Transocean Ltd. annual report, FY2021

Transocean Ltd. 2021 Form 10-K Summary

Business context and reporting period

Transocean Ltd. is a Swiss-based provider of offshore contract drilling services, focused on ultra-deepwater and harsh-environment floaters. The filing covers the fiscal year ended December 31, 2021; it is an annual report rather than a standalone fourth-quarter filing. As of February 14, 2022, the company operated 37 mobile offshore drilling units and had two ultra-deepwater drillships under construction.

Fleet: 27 ultra-deepwater floaters and 10 harsh-environment floaters.
2021 workforce: approximately 5,530 employees and contractors across 21 countries.
Major customers: Shell and Equinor represented approximately 31% and 30% of 2021 operating revenues, respectively.

Financial performance and key metrics

Metric	2021	2020	Change
Contract drilling revenues	$2.556 billion	$3.152 billion	Down 19%
Operating loss	$112 million	$493 million	Improved $381 million
Loss before income taxes	$470 million	$541 million	Improved $71 million
Net loss	$591 million	$568 million	Loss increased $23 million
Net loss attributable to controlling interest	$592 million	$567 million	Loss increased $25 million
Loss per share	$0.93	$0.92	Loss increased $0.01
Cash flow from operating activities	$575 million	$398 million	Increased $177 million
Capital expenditures	$208 million	$265 million	Down $57 million
Interest expense, net	$447 million	$575 million	Down $128 million

Average daily revenue increased to $365,600 from $327,500, while total fleet revenue efficiency improved to 97.0% from 96.3%. These gains were more than offset by lower operating days, which fell to 7,236 from 9,169, and lower total rig utilization, which declined to 53.4% from 62.4%.

Operating and maintenance expense declined 15% to $1.697 billion, depreciation and amortization declined 5% to $742 million, and general and administrative expense declined 9% to $167 million. The company recorded no asset impairment loss in 2021 compared with a $597 million impairment loss in 2020, but recognized a $62 million net loss on asset disposals, including a $57 million loss on the sale of a harsh-environment floater and related assets.

Income tax expense was $121 million, producing an effective tax rate of negative 25.7% on the pretax loss. The tax rate was affected by jurisdictional tax rules, tax law changes, valuation allowances and taxes calculated on gross revenues in certain countries.

Liquidity, debt and balance sheet

Unrestricted cash and cash equivalents: $976 million at December 31, 2021, compared with $1.154 billion at December 31, 2020.
Restricted cash and cash equivalents: $436 million, including approximately $409 million held for senior secured debt service and reserve requirements.
Total debt carrying amount: $7.170 billion, down from $7.807 billion; principal amount was $6.820 billion.
Secured debt: approximately $2.30 billion at December 31, 2021, compared with $2.77 billion in 2020.
Debt due within one year: $513 million on the balance sheet; scheduled debt installments, including certain contractual interest installments, totaled $524 million for 2022.
Secured revolving credit facility: $1.33 billion capacity, undrawn at year-end, with approximately $1.32 billion available as of February 14, 2022. The facility expires June 22, 2023 and requires minimum liquidity of $500 million.
Operating cash flow exceeded capital expenditures by $367 million, but cash was also used for debt repayments and other financing activities.
Contractual obligations totaled $12.149 billion, including $7.243 billion of debt, $2.385 billion of interest on debt, $1.002 billion of purchase obligations and $800 million of service agreement obligations.

In 2021, Transocean raised $158 million net through its at-the-market equity program by issuing 36.1 million shares. It also exchanged $323 million of 0.50% exchangeable bonds for $294 million of 4.00% senior guaranteed exchangeable bonds plus an $11 million cash payment, recognizing a $51 million gain. The company repurchased $79 million principal amount of debt for $79 million in cash.

Material changes versus prior comparable period

Revenue declined primarily because 2020 included approximately $200 million from dispute settlements and an early contract termination, while 2021 had more rigs idle or in shipyard, more rigs previously stacked, and fewer rigs in the fleet after dispositions.
Operating loss improved substantially because 2020 included $597 million of impairment losses and higher operating costs.
Net loss nevertheless increased modestly because the $533 million debt restructuring gain recorded in 2020 was largely absent in 2021; the 2021 debt retirement gain was $51 million.
Operating cash flow improved by $177 million, driven mainly by lower interest payments, lower income-tax payments and the absence of a $125 million restricted-cash settlement payment made in 2020.
Backlog declined to approximately $6.60 billion at December 31, 2021 from $8.06 billion at December 31, 2020 and $10.42 billion at December 31, 2019. Backlog was approximately $6.47 billion as of February 14, 2022.
The company sold one harsh-environment floater in 2021 for $4 million of net cash proceeds and continued to pursue disposal of lower-specification assets.
Shares outstanding increased, reflecting the ATM issuance; approximately 655.5 million shares were outstanding at December 31, 2021, compared with 615.1 million at December 31, 2020.

Guidance, outlook, risks and unusual items

Management reported an improved offshore drilling outlook, particularly for high-specification assets. It cited higher commodity prices, renewed customer interest in deepwater and harsh-environment projects, reduced global rig supply and increased tendering activity. Management stated that offshore activity accelerated in early 2022 and expects potential improvement in utilization and dayrates, but provided no formal earnings or revenue guidance.

Uncommitted fleet rates as of February 14, 2022 were 60% for ultra-deepwater floaters and 48% for harsh-environment floaters in 2022, increasing materially in later years.
Two newbuild drillships, Deepwater Atlas and Deepwater Titan, were expected to be delivered in 2022, with estimated remaining 2022-2023 construction expenditures of approximately $1.305 billion. Expected shipyard financing was approximately $370 million for Atlas and $90 million for Titan.
Management expects operating cash flows to remain positive over the following year, but cautioned that deterioration in the drilling market, poor operating results, fleet reactivation or stacking costs could reduce or reverse cash generation.
Key risks include oil and gas price volatility, customer contract cancellations or renegotiations, low utilization, delayed newbuild deliveries, substantial leverage, below-investment-grade debt ratings, refinancing risk, COVID-19 impacts, regulatory and environmental requirements, climate-transition risks, cybersecurity, litigation, tax disputes and dependence on a small number of customers.
The company had 15 uncontracted rigs as of February 14, 2022, including five out of service for more than five years; 11 operating contracts were scheduled to expire before December 31, 2022.
A DOJ enforcement matter relating to alleged Clean Water Act permit violations involving seven drillships was under settlement discussion. Management believed the monetary penalty would be immaterial, but corrective actions were expected.
Brazilian tax assessments remained outstanding for approximately $135 million in total, including interest and penalties. The company is contesting the assessments.
The company recognized a $37 million impairment of its equity investment in Orion Holdings, reducing the carrying amount of the investment to $57 million.
The company targets a 40% reduction in operating Scope 1 and Scope 2 greenhouse-gas emissions intensity from 2019 levels by 2030.

Important facts for investors to verify

Whether higher oil prices and customer tendering activity convert into signed contracts, higher utilization and improved dayrates.
The timing, cost and customer acceptance of Deepwater Atlas and Deepwater Titan, including the related shipyard borrowings and capital requirements.
Liquidity relative to 2022 debt maturities, contractual obligations and the June 2023 expiration of the secured revolving credit facility.
The realization of the $6.47 billion backlog, including exposure to customer termination rights, downtime, force majeure and counterparty credit risk.
Progress in reducing the 15 uncontracted rigs and the cost of reactivating or maintaining stacked and idle units.
Resolution of Brazilian tax assessments, other tax audits and the $435 million of unrecognized tax benefits including interest and penalties.
Potential effects of environmental regulation, climate-related litigation, energy-transition policies and customer changes in hydrocarbon investment.
Impact of further equity issuance, exchangeable-bond conversions and potential dilution to existing shareholders.