Business Context and Reporting Period
Transocean Ltd. is an international offshore contract drilling company focused on ultra-deepwater and harsh-environment drilling. It operates a single global segment and contracts rigs, equipment and crews primarily on a dayrate basis. As of September 30, 2020, the fleet comprised 38 mobile offshore drilling units, including 27 ultra-deepwater and 11 harsh-environment floaters, with two ultra-deepwater drillships under construction. This unaudited Form 10-Q covers the three and nine months ended September 30, 2020, compared with the corresponding 2019 periods.
Key Financial Metrics
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Contract drilling revenue | $773 million | $784 million | $2.462 billion | $2.296 billion |
| Operating income (loss) | $4 million | $(607) million | $(459) million | $(647) million |
| Operating margin | 0.5% | (77.4)% | (18.6)% | (28.2)% |
| Net income (loss) attributable to controlling interest | $359 million | $(825) million | $(530) million | $(1.204) billion |
| Net margin | 46.5% | (105.2)% | (21.5)% | (52.4)% |
| Diluted earnings (loss) per share | $0.51 | $(1.35) | $(0.86) | $(1.97) |
| Net cash provided by operating activities | Not separately provided | Not separately provided | $120 million | $193 million |
| Capital expenditures | Not separately provided | Not separately provided | $218 million | $259 million |
Q3 net income was primarily driven by a $449 million net gain on restructuring and retirement of debt, including gains from the August and September 2020 exchange transactions. The quarter also included a $64 million net loss on asset disposals. Nine-month results included $597 million of impairment losses, $64 million of disposal losses and a $59 million impairment of the Orion investment.
Liquidity, Debt and Balance Sheet
- Cash and cash equivalents were $1.382 billion at September 30, 2020, down from $1.790 billion at December 31, 2019. Restricted cash and investments were $448 million, producing total unrestricted and restricted cash of $1.830 billion.
- Total debt principal was $8.011 billion and carrying value was $8.434 billion at September 30, 2020, compared with principal of $9.361 billion and carrying value of $9.261 billion at year-end 2019.
- Debt due within one year was $640 million on the balance sheet. Scheduled debt-related installments, including projected interest installments, totaled $652 million for the twelve months ending September 30, 2021.
- The $1.3 billion secured revolving credit facility had no borrowings, $30 million of letters of credit and $1.3 billion of available capacity at September 30, 2020. The facility expires June 22, 2023 and includes a minimum liquidity covenant of $500 million.
- Net cash used in financing activities was $419 million, reflecting $743 million of debt issuance proceeds and $1.135 billion of debt repayments.
- Total assets were $22.472 billion and total equity was $11.403 billion at September 30, 2020.
Material Changes Versus the Prior Comparable Period
- Q3 revenue declined 1%, as higher dayrates and improved comparable-fleet performance were offset by approximately $65 million from stacked or idle rigs, approximately $20 million from sold or held-for-sale rigs and lower reimbursement revenue.
- Nine-month revenue increased 7%, primarily due to $177 million of revenue recognized from a customer dispute settlement, increased activity and COVID-19-related reimbursements. This was partly offset by approximately $140 million from stacked or idle rigs, lower dayrates and lower revenue efficiency.
- Operating and maintenance expense decreased 14% in Q3 and 2% for the nine-month period, reflecting cost reductions, idle rigs and asset disposals, partly offset by COVID-19 mitigation costs and bareboat charter expenses.
- Operating results benefited materially from the absence of the $583 million Q3 2019 impairment charge. However, nine-month 2020 impairment losses remained significant at $597 million, including $556 million related primarily to rigs classified as held for sale.
- Average daily revenue increased to $343,500 in Q3 2020 from $314,500 in Q3 2019, while total fleet utilization improved to 65% from 58%. Revenue efficiency was unchanged at 97%.
- Contract backlog declined to $8.217 billion as of October 14, 2020, from $8.890 billion on July 15, 2020 and $10.163 billion on February 14, 2020.
- The company completed substantial liability management transactions: $1.910 billion of principal was exchanged, $714 million was redeemed and $124 million was repurchased during the nine months. These transactions generated a $396 million net gain on restructuring and retirement of debt.
Guidance, Outlook, Risks and Unusual Items
- Management stated that offshore drilling demand was disrupted by COVID-19, lower commodity prices and customer capital-expenditure reductions. New ultra-deepwater contract awards were at their lowest nine-month level since 2015, and subdued activity could continue through the first half of 2021.
- Management expects accelerated retirement of idle rigs and potential industry consolidation to support utilization and dayrate improvement over the medium and long term, although no quantitative earnings guidance was provided.
- Uncommitted fleet rates for 2021 were 65% for ultra-deepwater floaters and 47% for harsh-environment floaters; rates were projected to rise further in later years as existing contracts expire.
- A customer settlement resulted in $177 million of recognized revenue in the first nine months and provides for $185 million of payments through January 15, 2023. Collection timing and credit risk should be monitored.
- Bondholders filed litigation and delivered purported notices of default concerning alleged breaches related to an internal reorganization and the 2020 debt exchanges. If defaults were ultimately established and debt accelerated, the resulting liquidity requirement could be substantial and could trigger a default under the secured credit facility. Management considers the allegations meritless.
- On October 14, 2020, the NYSE notified Transocean that its average share price had fallen below $1.00 for 30 consecutive trading days. The company had six months, subject to applicable rules and possible extensions, to regain compliance. Delisting could reduce equity-market access and trigger repurchase obligations for exchangeable bonds.
- On October 27, 2020, the company paid $213 million to settle early tenders under new cash tender offers and expected to recognize an approximately $130 million gain in the fourth quarter.
- Brazilian tax assessments remaining at September 30, 2020 totaled approximately $131 million, including penalties and interest. The company is contesting the assessments and stated that an unfavorable outcome could materially affect financial position, results or cash flows.
- The company expects an additional $33 million cash contribution to Orion during the six months ending June 30, 2021.
- COVID-19 continues to pose risks to rig operations, crew mobility, supply chains, customer demand, contract renewals, receivable collection, dayrates and capital-market access. The filing does not provide a clear quantitative estimate of the ultimate financial impact.
Most Important Facts for Investors to Verify
- Whether the bondholder litigation and purported defaults are dismissed, cured or result in acceleration of the $612 million of Existing 2027 Guaranteed Notes or the $543 million of Existing 2025 Guaranteed Notes.
- Actual fourth-quarter cash balances, operating cash flow and compliance with the secured credit facility’s $500 million minimum liquidity covenant.
- Progress toward regaining NYSE minimum share-price compliance and any resulting exchangeable-bond repurchase obligations.
- Backlog conversion, contract cancellations, dayrate trends and utilization as offshore drilling customers adjust capital spending.
- Whether the $185 million customer settlement is collected as scheduled and whether the reported backlog is realized at stated contractual rates.
- Completion costs, customer commitments and funding requirements for the Deepwater Atlas and Deepwater Titan newbuilds.
- Further rig impairments, retirements or asset-sale proceeds, particularly given the continuing COVID-19 and oil-price environment.
- Final outcomes of the Brazilian tax assessments and other tax, environmental and legal contingencies.