditures were expected to be approximately $2.7 billion.
- Management expected near-term slowing in global floater contracting, increased competition and possible idle capacity. Midwater-floater demand was weakening outside the U.K. and Norway, while high-specification jackup demand remained comparatively strong.
- Management expected 2013 operating and maintenance expense to exceed 2012, excluding prior-year loss contingencies. Shore-based efficiency initiatives were expected to produce future savings, but 2013 benefits were expected to be offset at least partly by restructuring costs. The company expected approximately $10 million of incremental fourth-quarter 2013 restructuring costs.
- Macondo obligations were a major liquidity and litigation risk. The company agreed to $1.4 billion of DOJ fines, recoveries and civil penalties, with $840 million of principal settlement obligations remaining at September 30, 2013, excluding interest. The company had paid $564 million during the first nine months.
- Macondo-related probable loss contingencies were $451 million at September 30, 2013, down from $1.9 billion at December 31, 2012; the insurance recoverable asset was $34 million. Additional claims considered reasonably possible or probable could not be reasonably estimated.
- Macondo litigation remained unresolved, including multidistrict litigation, potential punitive damages, indemnity disputes, insurance coverage issues and government claims. The company stated that adverse outcomes could materially affect financial position, results and cash flow.
- Other significant contingencies included Norwegian and Brazilian tax matters, unrecognized tax benefits of $513 million, and various asbestos, environmental and regulatory claims. Management stated that several matters could materially affect cash flows even where a material earnings or balance-sheet impact was not expected.
- In September 2013, the Brazil Frade civil claims were settled and dismissed without a finding of fault or liability and without financial obligations for Transocean.
Investor verification points
- Verify the timing and amount of remaining Macondo payments, unrecorded contingencies, insurance recoveries and the status of related trials and indemnity claims.
- Assess whether backlog converts into revenue at stated dayrates, particularly given high uncommitted fleet rates for 2014–2017 and expected floater market weakness.
- Reconcile planned capital expenditures and newbuild delivery schedules with operating cash flow, debt maturities and required working capital.
- Monitor utilization, revenue efficiency, dayrates and idle or shipyard days by rig class, especially midwater and non-harsh-environment floaters.
- Review exposure to tax assessments, including Norway and Brazil, and the timing of the $513 million of unrecognized tax benefits.
- Confirm compliance with Macondo-related regulatory requirements, the Consent Decree performance plan and applicable credit-facility covenants.