Transocean Ltd. 2015 Q2 Form 10-Q Summary
Business context and reporting period
Transocean provides offshore contract drilling services, primarily on a dayrate basis, with a focus on deepwater and harsh-environment drilling. At June 30, 2015, it owned or operated 63 mobile offshore drilling units and had 12 units under construction or contract to be constructed. This unaudited Form 10-Q covers the three and six months ended June 30, 2015, compared with the same periods in 2014.
Financial performance and liquidity
| Metric | Three months ended June 30, 2015 | Three months ended June 30, 2014 | Six months ended June 30, 2015 | Six months ended June 30, 2014 |
|---|---|---|---|---|
| Total revenues | $1.884 billion | $2.328 billion | $3.927 billion | $4.667 billion |
| Contract drilling revenues | $1.777 billion | $2.278 billion | $3.777 billion | $4.570 billion |
| Operating income | $506 million | $765 million | $185 million | $1.437 billion |
| Net income attributable to controlling interest | $342 million | $587 million | $(141) million | $1.043 billion |
| Diluted EPS | $0.93 | $1.61 | $(0.39) | $2.86 |
| Net cash from operating activities | $1.311 billion | $636 million | $1.837 billion | $772 million |
- Approximate operating margin was 26.9% in the second quarter and 4.7% for the first six months. The six-month margin was heavily affected by impairment charges.
- Cash and cash equivalents were $3.769 billion at June 30, 2015, up from $2.635 billion at December 31, 2014. Management estimated approximately $1.3 billion was required for working capital and operating needs.
- Total debt was $10.015 billion, including $1.026 billion due within one year and $8.989 billion of long-term debt. The company had $3.0 billion available under its unsecured revolving credit facility and no borrowings or letters of credit outstanding under that facility.
- Capital expenditures were $396 million for the first six months, compared with $1.482 billion in 2014. Management expected full-year 2015 capital expenditures of approximately $1.7 billion.
- Six-month cash flow was supported by $445 million of insurance recoveries and lower capital spending. Investing activities used $348 million and financing activities used $355 million, including $327 million of shareholder distributions and $69 million of debt repayments.
Material changes versus the prior comparable period
- Second-quarter revenue declined 19%, while contract drilling revenue declined 22%. Six-month revenue declined 16%, primarily because more rigs were idle or stacked, rigs were sold or classified as held for sale, and dayrates were lower.
- Operating days fell 20% in the quarter and 15% year to date. Total fleet utilization decreased to 75% from 78% in the second quarter of 2014 and to 77% from 78% for the first six months.
- Average daily revenue declined 3% to $399,700 in the quarter and to $398,800 year to date. Revenue efficiency improved to 97% from 95% in the quarter and remained 97% year to date versus 95% in 2014.
- The company recorded $1.826 billion of impairment losses in the first six months, compared with $65 million in the prior year. Charges included $507 million for the Deepwater Floater asset group, $668 million for the Midwater Floater asset group and $651 million for rigs classified as held for sale.
- Second-quarter results included $788 million of income related to Macondo settlements, insurance recoveries and reductions in contingent liabilities. This included $538 million of insurance recoveries, $125 million of BP reimbursement for legal costs and a $125 million reduction in related liabilities.
- Operating and maintenance expense fell substantially, including the Macondo-related benefit. Excluding that benefit, management reported a second-quarter decrease of approximately $230 million, reflecting sold or held-for-sale rigs, lower costs for idle or stacked rigs and other cost reductions.
- Shareholder distributions were reduced to $0.60 per share for 2015, payable in four quarterly installments of $0.15, compared with $3.00 per share approved for 2014.
Guidance, outlook, commentary and unusual items
- Management described the near- to medium-term offshore drilling market as challenging because of weak commodity prices, customer capital discipline, delayed drilling programs, excess rig capacity, lower dayrates and increased idle time. The long-term outlook remained favorable, particularly for high-specification assets.
- Contract backlog was $18.557 billion as of July 15, 2015, down from $19.924 billion on April 16, 2015. The backlog includes only firm commitments and may not equal realized revenue because of downtime, alternative dayrates, suspensions or force majeure provisions.
- Uncommitted fleet rates for the remainder of 2015 were 36% for ultra-deepwater floaters, 36% for harsh-environment floaters, 33% for deepwater floaters, 42% for midwater floaters and 26% for high-specification jackups.
- On July 30, 2015, after quarter-end, the company redeemed $893 million of 4.95% senior notes for $904 million. On July 15, 2015, two credit-rating agencies had downgraded the company to below-investment-grade ratings; related debt and facility pricing increased.
- The company entered into BP and Plaintiffs’ Steering Committee settlements relating to the Macondo incident. The PSC settlement requires $212 million plus up to $25 million of attorneys’ fees and remains subject to court approval. Approximately $291 million of probable Macondo loss contingencies remained accrued at June 30, 2015.
- Approximately 1,398 Macondo-related actions or claims remained pending at June 30, 2015. Remaining exposures include settlement opt-outs, state claims, appeals, personal-injury claims and other litigation. BP indemnification generally covers compensatory damages, but not fines, penalties or punitive damages.
- At June 30, 2015, unrecognized tax benefits including interest and penalties totaled $401 million. The company also disclosed ongoing U.S., Norwegian and Brazilian tax investigations and assessments, including a potential U.S. transfer-pricing adjustment of approximately $290 million before interest and penalties.
Most important facts for investors to verify
- Whether weak commodity prices and excess offshore rig capacity lead to further contract cancellations, lower dayrates, stacking or utilization declines.
- The sustainability of operating cash flow after adjusting for the $788 million Macondo-related benefit and $445 million of insurance proceeds.
- The timing and funding of approximately $1.7 billion of 2015 capital expenditures and the remaining estimated newbuild commitments.
- Near-term debt maturities, including the $1.026 billion due within one year at June 30, 2015, and the effect of below-investment-grade ratings on borrowing costs and market access.
- Final approval and implementation of the PSC settlement, remaining Macondo litigation and the scope of BP indemnification and insurance recoveries.
- Potential additional impairments if dayrates, utilization, rig values or contract opportunities deteriorate further.
- Outcomes of the U.S., Norwegian and Brazilian tax matters and any resulting cash tax payments.