Transocean Ltd. — 2014 Form 10-K Summary
Business context and reporting period
Transocean is a Swiss-based global offshore contract drilling company operating primarily on a dayrate basis. The filing covers the fiscal year ended December 31, 2014, with quarterly data for the three months ended December 31, 2014. At year-end, continuing operations included 72 mobile offshore drilling units: 45 high-specification floaters, 17 midwater floaters and 10 high-specification jackups, with 12 additional rigs under construction or contracted for construction.
The company operates in a single global segment focused on deepwater, ultra-deepwater and harsh-environment drilling. In August 2014, Transocean completed the initial public offering of Transocean Partners, retaining a 70.8% interest and receiving approximately $417 million of net proceeds.
Financial performance and key metrics
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Operating revenues | $9.174 billion | $9.249 billion | Down 1% |
| Contract drilling revenues | $8.952 billion | $9.070 billion | Down 1% |
| Operating income/(loss) | $(1.378) billion | $2.217 billion | Down $3.595 billion |
| Income/(loss) from continuing operations | $(1.946) billion | $1.398 billion | Down $3.344 billion |
| Net income/(loss) attributable to controlling interest | $(1.913) billion | $1.407 billion | Down $3.320 billion |
| Basic and diluted EPS from continuing operations | $(5.23) | $3.85 | Declined $9.08 |
| Cash flow from operating activities | $2.220 billion | $1.918 billion | Up $302 million |
| Capital expenditures | $2.165 billion | $2.238 billion | Down $73 million |
The reported loss was dominated by non-cash impairment charges, including $3.0 billion for goodwill, $788 million for the Deepwater Floater asset group and $268 million for rigs classified as held for sale. Operating and maintenance expense declined to $5.110 billion from $5.563 billion, while depreciation increased to $1.139 billion.
Average daily revenue increased 8% to $411,600, and revenue efficiency improved to 95% from 92%. However, fleet utilization declined to 76% from 79%, including a decline in high-specification floater utilization to 77% from 86%. Operating revenues were geographically diversified; the United States generated $2.289 billion, the United Kingdom $1.194 billion, Norway $1.036 billion and Brazil $651 million.
Liquidity, debt and balance sheet
- Cash and cash equivalents were $2.635 billion at December 31, 2014, down from $3.243 billion.
- Management estimated that approximately $1.3 billion of cash was required for working capital and operating needs.
- Total debt was $10.092 billion, down from $10.702 billion; debt due within one year increased to $1.033 billion from $323 million, largely reflecting the 2015 maturity of senior notes.
- Long-term debt was $9.059 billion, and the fair value of debt was approximately $9.8 billion.
- The company had a new $3.0 billion unsecured revolving credit facility, no borrowings or letters of credit outstanding under that facility at February 17, 2015, and $3.0 billion of available capacity.
- Capital expenditures were funded through operating cash flow, cash balances, asset sales and financing capacity. Management expected 2015 capital expenditures of approximately $1.8 billion.
- Total assets declined to $28.413 billion from $32.546 billion, while total equity declined to $13.982 billion from $16.685 billion.
Material changes versus the prior comparable period
- Revenue was broadly stable, but lower operating days, more idle rigs, asset disposals and increased mobilization, shipyard and certification time offset higher dayrates, improved revenue efficiency and contributions from newbuild rigs.
- Fleet utilization weakened, particularly for high-specification floaters, as customer spending slowed and excess industry capacity increased.
- Goodwill was fully impaired in 2014, eliminating the $2.987 billion balance carried at December 31, 2013.
- Net property and equipment declined modestly to $21.538 billion after the Deepwater Floater impairment and asset disposals.
- Operating cash flow increased despite the net loss, primarily because impairment charges were non-cash and working-capital effects changed.
- Cash used in financing activities decreased to $1.000 billion from $2.151 billion, reflecting lower debt repayments and $443 million of proceeds from the Transocean Partners offering, partly offset by $1.018 billion of shareholder distributions.
- Transocean completed the sale of several rigs and committed to scrap or sell additional lower-specification units. It also completed the sale of Applied Drilling Technology International, resulting in the discontinuation of the drilling management services segment.
Fourth-quarter 2014 results and unusual items
| Metric | Q4 2014 | Q4 2013 |
|---|---|---|
| Operating revenues | $2.237 billion | $2.252 billion |
| Operating income/(loss) | $(647) million | $398 million |
| Income/(loss) from continuing operations | $(762) million | $220 million |
| Net income/(loss) attributable to controlling interest | $(739) million | $233 million |
| Basic and diluted EPS from continuing operations | $(2.03) | $0.60 |
Fourth-quarter results included approximately $1.0 billion of additional goodwill impairment. The quarter also reflected the annualized effects of the $788 million Deepwater Floater impairment, the $268 million impairment of rigs held for sale, and Macondo-related items. The filing does not present a clear standalone adjusted margin excluding these items.
Guidance, outlook and management commentary
- Management expected 2015 revenue to be lower than 2014 because of increased floater idle time, lower dayrates on new contracts and asset disposals, partly offset by full-year operations of the Deepwater Invictus and Deepwater Asgard.
- Management expected 2015 operating and maintenance expense to be lower than 2014 due to idle and stacked rigs, cost initiatives and asset divestitures, partly offset by full-year operations of newbuild floaters.
- The near- to medium-term offshore market outlook was described as challenging because of the rapid decline in oil and natural gas prices, customer capital discipline, delayed drilling programs, excess capacity and contracting pressure.
- As of February 17, 2015, continuing-operations backlog was $21.240 billion, down from $23.573 billion at October 15, 2014 and $27.244 billion at February 18, 2014. Backlog at December 31, 2014 was approximately $22.5 billion under the business discussion's comparable measure.
- Uncommitted fleet rates for 2015 were 36% for high-specification floaters, 36% for midwater floaters and 26% for high-specification jackups. By 2019, the reported uncommitted rates increased to 84%, 100% and 100%, respectively.
- The company had substantial uncontracted newbuild exposure, including two ultra-deepwater drillships and five high-specification jackups without drilling contracts.
Risks, contingencies and other unusual items
- Macondo: At December 31, 2014, Transocean recorded $426 million of probable, estimable loss contingencies and a $10 million insurance recoverable asset. Approximately 1,400 Macondo-related actions or claims remained pending. The Phase One ruling allocated 30% fault to Transocean, 67% to BP and 3% to Halliburton, while finding Transocean negligent but not grossly negligent. Appeals and additional litigation remained unresolved.
- Transocean had agreed to approximately $1.4 billion of DOJ fines, recoveries and civil penalties, excluding interest, with remaining settlement obligations of $380 million at December 31, 2014. The Consent Decree payment obligations were subsequently fully paid in January 2015, while $120 million of Plea Agreement payments remained due through 2017.
- Contract backlog may not be fully realized because of customer cancellations, renegotiations, force majeure, downtime, lower applicable dayrates, customer liquidity problems or bankruptcy.
- The company was exposed to impairment risk for its large rig fleet, particularly if dayrates, utilization or customer demand deteriorate further. Management expected 2015 depreciation to increase by approximately $120 million due to lower salvage values assigned to certain rigs.
- Contractual obligations totaled $20.799 billion, including $9.467 billion of debt, $4.573 billion of purchase obligations, $4.927 billion of interest and $1.046 billion of capital lease payments.
- Outstanding commercial commitments included $338 million of letters of credit and $6 million of surety bonds.
- Tax disputes included a U.S. assessment involving approximately $290 million of potential additional taxes, Brazilian assessments and Norwegian tax proceedings. Unrecognized tax benefits, including interest and penalties, totaled $385 million.
- Offshore drilling is cyclical and exposed to oil and gas prices, customer capital budgets, dayrates, rig oversupply, regulatory requirements, operating hazards, environmental liability, political risk, cybersecurity and interest-rate and currency fluctuations.
- Management and Ernst & Young reported effective internal control over financial reporting and an unqualified audit opinion on the consolidated financial statements.
Most important facts for investors to verify
- Whether the $21.2 billion backlog can be converted into revenue at the stated dayrates, given high future uncommitted fleet rates and contract termination rights.
- The pace and magnitude of additional rig stacking, scrapping, impairments and newbuild delivery deferrals.
- Liquidity after 2015 debt maturities, shareholder distributions, Macondo payments and approximately $1.8 billion of expected 2015 capital expenditures.
- The ultimate outcome of Macondo appeals, indemnification claims, insurance coverage and remaining government and private-party litigation.
- Whether weaker oil prices and customer capital discipline will reduce dayrates and utilization beyond management’s 2015 assumptions.
- The financial impact of the five uncontracted high-specification jackups and two uncontracted ultra-deepwater drillships.
- Potential cash exposure from U.S., Norwegian, Brazilian and other tax disputes, including the approximately $290 million U.S. transfer-pricing assessment.