Transocean Ltd. 2016 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, 2016, it operated or partially owned 60 mobile offshore drilling units and had 10 units under construction or contracted for construction. The filing covers the three and six months ended June 30, 2016; financial statements are unaudited.
Key financial metrics
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Total revenue | $943 million | $1.884 billion | $2.284 billion | $3.927 billion |
| Contract drilling revenue | $918 million | $1.777 billion | $2.029 billion | $3.777 billion |
| Operating income | $154 million | $506 million | $568 million | $185 million |
| Net income attributable to controlling interest | $77 million | $342 million | $326 million | $(141) million |
| Diluted EPS | $0.21 | $0.93 | $0.88 | $(0.39) |
| Operating margin | 16.3% | 26.9% | 24.9% | 4.7% |
| Operating cash flow | Not provided quarterly | Not provided quarterly | $838 million | $1.837 billion |
- Q2 total revenue declined 50%, while contract drilling revenue declined 48%, primarily because of idle or stacked rigs, rig disposals and lower dayrates.
- Six-month total revenue declined 42%, but operating income increased substantially because the prior-year period included $1.826 billion of impairment charges, compared with $23 million in 2016.
- Fleet average daily revenue was $353,700 in Q2, down 12% year over year. Average rig utilization fell to 47% from 75%; revenue efficiency remained strong at 97%.
- Capital expenditures were $826 million in the first six months, including $89 million of capitalized interest. Net cash used in investing activities was $811 million.
- Cash and cash equivalents were $2.153 billion at June 30, 2016, compared with $2.339 billion at December 31, 2015. Restricted cash was $360 million.
- Total debt was $8.218 billion, including $1.063 billion due within one year, versus $8.490 billion at year-end 2015. Long-term debt was $7.155 billion.
- The $3.0 billion unsecured revolving credit facility had no borrowings or letters of credit outstanding at June 30, leaving the full facility available. The debt-to-tangible-capitalization ratio was 0.4 to 1.0 versus a 0.6 to 1.0 covenant maximum.
Material changes versus the prior comparable period
- Revenue contracted sharply as the offshore drilling market weakened, with low oil prices reducing customer exploration and development spending.
- Rig utilization fell across every major fleet class. Q2 utilization was 43% for ultra-deepwater floaters, 46% for harsh-environment floaters, 52% for deepwater floaters, 48% for midwater floaters and 59% for high-specification jackups.
- Operating and maintenance expense decreased after excluding the $788 million of Macondo-related recoveries and liability reductions recognized in Q2 2015. Cost reductions reflected idle or stacked rigs, lower active-fleet spending, disposals and reduced onshore costs.
- Operating cash flow fell $999 million year over year, principally because of lower operating activity, the absence of $455 million of prior-year insurance recoveries and lower Macondo-related cash payments. Current-period customer termination payments provided $340 million.
- The company completed construction and placed Deepwater Thalassa and Deepwater Proteus into service. It also sold one deepwater floater and five midwater floaters for $11 million of net proceeds.
- Transocean repurchased $228 million principal amount of debt for $189 million in cash and recognized a $38 million gain. Credit-rating downgrades increased interest rates on certain notes and the revolving-credit facility.
- The company completed a reduction in share par value effective January 7, 2016 and cancelled shares previously held in treasury. Shares outstanding were approximately 365.4 million as of July 26, 2016.
Guidance, outlook, commentary and risks
- Management described the near- to medium-term offshore drilling environment as very challenging, citing excess oil supply, low commodity prices, limited customer spending, falling utilization and pressure on dayrates.
- Contract backlog was $13.7 billion as of July 21, 2016, down from $14.6 billion on April 21, 2016 and $15.5 billion on February 11, 2016. The filing does not provide formal earnings guidance.
- Uncommitted fleet rates were high for future periods, including 59% for ultra-deepwater floaters and 54% for high-specification jackups for the remainder of 2016, increasing materially in later years.
- Management expects positive operating cash flow over the next year but notes that further market deterioration, weak operating performance, credit downgrades or restricted capital-market access could reduce liquidity.
- Newbuild and construction commitments remain significant. Estimated total completion costs for listed major projects were $7.471 billion, with $567 million expected to be spent in the second half of 2016 and $2.027 billion expected in 2017 through 2020.
- Macondo-related matters remain material. The company recorded a $250 million liability for probable and estimable remaining loss contingencies and held $237 million in escrow for the pending Plaintiffs’ Steering Committee settlement, which remained subject to court approval. The company also had a final $60 million Plea Agreement installment due by February 2017.
- Outstanding tax matters include assessments and investigations in Norway and Brazil. Management does not expect the ultimate liabilities to materially affect the balance sheet or earnings, but acknowledges that cash-flow effects could be material.
- Subsequent events include a $1.25 billion offering of 9.00% senior notes, generating $1.21 billion of net proceeds, and an $876 million cash tender offer for up to $1.0 billion of existing notes. Management expected an approximately $104 million debt-retirement gain in the third quarter.
- Transocean announced a proposed merger with Transocean Partners, expected to issue approximately 22.7 million Transocean shares and targeted for completion in the fourth quarter of 2016, subject to approvals and other conditions.
Most important facts for investors to verify
- Whether declining utilization, dayrates and backlog lead to additional contract cancellations, stacking or impairment charges.
- The timing and cash requirements of debt maturities, the post-quarter debt tender offer and the cost of the new 9.00% notes.
- Progress and final approval of the Transocean Partners merger and the resulting share issuance and ownership changes.
- The outcome of remaining Macondo opt-out claims, insurance recovery disputes and settlement obligations.
- Actual capital spending and delivery costs for the substantial newbuild program, especially units without drilling contracts.
- Developments in the Norway and Brazil tax matters and their potential cash-flow impact.