Transocean Ltd. 2016 Form 10-K Summary
Business context and reporting period
Transocean provides global offshore contract drilling services, primarily on a dayrate basis, with a focus on deepwater and harsh-environment operations. The filing covers the fiscal year ended December 31, 2016; fourth-quarter figures are included in the annual filing. At year-end, the company operated 56 mobile offshore drilling units and had nine newbuild rigs under construction or contracted for construction.
The offshore drilling market remained in a severe cyclical downturn, characterized by excess rig capacity, weak customer spending, lower utilization and declining dayrates.
Financial performance and key metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Operating revenues | $4.161 billion | $7.386 billion | Down 44% |
| Contract drilling revenues | $3.705 billion | $6.802 billion | Down 46% |
| Operating income | $1.132 billion | $1.365 billion | Down 17% |
| Income from continuing operations | $827 million | $895 million | Down 8% |
| Net income attributable to controlling interest | $778 million | $865 million | Down 10% |
| Basic and diluted EPS from continuing operations | $2.08 | $2.36 | Down 12% |
| Cash flow from operating activities | $1.911 billion | $3.445 billion | Down 45% |
| Capital expenditures | $1.344 billion | $2.001 billion | Down 33% |
Operating margin was approximately 27.2% in 2016 versus 18.5% in 2015, while net margin was approximately 19.9% versus 12.1%. The improvement in reported margins primarily reflects lower impairment charges and substantial cost reductions rather than stronger operating demand.
| Fourth-quarter 2016 metric | Value |
|---|---|
| Operating revenues | $974 million |
| Operating income | $316 million |
| Income from continuing operations | $257 million |
| Net income attributable to controlling interest | $243 million |
| Basic and diluted EPS from continuing operations | $0.64 |
Liquidity, debt and balance sheet
- Cash and cash equivalents were $3.052 billion at December 31, 2016, compared with $2.339 billion at December 31, 2015.
- Total debt was approximately $8.5 billion, including $724 million of debt due within one year and $7.740 billion of long-term debt on the balance sheet.
- The company had no borrowings or letters of credit outstanding under its $3.0 billion unsecured revolving credit facility at year-end; the facility expires June 28, 2019.
- Total assets were $26.889 billion and total equity was $15.805 billion.
- Contractual obligations totaled $16.495 billion, including $7.980 billion of debt principal, $4.915 billion of interest, $2.004 billion of purchase obligations and $542 million of service agreements.
Material changes versus the prior comparable period
- Rig utilization fell to 48% from 71%, operating days declined 38%, and average daily revenue declined 12% to $353,500.
- Contract backlog was approximately $11.7 billion at December 31, 2016, down 27% from $16.0 billion at December 31, 2015. The filing subsequently reported backlog of $11.251 billion as of February 9, 2017.
- Lower revenue was principally caused by more rigs being idle or stacked, rig disposals and lower dayrates. These effects were partly offset by revenue from three new ultra-deepwater drillships placed into service during 2016.
- Operating and maintenance expense declined 37% to $1.875 billion, reflecting stacking, asset sales, lower maintenance and shipyard spending, and reduced personnel and onshore costs.
- Impairment losses declined to $93 million from $1.875 billion. The 2016 charge included $52 million for the deepwater floater asset group and $41 million for assets held for sale.
- Operating cash flow declined by $1.534 billion, partly because 2015 included significantly larger Macondo-related insurance recoveries and cost reimbursements.
- Transocean completed the merger with Transocean Partners, issued 23.8 million shares and made the subsidiary wholly owned.
- The company issued $2.5 billion of new debt, retired or repurchased substantial amounts of existing debt and recognized a $148 million gain on debt retirement.
- Transocean sold 11 lower-specification rigs for scrap value and received $22 million of net proceeds.
Guidance, outlook, risks and unusual items
Management expected few new drilling contracts in 2017 and continued downward pressure on dayrates due to excess capacity. The company expected customers to prioritize cost reduction, debt reduction and dividends, limiting offshore exploration and development spending. Management maintained a positive long-term view, particularly for high-specification assets, but reported high uncommitted fleet rates for 2017: 64% for ultra-deepwater floaters, 71% for harsh-environment floaters, 33% for deepwater floaters, 86% for midwater floaters and 79% for high-specification jackups.
- Customers early terminated or cancelled contracts for eight rigs in 2016, and those rigs remained idle. Contract backlog may not be fully realized because of termination rights, force majeure, downtime, customer liquidity and renegotiation risk.
- Credit ratings were below investment grade and were further downgraded during 2016 and January 2017, increasing borrowing costs and potentially limiting capital-market access.
- Management identified a material weakness in income tax accounting controls. The weakness involved deferred-tax measurement, Norwegian nonmonetary asset remeasurement, U.S. pension accounting and deferred-tax-asset valuation allowances. Prior-period financial statements were revised, although the auditors issued an unqualified opinion on the financial statements.
- Macondo-related matters remained significant. The company carried $250 million of probable loss contingencies at year-end, while the PSC settlement had been funded with $237 million in escrow and was approved by the court on February 15, 2017, subject to appeal.
- Other material risks included additional asset impairments, shipyard delays and cost overruns, environmental and regulatory liabilities, tax disputes, customer concentration, cybersecurity, political risk and inadequate insurance or indemnification.
- The company expected 2017 capital expenditures and other capital additions of approximately $500 million, including $431 million for major construction projects.
Most important facts for investors to verify
- Whether offshore drilling demand, utilization and dayrates recover sufficiently to support the company’s backlog and high fixed-cost fleet.
- The maturity schedule and refinancing requirements for approximately $8.5 billion of debt, including $731 million scheduled for 2017 and $1.142 billion for 2018.
- Actual cash generation after capital expenditures, debt service, Macondo obligations and newbuild commitments.
- Progress in remediating the material weakness in income tax accounting and whether additional corrections or control deficiencies arise.
- Potential further impairments or scrap sales for idle and stacked rigs.
- The final outcome of Macondo-related claims, insurance recoveries, the PSC settlement appeal and unresolved tax proceedings, particularly in Norway and Brazil.
- Customer concentration and counterparty exposure, including Shell and Chevron, which represented approximately 63% and 20%, respectively, of backlog as of February 9, 2017.