Transocean Ltd. quarterly report, Q3 FY2019

Transocean Ltd. — 2019 Q3 Form 10-Q Summary

Business context and reporting period

Transocean provides offshore contract drilling services, primarily on a dayrate basis, with a focus on ultra-deepwater and harsh-environment drilling. As of September 30, 2019, the company operated or partially owned 45 mobile offshore drilling units: 28 ultra-deepwater floaters, 14 harsh-environment floaters and three midwater floaters. Two ultra-deepwater drillships were under construction. The filing covers the three and nine months ended September 30, 2019, compared with the corresponding 2018 periods.

Financial performance and liquidity

Metric	Q3 2019	Q3 2018	9M 2019	9M 2018
Contract drilling revenue	$784 million	$816 million	$2.296 billion	$2.270 billion
Operating loss	$(607) million	$(305) million	$(647) million	$(1.226) billion
Net loss attributable to controlling interest	$(825) million	$(409) million	$(1.204) billion	$(1.754) billion
Loss per diluted share	$(1.35)	$(0.88)	$(1.97)	$(3.86)
Cash flow from operations	Not separately provided	Not separately provided	$193 million	$320 million

Derived margins were approximately negative 77% operating and negative 105% net in Q3 2019, compared with approximately negative 37% and negative 50%, respectively, in Q3 2018. For the nine-month periods, derived operating margins were approximately negative 28% in 2019 versus negative 54% in 2018, while derived net margins were approximately negative 52% versus negative 77%.

Q3 average daily revenue increased to $314,500 from $295,000; revenue efficiency improved to 97% from 95%, but utilization declined to 58% from 65%.
For nine months, average daily revenue increased 5% to $312,000, revenue efficiency improved to 98% from 95%, and utilization declined slightly to 57% from 58%.
Q3 operating and maintenance expense increased 22% to $547 million. Nine-month operating and maintenance expense increased 20% to $1.565 billion.
Interest expense was $166 million in Q3 and $500 million for nine months, up from $160 million and $455 million, respectively.
Cash and cash equivalents were $1.906 billion at September 30, 2019, compared with $2.160 billion at December 31, 2018. Restricted cash and investments totaled $551 million.
Total debt principal was $9.496 billion, including $361 million due within one year; debt carrying value was $9.390 billion. Total debt principal declined from $10.094 billion at December 31, 2018.
The $1.3 billion secured revolving credit facility had no borrowings outstanding, $15 million of letters of credit issued and $1.3 billion of available capacity at September 30, 2019.
Capital expenditures were $259 million, versus $140 million in the prior-year period. Net cash used in investing activities was $158 million, while net cash used in financing activities was $167 million.

Material changes versus the prior comparable period

Q3 revenue decreased 4%, primarily because of approximately $60 million from rigs sold or held for sale, $50 million from lower activity and additional shipyard days, and $37 million of contract termination revenue recognized in Q3 2018. These effects were partly offset by Ocean Rig operations, rig reactivation, the newbuild harsh-environment floater and improved revenue efficiency.
Nine-month revenue increased 1%, supported by approximately $220 million from the Songa and Ocean Rig acquisitions, $65 million from rig reactivations and $55 million from improved revenue efficiency. Offsets included approximately $160 million from rigs sold or held for sale, $112 million of prior-year contract termination revenue, lower dayrates and stacked or idle rigs.
Q3 impairment loss increased to $583 million from $432 million, primarily reflecting the classification of three ultra-deepwater floaters as held for sale. Nine-month impairment loss declined to $584 million from $1.446 billion because 2018 included a $462 million goodwill impairment.
Q3 net loss worsened by $416 million, driven mainly by the larger impairment charge, higher operating costs and a tax expense rather than a tax benefit. Nine-month net loss improved by $558 million versus 2018.
During 2019, Transocean issued $1.075 billion of senior secured notes and received $1.056 billion of net proceeds. It retired or repurchased debt with aggregate principal amounts of $891 million and recorded $39 million of related losses.
The company sold eight drilling units or related assets during the first nine months and received $47 million of net proceeds.

Guidance, outlook, commentary and risks

Management reported improving offshore drilling market conditions, including increasing fixture durations and dayrates. It expects favorable trends for high-specification ultra-deepwater and harsh-environment rigs to continue into 2020 and beyond. Contract backlog was $10.8 billion as of October 17, 2019, down from $11.4 billion on July 25, 2019 and $12.2 billion on February 11, 2019. The filing does not provide formal revenue or earnings guidance.

Uncommitted fleet rates for the remainder of 2019 were 38% for ultra-deepwater floaters, 34% for harsh-environment floaters and 67% for midwater floaters; projected uncommitted rates rise materially in 2020 through 2023.
Management expected positive operating cash flow over the following year, but cautioned that weaker drilling conditions, poor operating performance, reactivation costs, stacking costs or fleet-marketability expenditures could reduce or reverse cash generation.
Two Ocean Rig drillship construction contracts were canceled in October 2019. The company expected to eliminate $132 million of related construction contract intangible liabilities in the fourth quarter of 2019.
Ongoing capital projects included an unnamed ultra-deepwater drillship expected in the third quarter of 2020 and Deepwater Titan, expected to commence operations in the fourth quarter of 2021. Estimated total completion costs were $905 million and $1.145 billion, respectively.
Principal risks include low rig utilization, dayrate pressure, contract cancellations or renegotiations, impairment of drilling assets, high leverage and refinancing needs, construction delays and cost overruns, dependence on oil-company spending, interest-rate and currency exposure, tax disputes, litigation and environmental liabilities.
The company disclosed a remaining Macondo-related liability of $124 million and a Brazilian tax assessment of approximately $162 million, which it is contesting. Management stated that other disclosed litigation and environmental matters were not expected to be materially adverse, but outcomes remain uncertain.
A proposed U.S. Treasury regulation issued after quarter-end was expected to produce an approximately $90 million tax benefit in the fourth quarter of 2019.

Most important facts for investors to verify

Whether improving dayrates and backlog convert into higher utilization and sustainable operating cash flow.
The timing and funding of $9.496 billion of debt principal maturities, including $361 million due within 12 months and $2.582 billion due in 2023.
Compliance with the secured credit facility’s minimum liquidity, leverage and collateral coverage covenants.
Whether further rig impairments, retirements or scrap sales are required as market values and utilization change.
The remaining cost, timing and execution risk of the two active drillship construction projects.
The final outcomes and cash-flow effects of Brazilian tax assessments, Macondo-related matters and other litigation or regulatory proceedings.
Whether the October 2019 cancellation of the two Ocean Rig construction contracts produces additional charges or materially changes future capital requirements.