Effective December 17, 2004, Transocean Inc. deconsolidated TODCO from its consolidated statements of operations and balance sheets and subsequently accounted for its investment in TODCO under the equity method of accounting. Financial results for the three months ended March 31, 2004 reflect the consolidation of TODCO as a business segment.
Robert L. Long, President and Chief Executive Officer of Transocean Inc., stated, "The company has begun 2005 with solid financial performance. Results for the first quarter benefited from the recommencement of operations on the jackup rig Trident 20 and semisubmersible rig Jim Cunningham, as well as the commencement of operations on four semisubmersible rigs that were previously idle. Also, we realized meaningful dayrate increases on four High-Specification Floaters while benefiting from lower than planned operating and maintenance expenses due to the timing of rig maintenance and upgrade programs.
"Of greater importance is the improving outlook for our business. We are seeing a substantial increase in customer rig needs, particularly for floating drilling units. Future quarterly financial performance should benefit from higher average dayrates on a number of our semisubmersibles and drillships, and we expect to sign several term contracts that should secure improved dayrates for several more years. At present, we are in advanced discussions with various customers regarding seven High-Specification Floaters with dayrates ranging from $260,000 to $350,000 per day and contract durations from a single well to several years."
The company reported that the industry's Fifth-Generation rig supply remains constrained, the result of deepwater contract opportunities in the U.S. Gulf of Mexico, West Africa, Brazil and emerging regions like India and the Mediterranean Sea. Contract durations for these units are lengthening, as evidenced by the recent contract awards for the company's semisubmersible rigs Sedco Energy and Deepwater Horizon for two and five years, respectively. This favorable trend is expected to continue through 2006, resulting in higher average dayrates for the company's fleet. At present, 89% of the company's Fifth-Generation fleet days are committed to firm contracts in 2005, while 64% of the fleet days are committed in 2006.
The company's Other Deepwater and Other High-Specification Floaters (harsh environment semisubmersibles) are experiencing higher utilization worldwide, leading to higher dayrates like the recent one-year contract for the Transocean Marianas in the U.S. Gulf of Mexico at $250,000 per day and the one-year contract for the semisubmersible rig Transocean Leader offshore Norway at a dayrate of $245,000 per day.
The company expects higher fleet utilization and average dayrates for its Other Floaters fleet, especially in the U.K. North Sea and the U.S. Gulf of Mexico. Industry dayrates in both regions have improved from approximately $50,000 per day in 2004 to a general range of $100,000 to $160,000 per day at present. Operator needs in these regions are becoming increasingly evident for 2006. Also, BP has just awarded a contract for work offshore Sahkalin Island for the company's semisubmersible rig Transocean Legend. The contract covers the 2005 through 2007 spring and summer drilling periods and drilling operations are expected to commence in July, 2005 following minor rig modifications in Singapore and mobilization to the drilling location. At present, 58% of the remaining Other Floater Fleet days are under firm contract in 2005, while 17% of the days are committed in 2006.
Finally, among the company's fleet of Jackup Rigs, utilization remains high and average dayrates continue to experience modest improvement in most regions, with contracting opportunities most prevalent in Asia and the Middle East. Speculative newbuild units, which are due to enter the active fleet in increasing numbers beginning in the second half of 2006, represent a growing concern to the long-term health of the jackup rig business. At present, 77% of the remaining Jackup Rig Fleet days are under firm contract in 2005, while 38% of the days are committed in 2006.
Operating and maintenance expense is expected to increase as improving activity levels lead to higher labor and rig maintenance costs. The company expects operating and maintenance expense for the second quarter of 2005 to be in a range of $415 million to $435 million, reflecting the impact of improvements in activity levels and the timing of planned shipyard and other rig maintenance programs.
Operations Quarterly Review - Revenues for the three months ended March 31, 2005 improved 7% to $630.5 million from revenues of $591.0 million for the Transocean Drilling Segment for the three months ended December 31, 2004. The improvement was primarily due to increased dayrates and activity throughout the company's fleet of drillships, semisubmersibles and jackup rigs, as well as the return to active service of the jackup rig Trident 20 and semisubmersible rig Jim Cunningham following lengthy repairs resulting from operational incidents during 2004. These improvements in revenue were partially offset by lower integrated services revenues, a scheduled shipyard program for the semisubmersible rig Henry Goodrich, idle time on the semisubmersible rig M.G. Hulme, Jr. and the sale of semisubmersible rig Sedco 600.
Operating income before general and administrative expenses(2) was $161.4 million and field operating income(2) (defined as revenues less operating and maintenance expense) was $241.9 million for the three months ended March 31, 2005. These amounts compared to Transocean Drilling Segment operating income before general and administrative expenses and field operating income for the three months ended December 31, 2004 of $73.9 million and $177.7 million, respectively. The improved results were due primarily to increased revenue during the first quarter of 2005, the gain from the sale of semisubmersible rig Sedco 600 and a 6% decline in operating and maintenance expense in the March 2005 quarter, to $388.6 million, down from $413.3 million for the three months ended December 31, 2004. The lower operating and maintenance expense was the result of a delay in some rig maintenance programs, the reduction in extraordinary repair costs incurred during the final three months in 2004 associated with the operational incidents on the jackup rig Trident 20 and semisubmersible rig Jim Cunningham, as well as a major shipyard project related to the semisubmersible rig Polar Pioneer and lower expenses pertaining to the reduced level of integrated services activities, partially offset by additional costs resulting from the increased activity during the period. Fleet utilization during the three months ended March 31, 2005 improved to 75%, up from 69% during the three months ended December 31, 2004 and was due significantly to improvements in the company's Jackup Rig and Other Floaters fleet. Average dayrates for the three months ended March 31, 2005 increased in the company's High-Specification Fleet, Other Floaters Fleet and Jackup Rig Fleet, resulting in an average fleet dayrate of $96,600, up from $93,900 during the final three months in 2004.
Effective Tax Rate - The company's effective tax rate(3) for the three months ended March 31, 2005 was approximately 16%. The decline from an effective tax rate of approximately 50% at December 31, 2004 was primarily related to improved earnings expectations for the year as a result of the continued improvement in the offshore drilling business. The company estimates its effective tax rate for 2005 to be approximately 16%. The final effective tax rate for the year will depend on a number of factors including the actual geographic mix of income, as well as the occurrences of various discrete events. These factors could cause the rate to vary significantly from current expectations.
Liquidity - Cash flow provided by operations was $176.9 million for the three months ended March 31, 2005 while net debt(4) at March 31, 2005 was $1,783.5 million, a 37% decline from $2,848.5 million at March 31, 2004. During the current quarter, the company redeemed $247.8 million of 6.95% Senior Notes due 2008, utilizing existing cash balances.
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