Transocean Ltd. 2022 Q3 Form 10-Q Summary
Business context and reporting period
Transocean provides offshore contract drilling services for oil and gas wells, specializing in ultra-deepwater and harsh-environment floaters. The filing covers the quarter and nine months ended September 30, 2022. At quarter-end, the company operated 37 mobile offshore drilling units and was constructing two ultra-deepwater drillships; by October 27, 2022, the fleet had increased to 38 units after Deepwater Atlas entered service.
Financial performance and liquidity
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Contract drilling revenue | $691 million | $626 million | $1.969 billion | $1.935 billion |
| Operating income (loss) | $53 million | $0 million | $31 million | $(69) million |
| Net loss attributable to controlling interest | $(28) million | $(130) million | $(271) million | $(332) million |
| Loss per share | $(0.04) | $(0.20) | $(0.39) | $(0.53) |
| Cash flow from operations | Not separately provided | Not separately provided | $270 million | $390 million |
- Q3 operating margin was approximately 7.7%, compared with approximately 0% in the prior-year quarter. Nine-month operating margin was approximately 1.6%, compared with approximately negative 3.6% in 2021. Q3 net margin was approximately negative 4.1%; nine-month net margin was approximately negative 13.8%.
- Q3 revenue increased 10%, primarily from higher rig utilization, early termination revenue and higher reimbursable revenue. Nine-month revenue increased 2%, as higher utilization and early termination revenue were partly offset by lower dayrates, lower revenue efficiency and lower reimbursable revenue.
- Q3 operating days increased 8% to 1,948, while total fleet utilization rose to 59.4% from 52.8%. Average daily revenue declined 6% to $343,400, and revenue efficiency declined to 95.0% from 98.1%.
- Nine-month operating cash flow decreased $120 million year over year, while capital expenditures increased to $308 million from $137 million, principally because of the newbuild program. Net cash used in investing activities was $333 million.
- At September 30, 2022, unrestricted cash was $954 million and restricted cash was $387 million. Total debt had a principal amount of $6.975 billion and a carrying amount of $7.201 billion, including $750 million of current debt. The fair value of debt was $5.515 billion.
- The secured revolving credit facility had no borrowings, $7 million of letters of credit and $767 million of available capacity at September 30, 2022. Its maturity was extended to June 2025, but borrowing capacity was reduced to $774 million through June 2023 and $600 million thereafter.
Material changes versus the prior comparable period
- Revenue improved despite lower average daily revenue because utilization and operating days increased.
- Operating results improved materially because the prior-year nine-month period included a $60 million loss on disposal of the Leiv Eiriksson and related assets.
- Interest expense declined to $298 million from $340 million for the nine-month period, reflecting scheduled and early debt repayments and increased capitalization of interest, partly offset by Shipyard Loan interest.
- The company recognized a $7 million gain on debt retirement in the first nine months of 2022, versus a $51 million gain in 2021.
- Transocean issued $300 million of 4.625% senior guaranteed exchangeable bonds due 2029, including $188 million of net cash proceeds, and exchanged portions of bonds due 2023 and 2025. It also issued 22.2 million warrants.
- The company raised $264 million net through its at-the-market equity program from the sale of 61.0 million shares, compared with $141 million from 31.7 million shares in the prior-year period, increasing dilution risk.
- Deepwater Atlas was completed and placed into service in October 2022. Deepwater Titan was expected to be delivered in the fourth quarter of 2022 and commence operations in the second quarter of 2023.
Guidance, outlook, risks and unusual items
- Management described the offshore drilling outlook as positive, citing increased energy demand, reduced global floating-rig supply, higher oil prices and increased customer tendering activity. Management expects continued dayrate improvement, particularly for high-specification assets.
- Contract backlog was $7.270 billion as of October 13, 2022, including $6.327 billion for ultra-deepwater floaters and $943 million for harsh-environment floaters. Backlog excludes options and remains subject to contract performance, downtime, alternative dayrates and termination provisions.
- Uncommitted fleet rates remained high: 52% for ultra-deepwater and 47% for harsh-environment floaters for the remainder of 2022, rising to 85% and 100%, respectively, in 2026.
- Management expects positive operating cash flow over the following year but stated that additional liquidity of at least $200 million must be obtained within 12 months to maintain compliance with the secured facility’s $500 million minimum liquidity covenant. The planned source was secured financing for Deepwater Titan, which management believed probable but not assured.
- Debt maturities and related installments totaled $758 million in the twelve months ending September 30, 2023, and $1.486 billion in the twelve months ending September 30, 2026. Total contractual debt and interest obligations were $9.544 billion.
- Transocean Equinox concluded its drilling contract earlier than expected. The company anticipated a $121 million cash redemption payment in January 2023 for 50% of specified senior secured notes.
- Key risks include commodity-price volatility, customer contract cancellations or renegotiations, low utilization and dayrates, supply-chain and shipyard delays, substantial leverage, below-investment-grade credit ratings, refinancing needs, interest-rate and currency exposure, tax disputes, environmental and regulatory matters, and litigation.
- Brazilian tax assessments remaining at September 30, 2022 totaled approximately $143 million, comprising approximately $122 million of corporate income tax and $21 million of indirect tax. The company is contesting the assessments.
- The company was engaged in settlement discussions with the U.S. Department of Justice regarding alleged Clean Water Act permit violations involving seven drillships. Management expected a monetary penalty that would be immaterial, but future expenditures could exceed accrued amounts.
Investor verification checklist
- Verify whether the planned Deepwater Titan secured financing was completed and whether the company maintained the secured credit facility’s minimum liquidity and other covenants.
- Review the timing and funding of the $121 million Equinox-related redemption and other near-term debt maturities.
- Assess whether backlog converted into revenue through improved utilization and dayrates, particularly in Brazil, the U.S. Gulf of Mexico and Norway.
- Monitor Deepwater Titan delivery, commissioning, capital costs and expected second-quarter 2023 contract commencement.
- Evaluate dilution from the ATM share issuance, exchangeable bonds and 22.2 million warrants.
- Track the Brazilian tax assessments, Clean Water Act settlement and other legal, environmental and regulatory contingencies.
- Reconcile future operating cash flow and capital expenditures against the company’s substantial debt service and newbuild obligations.