Transocean Ltd. 2020 Q1 Form 10-Q Summary
Business context and reporting period
Transocean is an international offshore contract drilling company focused on ultra-deepwater and harsh-environment drilling. As of March 31, 2020, it operated 41 mobile offshore drilling units, including 28 ultra-deepwater floaters, 12 harsh-environment floaters and one midwater floater, and was constructing two ultra-deepwater drillships. The filing covers the unaudited three months ended March 31, 2020, compared with the three months ended March 31, 2019.
Key financial metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Contract drilling revenue | $759 million | $754 million | Up $5 million, or 1% |
| Operating loss | $199 million | $13 million | Down $186 million |
| Net loss attributable to controlling interest | $392 million | $171 million | Loss increased $220 million |
| Loss per diluted share | $0.64 | $0.28 | Loss increased $0.36 |
| Net cash used in operating activities | $48 million | $51 million | Improved by $3 million |
| Capital expenditures | $107 million | $52 million | Up $55 million |
| Total debt principal | $9.246 billion | $9.361 billion at Dec. 31, 2019 | Down $115 million |
- Operating margin was approximately negative 26.2% in Q1 2020 versus negative 1.7% in Q1 2019. Net margin was approximately negative 51.5% versus negative 22.7%.
- Operating and maintenance expense rose 6% to $540 million, while depreciation and amortization declined 5% to $206 million and general and administrative expense declined 12% to $43 million.
- Reported operating loss included $168 million of impairment charges: $137 million on four rigs and related assets classified as held for sale and $31 million on a midwater floater asset group held for use.
- Interest expense declined to $160 million from $166 million, but the company recorded a $57 million loss on debt retirement, including the $65 million loss on redemption of its 9.00% senior notes partially offset by an $8 million gain on open-market repurchases.
- Cash and cash equivalents were $1.483 billion at March 31, 2020, down from $1.790 billion at December 31, 2019. Restricted cash and investments were $531 million, producing total unrestricted and restricted cash of approximately $2.014 billion.
- The company had $1.3 billion of available capacity under its secured revolving credit facility, no borrowings outstanding and $7 million of letters of credit issued as of March 31, 2020.
- Total equity declined to $11.475 billion from $11.867 billion at year-end 2019, primarily reflecting the quarterly comprehensive loss.
Material changes versus the prior comparable period
- Revenue was broadly stable, but the mix changed. Increases from two reactivated ultra-deepwater floaters in Brazil, higher dayrates and a harsh-environment floater placed into service in August 2019 were largely offset by lower activity, weaker revenue efficiency and disposed or held-for-sale rigs.
- Total fleet average daily revenue increased to $314,900 from $306,500. However, revenue efficiency declined to 94% from 98%, while utilization improved to 60% from 56%.
- Contract backlog decreased to $9.598 billion as of April 16, 2020, from $12.130 billion as of April 17, 2019 and $10.163 billion as of February 14, 2020. Ultra-deepwater backlog was $6.936 billion and harsh-environment backlog was $2.662 billion; midwater backlog was zero.
- Operating cash flow remained negative at $48 million, while investing cash use increased to $112 million from cash provided of $23 million, primarily because of higher capital expenditures and no comparable investment maturities.
- Financing cash use increased to $175 million from $91 million. The company issued $750 million of 8.00% senior notes, redeemed the $714 million principal amount of 9.00% senior notes for $767 million including the make-whole payment, repaid other debt and repurchased $55 million principal amount of debt securities.
- The company adopted the expected-credit-loss accounting standard on January 1, 2020, with no material reported effect.
Guidance, outlook, commentary, risks and unusual items
- Management did not provide specific quantitative earnings or revenue guidance in the filing. It stated that operating cash flows were currently expected to be positive over the next year, but emphasized that this expectation could change if market conditions deteriorate.
- COVID-19, the collapse in oil prices and disputes among major oil-producing countries interrupted the improving offshore drilling market. Customers reduced capital expenditures, delayed or cancelled offshore projects and deferred final investment decisions.
- Management expects volatile conditions in the near term and identified increased risks of contract cancellations, renegotiations, early terminations, lower dayrates, unexercised options, stacking and retirement of rigs. It views the long-term outlook for high-specification floaters more favorably if oil prices recover and stabilize.
- Uncommitted fleet rates as of April 16, 2020 were 62% for ultra-deepwater floaters and 47% for harsh-environment floaters for the remainder of 2020. Midwater floaters were 100% uncommitted.
- COVID-19 created operational risks involving personnel movement, supply chains, rig outbreaks, downtime, remote work, cybersecurity and additional costs. The company incurred approximately $2 million of COVID-19-related personnel and mitigation costs in Q1.
- Debt and liquidity remain important risks. The company has $595 million of scheduled debt maturities in the twelve months ending March 31, 2021 and total contractual debt principal and interest obligations of $13.591 billion.
- Two drillships remain under construction. Estimated total completion costs were approximately $925 million for Deepwater Atlas and $1.145 billion for Deepwater Titan. Deepwater Atlas lacked a drilling contract and was expected to be delivered in Q4 2020; Deepwater Titan was expected to begin contracted operations in Q4 2021.
- Brazilian tax assessments remaining under dispute totaled approximately BRL 730 million, or approximately $140 million, including penalties and interest. An unfavorable outcome could materially affect financial position, results or cash flows.
- The company reported $124 million of remaining probable Macondo-related loss contingencies, with $125 million held in a restricted escrow account at March 31, 2020.
- Management concluded that disclosure controls and procedures were effective as of March 31, 2020, and reported no material changes to internal control over financial reporting.
Important facts for investors to verify
- Whether COVID-19 and depressed oil prices lead to further contract cancellations, renegotiations, lower dayrates or backlog reductions.
- The company’s ability to fund the $595 million near-term debt maturities, ongoing interest obligations, newbuild expenditures and any required rig reactivation, stacking or retirement costs.
- Future operating cash flow, given that Q1 operating cash flow was negative despite substantial non-cash impairment and depreciation charges.
- The timing and final costs of Deepwater Atlas and Deepwater Titan, including whether Atlas obtains a drilling contract before delivery.
- Additional impairments or scrap sales of lower-specification rigs and the effect on fleet utilization, revenue and collateral values.
- The outcome and cash-flow implications of the Brazilian tax assessments, Macondo-related matters and other litigation or regulatory proceedings.
- Whether the $1.3 billion secured credit facility remains available after considering covenant compliance, collateral requirements, credit-rating changes and any future defaults.