Transocean Ltd. 2014 Q2 Form 10-Q Summary
Business context and reporting period
Transocean is an international offshore contract drilling company focused on deepwater and harsh-environment drilling. The unaudited report covers the quarter and six months ended June 30, 2014. At June 30, the continuing-operations fleet included 77 mobile offshore drilling units; management reported 78 units as of July 29, 2014. Results exclude discontinued standard jackup, swamp barge and drilling-management operations.
Financial performance and key metrics
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Total revenues | $2.328 billion | $2.364 billion | $4.667 billion | $4.548 billion |
| Contract drilling revenues | $2.278 billion | $2.321 billion | $4.570 billion | $4.466 billion |
| Operating income | $765 million | $605 million | $1.437 billion | $1.081 billion |
| Operating margin | 32.9% | 25.6% | 30.8% | 23.8% |
| Income from continuing operations | $604 million | $322 million | $1.078 billion | $638 million |
| Net income attributable to controlling interest | $587 million | $307 million | $1.043 billion | $628 million |
| EPS, diluted | $1.61 | $0.84 | $2.86 | $1.73 |
| Cash flow from operations | $636 million | $416 million | $772 million | $522 million |
Q2 revenue declined 2%, while operating income increased 26% and continuing-operations income increased 88%. Six-month revenue increased 3%, operating income increased 33% and continuing-operations income increased 69%. The improvement was driven primarily by lower operating and maintenance costs, higher dayrates, improved revenue efficiency, lower interest expense and the absence of the prior-year impairment charge.
- Q2 average daily revenue was $410,000 versus $382,800; revenue efficiency was 95% versus 93%; utilization was 78% versus 80%.
- Six-month average daily revenue was $411,500 versus $372,100; revenue efficiency was 95% versus 91%; utilization remained 78% versus 80%.
- Q2 operating and maintenance expense decreased 11% to $1.213 billion; six-month expense decreased 9% to $2.482 billion.
- The six-month effective annual tax rate was 13.8%, compared with 21.7% in the prior-year period. The Q2 effective tax rate was 10.7%, compared with 29.1%.
- Q2 and six-month discontinued-operations losses were $7 million and $15 million, respectively.
Balance sheet, debt and liquidity
| Balance-sheet item | June 30, 2014 | December 31, 2013 |
|---|---|---|
| Cash and cash equivalents | $2.117 billion | $3.243 billion |
| Total assets | $32.067 billion | $32.546 billion |
| Total debt | $10.457 billion | $10.702 billion |
| Debt due within one year | $159 million | $323 million |
| Total equity | $16.775 billion | $16.685 billion |
- Cash decreased by $1.126 billion during the first six months, primarily reflecting $1.482 billion of capital expenditures, $639 million of financing cash uses and shareholder distributions.
- Management estimated that approximately $1.3 billion of cash was required for working capital and other operating needs and was not generally available for other uses.
- In June 2014, Transocean established a new $3.0 billion unsecured five-year revolving credit facility expiring June 28, 2019. No borrowings were outstanding at June 30, and the company reported $3.0 billion of available capacity, subject to $20 million of letters of credit.
- The debt-to-tangible-capitalization ratio was 0.4 to 1.0 against a maximum covenant ratio of 0.6 to 1.0.
- Six-month capital expenditures were $1.482 billion, including $76 million of capitalized interest. Full-year 2014 capital expenditures were expected to be approximately $2.5 billion.
- Shareholders approved a $3.00-per-share distribution of qualifying additional paid-in capital. The first $272 million installment was paid in June; $816 million remained payable at June 30.
Material changes versus the prior comparable period
- Revenue growth for the first half reflected higher dayrates, improved revenue efficiency, reactivation of the Sedco 712 and contributions from newbuild jackups, partly offset by lower utilization, increased idle time, mobilization, shipyard work, certifications and asset disposals.
- Operating and maintenance costs benefited from fewer costs for idle and stacked rigs, lower Macondo-related costs, reduced shore-based costs and asset divestitures.
- The company recorded a $65 million impairment loss in the first half of 2014 on the Sedneth 701 and GSF Magellan, compared with a $37 million impairment in the prior-year period.
- Debt repayments were $243 million in the first half of 2014 versus $1.596 billion in the prior-year period. ADDCL credit facilities totaling $163 million were repaid and terminated in February 2014.
- Defined-benefit plan changes reduced the aggregate pension and postretirement liability by approximately $73 million in the first half. Benefits under certain U.S. defined-benefit plans were frozen effective January 1, 2015.
- ADTI was sold in February 2014 for $11 million of net cash proceeds, with a $12 million six-month loss recognized in discontinued operations.
Guidance, outlook, commentary and risks
- Management expected 2014 total revenue to be broadly in line with 2013. Lower floater utilization and asset divestitures were expected to offset newbuild contributions, higher contractual dayrates and improved revenue efficiency.
- Management expected 2014 operating and maintenance expense to be lower than 2013, subject to utilization, shipyard timing, regulatory requirements, newbuild operations, Macondo matters, inflation and execution of cost initiatives.
- As of July 16, 2014, continuing-operations contract backlog was $25.0 billion, down from $26.1 billion on April 17, 2014 and $27.2 billion on February 18, 2014.
- Management expected slow floater contracting, excess capacity, idle time, lower dayrates and increased competition in the near term. High-specification jackups remained stronger, although more than 30 uncontracted newbuild jackups were expected to enter the market in 2015.
- Management intended to pursue the disposition of approximately eight U.K. North Sea Midwater Floaters during the second half of 2014.
- Macondo-related settlement obligations remaining at July 29, 2014 were $180 million under the Plea Agreement and $200 million under the Consent Decree, excluding accrued interest where applicable. The company had accrued $432 million for probable, estimable Macondo-related loss contingencies at June 30.
- Approximately 1,414 Macondo-related actions or claims were pending at June 30, 2014. Material unrecognized exposure remained possible because certain litigation, indemnity, insurance and environmental matters could not be reasonably estimated.
- Significant tax contingencies included a U.S. assessment involving approximately $290 million of potential additional tax, Norwegian assessments and appeals, and Brazilian assessments. Subsequent to quarter-end, Petrobras notified the company of potential claims related to approximately $128 million of Brazilian withholding taxes, excluding penalties, interest and fees.
- U.K. tax legislation enacted in July 2014 applied retroactively to April 2014; management expected the worldwide effective tax rate to increase beginning in the third quarter.
- On August 5, 2014, Transocean completed the IPO of Transocean Partners LLC, selling a 29.2% noncontrolling interest. The filing does not provide the net cash proceeds from the offering.
Important facts for investors to verify
- Whether floater utilization, dayrates and backlog continue to decline and how quickly idle rigs can be contracted.
- Actual 2014 capital expenditures, newbuild delivery timing, contract coverage and funding sources.
- Remaining Macondo settlement payments, litigation developments, insurance recoveries and any additional required accruals.
- Outcomes of U.S., Norwegian, Brazilian and Petrobras-related tax matters and the effect of U.K. tax law on future effective tax rates.
- Compliance with the new revolving-credit covenant and the company’s ability to maintain liquidity after capital expenditures and shareholder distributions.
- Potential impairment of the $22.4 billion net property-and-equipment balance and $3.0 billion goodwill balance if market conditions, dayrates or utilization deteriorate.
- Final proceeds and ongoing financial effects of the Transocean Partners IPO and any planned U.K. North Sea rig dispositions.