For the 12 months ended December 31, 2004, net income totaled $152.2 million, or $0.47 per diluted share, on revenues of $2,613.9 million, compared to net income of $19.2 million, or $0.06 per diluted share, on revenues of $2,434.3 million for the 12 months ended December 31, 2003. Net income adjusted(1) for the gains from the TODCO offerings, a gain on the sale of the semisubmersible rig Sedco 602, the non-cash charge from the deconsolidation of TODCO relating to the tax sharing agreement between Transocean and TODCO, losses on early retirements of debt and TODCO initial public offering (IPO)-related costs was $103.4 million, or $0.32 per diluted share, for the 12 months ended December 31, 2004. For the 12 months ended December 31, 2003, net income adjusted(1) for the restructuring of certain benefit plans in Nigeria, non-cash charges for impairment of certain assets, losses on early retirements of debt, costs related to the planned IPO of TODCO and a favorable resolution of a non-U.S. income tax liability, was $71.0 million, or $0.22 per diluted share.
Robert L. Long, President and Chief Executive Officer of Transocean Inc., stated, "The fourth quarter of 2004 was a challenging time as we concentrated our efforts on completing repairs on the jackup rig Trident 20 and semisubmersible rig Jim Cunningham, commenced reactivation efforts on four semisubmersible rigs that had been idle for extended periods and completed the mobilization of three High-Specification Floaters and three Jackup Rigs between market sectors. At the same time, we had success with our fleet marketing efforts as we finalized negotiations leading to term contracts on three Fifth-Generation rigs at dayrates ranging from $190,000 to $240,000. The successful efforts have continued into 2005 as evidenced by the recent contracts for the drillship Discoverer Spirit and semisubmersible rig Deepwater Nautilus at dayrates of $270,000 and $220,000, respectively, that are expected to commence by the end of September 2005. In our fleet of Other Floaters, we obtained contracts on four previously stacked rigs and have subsequently secured additional contracts on two of these units at improved dayrates that exceed $100,000. In addition, our Jackup Rig fleet, which operates internationally, is experiencing a continued rise in dayrates with contracts on two rigs signed during late 2004 above $70,000, an improvement from dayrates of $55,000 to $60,000 seen earlier in the year."
In closing, Mr. Long stated, "We begin 2005 with an improving outlook for all segments of our fleet, especially among our 13 Fifth-Generation rigs, where capacity constraints are evident for the next 12 to 24 months. As a result, the prospect for improving utilization and dayrates among our fleet of drillships, semisubmersibles and jackups is excellent. However, our industry will experience higher costs in 2005 relative to levels seen in the recent past, due in part to higher personnel costs required to support the increased level of offshore drilling activity."
TODCO Deconsolidation - In December 2004, Transocean Inc. completed a public offering of TODCO common stock, bringing the company's ownership interest in TODCO, comprised entirely of Class A common stock, to approximately 22% of total TODCO shares outstanding. Transocean received $258.0 million in net proceeds from this offering and recognized a gain of $140.0 million. In conjunction with the offering, Transocean converted its remaining shares of Class B common stock, which had five votes per share, into shares of Class A common stock, which have one vote per share, reducing its voting interest in TODCO to a level proportionate to its ownership interest. As a result, Transocean deconsolidated TODCO from its financial statements effective December 17, 2004 and will account for its remaining investment under the equity method of accounting.
Due to the deconsolidation of TODCO, the company recorded a non-cash charge of $167.1 million related to contingent amounts due from TODCO under the tax sharing agreement between Transocean and TODCO. As TODCO generates income and utilizes its pre-IPO tax assets, TODCO is required to pay Transocean for the benefit received in accordance with the provisions of the tax sharing agreement. Transocean will recognize those amounts as other income.
Transocean Drilling Segment - Revenues for the three months ended December 31, 2004 improved 6% to $591.0 million, compared to revenues of $558.7 million during the three months ended September 30, 2004. The revenue improvement was due principally to higher average dayrates and activity. The effects of the higher average dayrates and activity were partially offset by idle time on the drillship Deepwater Millennium, as the unit transitioned between contracts in the Gulf of Mexico, mobilizations of the drillship Deepwater Pathfinder to Nigeria and the semisubmersible rig Transocean Rather to the North Sea, and the warm stacking of the semisubmersible rig M.G. Hulme, Jr. in Nigeria.
Operating income before general and administrative expenses(2) was $73.9 million and field operating income(2) (defined as revenues less operating and maintenance expense) was $177.7 million for the three months ended December 31, 2004. These amounts compared to operating income before general and administrative expenses and field operating income of $88.7 million and $198.2 million, respectively, for the three months ended September 30, 2004. The fourth quarter 2004 results were negatively impacted by a 15% increase in operating and maintenance expenses, to $413.3 million, compared to third quarter 2004 levels. The increase was due primarily to an estimated $20 million related to increased offshore activity, approximately $9 million of higher costs to complete repairs on two previously damaged rigs, the jackup rig Trident 20 and semisubmersible rig Jim Cunningham, as well as costs totaling approximately $14 million for a periodic survey on the semisubmersible rig Polar Pioneer and maintenance to the jackup rig J.T. Angel prior to commencing new term contracts. Repair and maintenance programs performed on the Trident 20, Polar Pioneer and J.T. Angel were completed during the fourth quarter of 2004 and each rig has returned to service. Repairs to the Jim Cunningham were completed in February 2005 and the rig has recommenced a drilling program in the eastern Mediterranean. Operating and maintenance expenses in the fourth quarter of 2004 were further increased by the impact of a weakening dollar and higher personnel costs. Fleet utilization averaged 69% during the three months ended December 31, 2004, including 80% average utilization for the company's 32 High-Specification Floaters, compared to average utilization of 67% and 81%, respectively, during the preceding quarter in 2004. The segment's average dayrate improved to $93,900 during the fourth quarter of 2004 compared to $91,100 in the preceding quarter of 2004, with the average dayrate for the High-Specification Floaters improving to $149,000 during the fourth quarter of 2004 from $142,200 during the preceding quarter of the year.
TODCO Segment - Revenues from October 1, 2004 to December 17, 2004, the deconsolidation date, were $85.9 million, while operating income before general and administrative expenses(2) was $5.0 million and field operating income(2) was $24.4 million.
Effective Tax Rate - The company's effective tax rate(3) for the 12 months ended December 31, 2004 was 49.7%, based on adjusted income before taxes as previously mentioned. Included in the company's income tax expense are additional taxes related to a valuation allowance, which resulted from the TODCO IPO, partially offset by other adjustments to tax liabilities. The company's effective tax rate fluctuates in part because many of the jurisdictions in which the company operates have revenue-based tax regimes. This volatility is particularly evident when earnings are low. Similarly, the company expects the rate to decrease significantly as earnings improve.
Liquidity - Cash flow from operations totaled $598.5 million for the 12 months ended December 31, 2004. During this period, Transocean recognized losses of $76.5 million in conjunction with the early retirements of debt with an aggregate principal amount of $774.8 million. The company funded the retirements primarily with cash from operations and cash received from the TODCO offerings. Net debt(4) declined 36% over the 12 months of 2004 to $2,030.2 million from $3,184.1 million at December 31, 2003.
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