Transocean Ltd. 2013 Q2 Form 10-Q Summary
Business context and reporting period
Transocean is an international offshore contract drilling provider focused on deepwater and harsh-environment drilling. The unaudited filing covers the three and six months ended June 30, 2013, with comparisons to the same periods in 2012. At June 30, the continuing-operations fleet comprised 81 mobile offshore drilling units; management later reported 80 units as of July 30 following dispositions.
Key financial metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Operating revenues | $2.397 billion, up 3% | $4.594 billion, up 3% |
| Contract drilling revenues | $2.321 billion, up 7% | $4.466 billion, up 7% |
| Operating income | $602 million; approximately 25.1% margin | $1.075 billion; approximately 23.4% margin |
| Net income attributable to controlling interest | $307 million, or $0.84 diluted EPS | $628 million, or $1.73 diluted EPS |
| Net cash provided by operating activities | $416 million | $522 million |
| Capital expenditures | $352 million | $840 million |
- Compared with 2012, quarterly net income attributable to controlling interest improved from a $304 million loss, while six-month results improved from a $294 million loss.
- Cash and cash equivalents were $3.357 billion at June 30, down from $5.134 billion at December 31, 2012. Management estimated that approximately $1.5 billion was required for working capital and other operating needs.
- Total consolidated debt was $10.799 billion, including $10.621 billion of Transocean Ltd. and subsidiary debt and $178 million of consolidated variable-interest-entity debt. Debt due within one year totaled $191 million.
- Available revolving capacity was $2.0 billion under the five-year facility and $900 million under the three-year secured facility; there were no borrowings outstanding under either facility at June 30.
- Total assets were $32.215 billion and total equity was $15.664 billion. Property and equipment, net, was $21.056 billion.
Material changes versus the prior comparable periods
- Contract drilling revenue growth reflected higher dayrates, greater rig utilization, less shipyard time and contributions from new high-specification jackups. Quarterly operating days increased 4% and average daily revenue increased 3%; six-month operating days increased 5% and average daily revenue increased 2%.
- Fleet utilization improved to 80% in both the quarter and six-month period, compared with 77% and 76%, respectively, in 2012. Revenue efficiency was 93% for the quarter and 91% for the six-month period, unchanged from the comparable periods.
- Operating and maintenance expense declined year over year primarily because 2012 included a $750 million Macondo-related contingency charge. Excluding that charge, underlying operating and maintenance costs increased with higher rig utilization and newbuild activity.
- Interest expense declined to $146 million in the quarter and $303 million year to date, reflecting debt repayments and redemptions.
- The company repaid the $735 million TPDI Credit Facilities, redeemed $273 million of Aker callable bonds, repaid the $250 million 5% notes and $500 million 5.25% notes at maturity, and redeemed the remaining $62 million of Series C convertible notes.
- Capital expenditures increased materially, from $445 million to $840 million for the six-month period, while operating cash flow declined from $999 million to $522 million. The decline was primarily associated with $560 million of Macondo settlement payments and unfavorable working-capital changes.
- Shareholders approved a $2.24-per-share distribution of qualifying additional paid-in capital. The first $204 million installment was paid in June, and $612 million remained payable at June 30.
Guidance, outlook, commentary and unusual items
- Management expected 2013 revenue to exceed 2012 revenue, supported by higher dayrates, fewer out-of-service and idle days, increased activity and new high-specification jackups. Operating and maintenance expense, excluding 2012 loss contingencies, was also expected to increase.
- Contract backlog for continuing operations was $27.277 billion as of July 17, down from $28.479 billion on April 18. Management expected customer commodity pricing to support contracting opportunities but anticipated near-term flattening dayrates and greater competition for term work.
- Uncommitted fleet rates for the remainder of 2013 were 10% for high-specification floaters, 28% for midwater floaters and 17% for high-specification jackups. The company expected 2013 capital expenditures of approximately $2.4 billion.
- Management initiated a shore-based organizational-efficiency program. It recognized $10 million of severance expense in the first half and expected approximately $30 million of incremental costs in the second half of 2013, with limited net benefit expected during 2013.
- The company recorded a $37 million impairment charge on rigs classified as held for sale and a $10 million loss on the sale of Shelf Drilling preference shares. It also recorded $10 million of discontinued-operations losses for the quarter and six months.
- Macondo-related obligations were material. The DOJ resolution required $1.4 billion of fines, recoveries and civil penalties through 2017. At June 30, outstanding settlement obligations excluding interest totaled $840 million, including $240 million under the plea agreement and $600 million under the consent decree.
- Macondo-related estimated loss contingencies declined to $454 million at June 30 from $1.9 billion at December 31, 2012, but additional reasonably possible or probable losses could not be reliably estimated. The company had $66 million of probable insurance recoverables.
- Material tax exposures remained, including a potential U.S. tax assessment of approximately $363 million before interest and penalties, Norwegian tax assessments and litigation, and Brazilian tax assessments. Management stated that adverse outcomes could materially affect cash flows.
- Enhanced offshore regulations, customer inspections and certifications may increase downtime, maintenance costs and operating complexity. The filing also identifies risks from dayrate pressure, idle or stacked rigs, shipyard delays, contract cancellations, capital requirements, litigation, insurance limitations and tax-law changes.
Investor verification points
- Verify the sustainability of utilization, dayrates, revenue efficiency and the $27.3 billion backlog, including customer options, contract cancellations and potential dayrate reductions.
- Reconcile cash availability after reserving approximately $1.5 billion for operations against debt maturities, remaining Macondo payments, shareholder distributions and approximately $2.4 billion of expected 2013 capital expenditures.
- Monitor the second phase and subsequent outcomes of the Macondo litigation, unresolved indemnity claims, insurance proceedings and potential additional liabilities.
- Assess execution, timing and final cost of the newbuild program, including approximately $2.935 billion of estimated costs thereafter for listed projects.
- Track the organizational-efficiency program, expected severance and restructuring costs, and whether projected savings materialize.
- Review the U.S., Norway and Brazil tax matters and the potential effect of tax-law changes in Switzerland and the United States.