Transocean Ltd. 2017 Form 10-K Summary
Business context and reporting period
Transocean is a global offshore contract drilling company focused on ultra-deepwater and harsh-environment floaters. The filing covers the fiscal year ended December 31, 2017, with unaudited quarterly data also provided for the fourth quarter. At year-end, the company operated 39 mobile offshore drilling units and had three ultra-deepwater drillships under construction or contract to be constructed. The Songa Offshore acquisition closed on January 30, 2018 and therefore was a subsequent event rather than part of 2017 operating results.
Key financial metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Operating revenues | $2.973 billion | $4.161 billion | Down 29% |
| Contract drilling revenues | $2.731 billion | $3.705 billion | Down 26% |
| Operating income (loss) | $(2.504) billion | $1.132 billion | Declined $3.636 billion |
| Net income (loss) | $(3.097) billion | $827 million | Declined $3.924 billion |
| Net loss attributable to controlling interest | $(3.127) billion | $778 million | Declined $3.905 billion |
| Basic and diluted EPS | $(8.00) | $2.08 | Down from profit to loss |
| Cash flow from operations | $1.144 billion | $1.911 billion | Down 40% |
| Capital expenditures | $497 million | $1.344 billion | Down 63% |
| Total debt | $7.484 billion principal | $8.546 billion principal | Down $1.062 billion |
| Cash and cash equivalents | $2.519 billion | $3.052 billion | Down $533 million |
2017 operating results were heavily affected by a $1.498 billion impairment charge and a $1.603 billion net loss on asset disposals. The impairment charge included $1.4 billion on rigs classified as held for sale and $94 million on the midwater floater asset group. The disposal loss primarily reflected the sale of 10 high-specification jackups and novation of five jackup construction contracts.
Total fleet average daily revenue declined to $321,300 from $353,500, while total fleet revenue efficiency declined to 96% from 98%. Average rig utilization was unchanged at 48%, but the mix deteriorated: ultra-deepwater utilization fell to 39% from 45%, while harsh-environment utilization improved to 73% from 57%. Contract drilling revenues were reduced by approximately $600 million from additional idle or stacked rigs, $450 million from rigs sold or held for sale, $255 million from lower dayrates and $45 million from lower revenue efficiency.
Material changes versus the prior comparable period
- Revenue declined $1.188 billion as the offshore drilling downturn continued, with lower utilization, dayrates, and fewer operating rigs.
- Operating and maintenance expense decreased 26% to $1.388 billion, primarily due to rigs sold, stacked or idle and lower onshore and offshore costs.
- Interest expense increased to $491 million from $409 million, partly due to new debt, reduced capitalized interest and credit-rating downgrades.
- Operating cash flow declined $767 million, reflecting weaker operating activity and lower proceeds from early contract terminations.
- The company issued $750 million of 7.50% senior unsecured notes and $410 million of 5.52% senior secured notes, while retiring or repurchasing substantial debt. Debt repayments totaled $2.284 billion.
- The company sold 10 high-specification jackups and novated five jackup construction contracts for $319 million of net cash proceeds, but recognized a $1.6 billion net loss.
- Contract backlog at December 31, 2017 was approximately $9.5 billion, down 19% from $11.7 billion at December 31, 2016 and down 41% from $16.0 billion at December 31, 2015.
- Fourth-quarter 2017 revenue was $629 million, with a $102 million net loss attributable to controlling interest, or $(0.28) per diluted share. The filing does not identify fourth-quarter cash flow separately in the provided text.
Guidance, outlook, commentary, risks and unusual items
Management described the long-term offshore drilling outlook as positive, particularly for high-specification harsh-environment and ultra-deepwater assets. Improved oil prices and a better hydrocarbon supply-demand balance increased customer opportunities. Harsh-environment markets showed improving utilization and dayrates because of limited specialized-rig supply, while excess ultra-deepwater capacity continued to suppress dayrates.
As of February 19, 2018, backlog was approximately $12.8 billion, including $3.7 billion acquired from Songa. However, the backlog includes contractual maximum dayrates and may not be fully realized because of downtime, force majeure, customer liquidity, renegotiations, cancellations or early terminations. Uncommitted fleet rates were high for 2018, including 63% for ultra-deepwater floaters, 42% for harsh-environment floaters, 30% for deepwater floaters and 80% for midwater floaters.
The company expected 2018 capital expenditures and other capital additions of approximately $130 million, including $74 million for major construction projects. Two uncontracted ultra-deepwater drillships were expected to be delivered in the second and fourth quarters of 2020. Management stated that cash flows from operations were expected to remain positive over the next year, but acknowledged dependence on market conditions, asset sales, financing access and the revolving credit facility.
- The Songa acquisition added seven rigs, including five harsh-environment floaters and two midwater floaters. Consideration included 66.9 million shares valued at $735 million and $854 million principal amount of 0.5% exchangeable bonds.
- Total debt was substantial, with $7.484 billion of principal outstanding and $257 million scheduled for 2018 maturity. The $3.0 billion unsecured revolving facility was undrawn at year-end, except for $7 million of letters of credit, and was scheduled to expire June 28, 2019.
- Credit ratings were below investment grade, increasing borrowing costs and potentially limiting access to debt markets.
- Contract termination risk remained material. Customers early terminated or cancelled contracts for one rig in 2017, compared with eight rigs in 2016. The Transocean Leader contract was amended in February 2018 after an equipment breakdown, reducing dayrate and duration and removing approximately $112 million from backlog.
- Macondo-related matters remained unresolved, including 30 settlement-class opt-out claims. The company had $219 million of accrued probable Macondo-related loss contingencies at December 31, 2017 and maintained a $212 million escrow balance for the plaintiff settlement.
- Tax uncertainty remained significant. Unrecognized tax benefits, including interest and penalties, totaled $309 million. The company had not completed its analysis of the U.S. Tax Cuts and Jobs Act transition tax and recorded a $66 million deferred-tax remeasurement expense.
- Property and equipment represented 78% of total assets, making the company sensitive to future dayrates, utilization, asset values and additional impairment charges.
- Management concluded that the material weakness in deferred-tax accounting controls identified in 2016 had been remediated as of December 31, 2017. The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Reconcile reported 2017 cash generation with cash requirements for debt maturities, capital leases, interest, contractual obligations and potential Songa-related integration costs.
- Assess whether the $12.8 billion post-acquisition backlog can be realized at stated dayrates, given the high uncommitted fleet rates and customer termination rights.
- Review debt covenants, below-investment-grade ratings, secured collateral arrangements and the need to extend or replace the revolving credit facility before June 2019.
- Monitor additional impairments or scrap sales, especially for midwater, deepwater and older ultra-deepwater rigs.
- Evaluate Songa integration, expected synergies, final purchase-price accounting and dilution or potential dilution from shares and exchangeable bonds.
- Track Macondo opt-out litigation, Global Marine litigation, Brazilian tax assessments and other tax, environmental and regulatory contingencies.
- Confirm the final accounting impact of the U.S. Tax Cuts and Jobs Act and the adoption of the 2018 revenue, lease and restricted-cash standards.