Transocean Ltd. 2010 Q1 Form 10-Q Summary
Business context and reporting period
Transocean is an international offshore contract drilling company focused on deepwater and harsh-environment drilling. At March 31, 2010, it owned, partially owned or operated 140 mobile offshore drilling units and had three ultra-deepwater floaters under construction. The unaudited interim filing covers the three months ended March 31, 2010, compared with the three months ended March 31, 2009. Amounts are in millions except per-share data and operating statistics.
Financial performance and condition
| Metric | Q1 2010 | Q1 2009 | Change |
|---|---|---|---|
| Operating revenues | $2,602 | $3,118 | Down $516, or 17% |
| Operating income | $926 | $1,319 | Down $393, or 30% |
| Operating margin | 35.6% | 42.3% | Down 6.7 percentage points |
| Net income | $685 | $939 | Down $254, or 27% |
| Net income attributable to controlling interest | $677 | $942 | Down $265, or 28% |
| Net margin attributable to controlling interest | 26.0% | 30.2% | Down 4.2 percentage points |
| Diluted EPS | $2.09 | $2.93 | Down $0.84 |
| Cash flow from operations | $1,172 | $1,441 | Down $269, or 19% |
| Capital expenditures | $379 | $708 | Down $329 |
Contract drilling revenue declined 14% to $2,441, while contract drilling intangible revenue declined 68% to $33 and other revenue declined 29% to $128. Revenue-earning days fell 26% to 8,184, and utilization decreased to 66% from 91%. Average daily revenue increased 16% to $298,300, partly because lower-rate rigs were stacked and the fleet mix shifted toward higher-specification floaters.
Operating and maintenance expense increased 2% to $1,196, depreciation and amortization increased 13% to $401, and general and administrative expense increased 13% to $63. The filing reports a $2 impairment loss in 2010 versus a $221 impairment loss in 2009, but the 2010 period included a $15 loss on the sale of two midwater floaters compared with a $4 gain on asset disposals in the prior-year period.
At March 31, 2010, cash and cash equivalents were $1,586, up from $1,130 at year-end 2009. Total assets were $36,838 and total equity was $21,206. Consolidated debt was $11,439, including $10,437 of Transocean Ltd. debt and $1,002 of debt of consolidated variable-interest entities. Debt declined from $11,717 at December 31, 2009. The company had $1,447 of debt due within one year, $150 of commercial paper outstanding, no borrowings under its $2.0 billion revolving credit facility, and $81 of outstanding letters of credit under that facility.
Operating cash flow covered capital expenditures by approximately 3.1 times. Financing cash outflows were $393, including $253 of debt repayments and $60 of share repurchases. The company reported a debt-to-tangible-capitalization ratio of 0.47 to 1.0 against a revolving-facility covenant maximum of 0.60 to 1.0.
Material changes versus the prior comparable period
- Utilization fell sharply because 33 rigs were stacked or idle at March 31, 2010, compared with six a year earlier. Newbuild operations partly offset the resulting revenue decline.
- Average daily revenue rose despite lower utilization, reflecting fleet mix and the stacking of lower-rate midwater floaters and jackups.
- Capital expenditures declined as construction activity shifted from 10 units in the prior-year period to three ultra-deepwater floaters.
- Debt repayments and reduced commercial paper borrowings lowered total debt, while the company initiated a share repurchase program and repurchased 717,000 shares for $60 million during the quarter.
- Contract backlog was $28.936 billion at March 31, 2010, down from $31.171 billion at December 31, 2009 and $36.677 billion at March 31, 2009.
Guidance, outlook, risks and unusual items
Management expected 2010 revenue to decline slightly from 2009 because of stacked and idle rigs, termination of the Deepwater Horizon contract and lower integrated-services activity. These effects were expected to be partly offset by a full year of operations from five 2009 newbuilds, four additional newbuilds commencing operations in 2010 and increased other-segment activity. Management expected 2010 operating and maintenance expense to increase, principally because of newbuild operations, maintenance and shipyard work, increased other-segment activity and costs associated with the Deepwater Horizon incident.
Management expected utilization to stabilize over the next several quarters, potentially below 2008 levels. It cited increased tendering activity and improved opportunities for high-specification floaters, but did not expect near-term dayrates to return to 2008 highs because of uncontracted newbuild and existing capacity. Uncommitted fleet rates for the remainder of 2010 were 7% for high-specification floaters, 32% for midwater floaters, 52% for high-specification jackups and 55% for standard jackups.
Subsequent to quarter-end, the Deepwater Horizon sank on April 22, 2010 after an explosion and fire. Eleven persons were missing and presumed dead, the rig was declared a total loss, and the related contract and approximately $590 million of backlog terminated. The rig had an insured value of $560 million; Transocean had received $401 million of partial insurance proceeds by May 5. The company stated that the incident was expected to have a material effect on future results and cash flows and could materially affect its financial position. Numerous personal-injury, wrongful-death and environmental lawsuits, government investigations and congressional inquiries were pending or expected. A subsidiary was designated a responsible party under the Oil Pollution Act for specified oil discharges, a designation the company disputed for underwater well-head discharges.
Other significant exposures include U.S. tax proposals of approximately $320 million for 2006 through 2009, including $278 million of additional proposed adjustments for 2006 and 2007; Norwegian tax assessments that could require financial security of up to $973 million; and Brazilian assessments totaling $110 million plus penalties and interest. The company also reported $661 million of unrecognized tax benefits, including interest and penalties, at March 31, 2010. Management contested the tax positions but acknowledged that adverse outcomes could materially affect cash flows and, in some cases, financial position and results.
The company recommended a shareholder distribution of approximately $1.0 billion, or about $3.11 per share, subject to approval at the May 2010 annual meeting. It expected to fund the proposed distribution from operating cash flow. The filing also identifies exposure to dayrate and utilization declines, customer contract cancellations, newbuild oversupply, commodity prices, credit-market access, interest rates, foreign exchange, insurance limitations, litigation, environmental liabilities and regulatory or compliance investigations.
Most important facts for an investor to verify
- Subsequent filings should quantify the ultimate costs, insurance recoveries, liabilities, legal expenses and revenue effects arising from the Deepwater Horizon incident.
- Verify utilization, dayrates, stacking and backlog trends, especially for high-specification floaters and jackups.
- Review the timing and funding of the proposed approximately $1.0 billion shareholder distribution, continuing share repurchases and near-term convertible-note repurchase options.
- Assess liquidity against scheduled debt maturities, including approximately $1.557 billion due in the twelve months ending March 31, 2011 and $2.479 billion due in the following year.
- Monitor U.S., Norwegian and Brazilian tax proceedings, potential security requirements and cash settlement timing.
- Evaluate insurance limits, deductibles, indemnities and exclusions, particularly for pollution, wreck removal, loss of revenue and liabilities exceeding policy limits.
- Confirm the impact of newbuild completion costs and the company’s approximately $1.4 billion 2010 capital-expenditure expectation.