Transocean Ltd. annual report, FY2019

Transocean Ltd. 2019 Form 10-K Summary

Business context and reporting period

Transocean is a Swiss-based offshore contract drilling company specializing in ultra-deepwater and harsh-environment drilling. The filing covers the fiscal year ended December 31, 2019; it is an annual report rather than a standalone fourth-quarter filing. At year-end, the company operated 45 mobile offshore drilling units: 28 ultra-deepwater, 14 harsh-environment and three midwater floaters. Two additional ultra-deepwater drillships were under construction.

Financial performance and key metrics

Metric	2019	2018	Change
Operating revenues	$3.088 billion	$3.018 billion	+2%
Operating loss	$(721) million	$(1.251) billion	Improved $530 million
Net loss	$(1.257) billion	$(2.003) billion	Improved $746 million
Net loss attributable to controlling interest	$(1.255) billion	$(1.996) billion	Improved $741 million
Basic and diluted loss per share	$(2.05)	$(4.27)	Improved $2.22
Cash provided by operating activities	$340 million	$558 million	Down $218 million
Capital expenditures	$387 million	$184 million	Up $203 million

Approximate 2019 operating margin was negative 23.4%; net margin was negative 40.7%; operating cash flow margin was approximately 11.0%.
Average daily revenue increased 6% to $313,400, while total revenue efficiency improved to 97% from 95%. Fleet utilization declined slightly to 58% from 59%.
Contract drilling revenue increased primarily from the Songa and Ocean Rig acquisitions, rig reactivations, higher revenue efficiency and newbuild operations. These benefits were partly offset by asset sales, lower activity, lower dayrates and the absence of 2018 contract termination revenue.
Operating and maintenance expense increased 19% to $2.140 billion, primarily due to acquired operations, rig reactivations and shipyard activity. Interest expense increased to $660 million from $620 million.
The company recognized $609 million of impairment expense, including $578 million related principally to three ultra-deepwater floaters classified as held for sale. The 2018 impairment charge was $1.464 billion, including a $462 million goodwill impairment.

Balance sheet, debt and liquidity

At December 31, 2019, unrestricted cash and cash equivalents were $1.790 billion and restricted cash and investments were $558 million.
Total debt was $9.3 billion at principal amount, compared with $10.1 billion at December 31, 2018; approximately $3.3 billion was secured. Debt carrying value was $9.261 billion, and total equity was $11.867 billion.
The company had no borrowings under its $1.3 billion secured revolving credit facility at December 31, 2019, with $13 million of letters of credit issued and $1.3 billion of available borrowing capacity. The facility requires minimum liquidity of $500 million and includes leverage, collateral and other restrictive covenants.
Cash flow from operations was insufficient to cover capital expenditures, resulting in approximately $47 million of negative operating cash flow after capital expenditures before asset-sale proceeds.
Contractual obligations totaled $16.702 billion, including $9.361 billion of debt, $4.307 billion of interest on debt, $1.116 billion of purchase obligations and $1.035 billion of service agreement obligations.

Material changes versus the prior comparable period

Revenue increased modestly, but operating costs grew substantially faster than revenue because of acquired and reactivated rigs, shipyard work and newbuild operations.
Operating and net losses narrowed substantially, primarily because 2019 impairment charges were lower than in 2018 and because 2018 included a large goodwill impairment.
Operating cash flow declined 39% because of increased operating costs, higher cash interest payments and unfavorable working-capital changes.
The company issued $550 million of 6.875% senior secured notes and $525 million of 5.375% senior secured notes. It also retired debt through tender offers and open-market repurchases, paying $971 million in aggregate for the 2019 tendered notes and $434 million of principal repurchased in the open market.
Transocean sold 11 drilling units and related assets for $64 million of net proceeds and recognized a $4 million aggregate gain on those rig disposals.
In October 2019, the company canceled construction contracts for two ultra-deepwater drillships, eliminating related contract liabilities and recognizing a $132 million gain.
Transocean’s 33% investee, Orion, completed construction of the harsh-environment floater Transocean Norge, which entered service in August 2019.

Guidance, outlook, commentary and risks

Management described the offshore floater market as improving, particularly for high-specification ultra-deepwater and harsh-environment rigs. It cited stronger contracting activity, longer fixture durations, higher dayrates and offshore project break-even prices of approximately $40 per barrel or below in many basins.
Management expected improving utilization and dayrates to continue through 2020 and beyond, but did not provide formal revenue, earnings or cash-flow guidance.
Contract backlog was approximately $10.4 billion at December 31, 2019, down 17% from $12.5 billion at December 31, 2018. As of February 14, 2020, backlog was $10.2 billion, including $2.6 billion expected in 2020.
As of February 14, 2020, 15 rigs were uncontracted or stacked/idle, one newbuild was uncontracted and 11 operating contracts were scheduled to expire before December 31, 2020.
Backlog is not guaranteed revenue: it can be reduced by downtime, lower contractual rates, force majeure, customer liquidity problems, renegotiations, cancellations or early terminations.
Major customers were Shell, Equinor and Chevron, representing approximately 26%, 21% and 17% of 2019 revenue, respectively. These customers represented approximately 49%, 26% and 13% of backlog, respectively, as of February 14, 2020.
Key risks include prolonged weak oil and gas prices, excess rig supply, dayrate pressure, high fixed operating costs, substantial debt and below-investment-grade ratings, refinancing and covenant risk, construction delays, impairment risk, customer concentration, environmental liabilities, litigation, tax disputes, geopolitical exposure, labor disruptions, cybersecurity and public-health events.
Material contingencies include a remaining $124 million liability for probable Macondo-related losses, a Brazilian tax assessment of approximately $168 million under appeal, $369 million of unrecognized tax benefits including interest and penalties, and substantial insurance and customer-indemnity limitations.
Subsequent to year-end, Transocean issued $750 million of 8.00% senior unsecured notes and redeemed its 9.00% senior notes for $767 million, with an expected approximately $66 million loss on retirement in the first quarter of 2020.

Important facts for investors to verify

Reconcile backlog conversion, contract expirations, uncommitted fleet rates and dayrate assumptions with actual 2020 and later operating results.
Assess liquidity after scheduled debt maturities, interest payments, newbuild commitments, rig reactivation costs and the February 2020 debt redemption.
Monitor utilization, dayrates, customer cancellations or renegotiations and the number of stacked or idle rigs.
Evaluate the sensitivity of asset impairments to future dayrates, utilization, scrap values and market recovery assumptions.
Review the enforceability and collectability of customer indemnities and the adequacy of insurance for environmental, operational and litigation exposures.
Track the Brazilian tax proceedings, other uncertain tax positions, Macondo-related payments and any related cash-flow impact.
Confirm the timing, cost and contracting status of Deepwater Atlas and Deepwater Titan, including the uncontracted status of Deepwater Atlas.