Transocean Ltd. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2010; unaudited financial statements. Transocean is an international offshore contract drilling company operating 139 mobile offshore drilling units, including 45 high-specification floaters, 26 midwater floaters, 65 jackups and three other rigs. Three ultra-deepwater floaters were under construction.
Financial performance and condition
| Metric | Q3 2010 | Q3 2009 | 9M 2010 | 9M 2009 |
|---|---|---|---|---|
| Operating revenues | $2,309 million | $2,823 million | $7,416 million | $8,823 million |
| Operating income | $645 million | $957 million | $2,528 million | $3,397 million |
| Net income attributable to controlling interest | $368 million | $710 million | $1,760 million | $2,458 million |
| Diluted EPS | $1.15 | $2.19 | $5.47 | $7.61 |
| Cash flow from operations | $709 million | $1,406 million | $3,150 million | $4,423 million |
- Operating margin was approximately 28% in Q3 2010 versus 34% in Q3 2009; nine-month operating margin was approximately 34% versus 39%.
- Net margin attributable to controlling interest was approximately 16% in Q3 2010 versus 25% in Q3 2009; nine-month net margin was approximately 24% versus 28%.
- Average daily revenue was $271,200 in Q3 2010 versus $283,800 in Q3 2009. Utilization declined to 64% from 75%. Nine-month average daily revenue increased to $284,600 from $264,500, but utilization fell to 65% from 83%.
- At September 30, 2010, cash and cash equivalents were $4.636 billion, compared with $1.130 billion at December 31, 2009. Total assets were $39.330 billion.
- Total debt was $12.840 billion, including $1.717 billion due within one year, versus $11.717 billion at December 31, 2009. The company had no borrowings under its $2.0 billion revolving credit facility and $150 million of commercial paper outstanding at quarter-end.
- Capital expenditures were $983 million for the nine months, versus $2.195 billion in the prior-year period. Net cash used in investing activities was $341 million, compared with $2.026 billion.
- Shareholders’ equity was $21.039 billion at September 30, 2010. The company repurchased 2.863 million shares for $240 million during the nine months.
Material changes versus the prior comparable period
- Revenue declined 18% in Q3 and 16% for the nine months, primarily because of lower utilization, 42 stacked or idle rigs at September 30, 2010 versus 29 a year earlier, higher shipyard and maintenance downtime, the U.S. Gulf of Mexico drilling moratorium and the loss of Deepwater Horizon revenue.
- Operating and maintenance expense declined 13% in Q3 and 2% for the nine months, reflecting lower utilization and reduced activity, partly offset by newbuild costs, maintenance, shipyard costs and Macondo-related expenses.
- Operating income declined 33% in Q3 and 26% for the nine months. Net income attributable to controlling interest declined 48% in Q3 and 28% for the nine months.
- Results benefited from the absence of the $334 million of impairment losses recorded in the first nine months of 2009. In 2010, the company recorded a $267 million gain from insurance recoveries for the total loss of Deepwater Horizon and a $15 million loss on the sale of two midwater floaters.
- Interest expense increased to $415 million for the nine months from $365 million, while the company recorded a $20 million loss on debt retirement, primarily from convertible-note repurchases.
- In September 2010, Transocean issued $1.1 billion of 4.95% senior notes due 2015 and $900 million of 6.50% senior notes due 2020. It repurchased $703 million aggregate principal amount of Series B and Series C convertible notes during the nine months.
Outlook, commentary and risks
- Management expected 2010 revenue to decline from 2009 because of stacked and idle rigs, maintenance and shipyard downtime, the Deepwater Horizon contract termination, the Gulf of Mexico moratorium and lower integrated-services activity. Management expected 2011 revenue to be slightly higher than 2010, supported by newbuild activity and the lifting of the moratorium, but offset by lower dayrates and idle rigs.
- Contract backlog was $26.1 billion at October 14, 2010, down from $27.6 billion at July 15, 2010 and $32.7 billion at September 30, 2009. Gulf of Mexico backlog was approximately $7 billion, of which $2.0 billion could be lost if customers exercise contractual termination rights.
- The U.S. Gulf of Mexico moratorium was lifted October 12, 2010, but enhanced permitting, inspection, well-design, equipment-certification and emergency-response requirements could delay operations, increase costs and reduce utilization.
- Management estimated approximately $170 million of additional 2010 operating and maintenance expense related to Macondo, including insurance deductibles, higher premiums, legal expenses and investigation costs.
- The Deepwater Horizon incident generated 291 pending actions or claims as of September 30, 2010, including wrongful-death, personal-injury, economic-loss, environmental, securities and derivative claims. The company recorded approximately $116 million of liability and an $87 million insurance receivable, but stated that ultimate losses cannot be estimated reliably.
- Transocean asserted contractual indemnity rights against the well operator, while the operator reserved its rights regarding those obligations. The company had $950 million of excess liability coverage, generally retained risk above $1.0 billion, and faced potential claims that could reduce available insurance coverage.
- Significant tax contingencies included $707 million of unrecognized tax benefits, potential U.S. tax adjustments, Norwegian assessments for which financial security of up to $939 million could be required, and Brazilian assessments totaling $115 million plus penalties and interest.
- Other risks included high leverage, possible credit-rating downgrades, cyclical offshore-drilling demand, excess rig supply, dayrate pressure, regulatory changes, international political and compliance matters, insurance limitations and potential impairment of drilling assets or goodwill.
Investor verification points
- Reconcile the decline in utilization, stacked and idle rigs, dayrates and backlog with future revenue and cash-flow expectations.
- Assess the potential total cost of the Macondo claims, investigations, indemnity disputes, insurance recoveries and any exposure above policy limits.
- Review near-term debt maturities, including the expected December 2010 repurchase of Series A convertible notes, and liquidity after the $1.1 billion unpaid shareholder distribution.
- Monitor the appeal concerning the Swiss par-value reduction, which prevented payment of the approved distribution as of the filing.
- Evaluate tax litigation and assessments in the United States, Norway and Brazil, including possible cash collateral or settlement requirements.
- Compare projected newbuild spending and rig deliveries with utilization, dayrate trends and potential impairment indicators.