Transocean Ltd. 10-Q Summary: Period Ended June 30, 2009
Business Context and Reporting Period
This filing covers the quarterly period ended June 30, 2009. Transocean Ltd. is a leading international provider of offshore contract drilling services, operating a fleet of 133 mobile offshore drilling units, including 39 High-Specification Floaters. The company specializes in deepwater and harsh environment drilling. In December 2008, the company completed a redomestication transaction, changing its place of incorporation from the Cayman Islands to Switzerland.
Key Financial Metrics
| Metric (in millions) | Three Months Ended June 30, 2009 | Six Months Ended June 30, 2009 |
|---|---|---|
| Operating Revenues | $2,882 | $6,000 |
| Operating Income | $1,121 | $2,440 |
| Net Income (Attributable to Controlling Interest) | $806 | $1,748 |
| Diluted Earnings Per Share | $2.49 | $5.42 |
| Net Cash Provided by Operating Activities | $1,576 | $3,017 |
| Total Debt | $12,053 | $12,053 |
| Cash and Cash Equivalents | $907 | $907 |
Key Operational Metrics: Average daily revenue was $255,900 for the quarter and $256,200 for the six-month period. Fleet utilization was 84% for the quarter and 87% for the six-month period.
Material Changes vs. Prior Period
- Revenue Decline: Operating revenues decreased by 7% ($220 million) for the quarter and 3% ($212 million) for the six months compared to the prior year periods. This was driven by a significant drop in contract drilling intangible revenues (down 61% for the quarter) and other revenues (down 42% for the quarter), partially offset by higher contract drilling revenues due to increased average daily rates.
- Profitability Impact: Net income attributable to controlling interest decreased by 24% ($259 million) for the quarter and 21% ($466 million) for the six months. Operating income declined 17% for the quarter and 16% for the six months.
- Impairment Losses: The company recognized a significant impairment loss of $67 million for the quarter and $288 million for the six months ended June 30, 2009. This included $58 million for the quarter and $279 million for the six months related to two Midwater Floaters (GSF Arctic II and GSF Arctic IV) classified as assets held for sale, and $9 million related to customer relationship intangibles.
- Debt Reduction: Total debt decreased by $1,504 million from December 31, 2008, to June 30, 2009, primarily due to the repayment of $1.0 billion under the Term Loan and the repurchase of $440 million of 1.625% Series A Convertible Senior Notes.
Outlook, Risks, and Management Commentary
- Market Outlook: Management notes that the global economic downturn and declining commodity prices continue to adversely affect the industry. Demand for Midwater Floaters and Jackups has diminished, leading to rig stacking (15 Jackups and 4 Midwater Floaters stacked as of August 3, 2009). However, demand for High-Specification Floaters remains relatively strong due to limited supply.
- Contract Backlog: Contract backlog declined to $33.7 billion as of August 3, 2009, down from $39.8 billion at year-end 2008. Management expects total revenues for 2009 to be lower than 2008.
- Capital Expenditures: Capital expenditures for the first six months of 2009 totaled $1.655 billion. The company expects total capital expenditures for 2009 to be approximately $3.8 billion, including $750 million for the Petrobras 10000 capital lease.
- Legal and Tax Contingencies: Significant tax disputes remain open in Norway (assessments totaling approx. $243 million plus interest) and Brazil (assessments totaling $101 million plus penalties and interest). The company is vigorously contesting these. Additionally, the company is cooperating with DOJ and SEC investigations regarding potential FCPA violations related to customs brokers in Nigeria and West Africa.
- Liquidity: The company maintains strong liquidity with $907 million in cash and cash equivalents and access to revolving credit facilities. It expects to fund operations and capital expenditures through cash flow, asset sales, and existing credit facilities.
Investor Verification Checklist
- Impairment Valuation: Verify the assumptions used to value the GSF Arctic II and GSF Arctic IV rigs, specifically regarding the restrictions imposed by the UK Office of Fair Trading and the limited market for these assets.
- Tax Liability Exposure: Review the status of the Norwegian and Brazilian tax assessments and the potential cash flow impact of required security deposits or penalties.
- FCPA Investigation Status: Monitor updates on the DOJ and SEC investigations regarding customs brokers in Nigeria and the potential for fines or sanctions.
- Contract Backlog Renewals: Assess the risk of contract non-renewals or dayrate reductions for the Midwater Floater and Jackup fleets as current contracts expire in 2009 and 2010.
- Capital Project Costs: Track the actual costs and completion dates of the Ultra-Deepwater newbuilds, as delays or cost overruns could impact liquidity and future revenue recognition.