Transocean Cites 11% Fall in 2Q Profit

Transocean reported net income attributable to controlling interest for the three months ended June 30, 2010 of $715 million, or $2.22 per diluted share, on revenues of $2.505 billion. The results compare to net income attributable to controlling interest of $806 million, or $2.49 per diluted share, on revenues of $2.882 billion, for the three months ended June 30, 2009.

Second quarter 2010 results included increased expenses associated with the Macondo well incident of $82 million, or $69 million after tax at our Annual Effective Tax Rate. These expenses include insurance deductibles, legal costs, increased insurance premiums, internal investigation costs and professional fees.

In addition, second quarter 2010 results were favorably impacted by $249 million, after tax, as follows:

  • A $267 million gain resulting from insurance recoveries associated with the loss of Deepwater Horizon,
  • Partially offset by $18 million of expenses primarily relating to litigation matters not associated with the Macondo well incident.

Second quarter 2009 results were adversely impacted by certain net charges, after tax, totaling $96 million, or $0.30 per diluted share, including $67 million primarily related to write-downs of assets held for sale and a $29 million net loss primarily related to discrete tax items, the retirement of debt and the sale of an interest in a joint venture.

Operations Quarterly Review

Revenues for the three months ended June 30, 2010 decreased to $2.505 billion compared to $2.602 billion during the three months ended March 31, 2010. The $97 million decrease was primarily due to contract drilling revenue reductions, including $80 million resulting from the stacking of rigs, $69 million from rigs operating on contracts at lower dayrates, $61 million from increased rig time in shipyards and mobilizations and $37 million associated with the loss of Deepwater Horizon. The decrease was partially offset by an $80 million increase in drilling management services revenues, a $54 million increase in contract drilling revenue from newly-constructed ultra-deepwater rigs commencing or continuing operations in the second quarter and $16 million of other minor variances.

Operating and maintenance expenses totaled $1.358 billion for the second quarter 2010, up approximately 14 percent compared to $1.196 billion for the prior quarter. The $162 million quarter-to-quarter increase in operating and maintenance costs occurred as a result of $82 million of increased costs from insurance deductibles and legal costs associated with the Macondo well incident, a $65 million increase in drilling management services costs and $17 million of additional operating costs related to increased activity associated with newly-constructed ultra-deepwater rigs.

General and administrative expenses were $58 million for the second quarter 2010, compared to $63 million in the first quarter 2010. The $5 million decrease was primarily due to higher share-based compensation expenses in the first quarter.

Liquidity and Interest Expense

Interest expense, net of amounts capitalized in the second quarter 2010, totaled $141 million, compared to $132 million in the prior quarter. The increase was primarily due to reduced capitalized interest related to the commencement of operations of newly-constructed ultra-deepwater drillships in the first and second quarters. As of June 30, 2010, total debt was $11.426 billion, compared to $11.439 billion as of March 31, 2010, a decrease of $13 million.

Cash flow from operating activities totaled $1.269 billion for the second quarter 2010, up from $1.172 billion for the first quarter 2010.

As of June 30, 2010, the company had cash and cash equivalents of $2.888 billion, compared to $1.586 billion at March 31, 2010. The increase is principally due to operating cash flow and the receipt of $560 million in insurance proceeds for the loss of Deepwater Horizon.

Effective Tax Rate

Transocean's reported Effective Tax Rate(1) for the second quarter 2010 was 12.0 percent and included certain discrete items consisting primarily of the gain resulting from the insurance recoveries on the loss of Deepwater Horizon and changes in prior years tax estimates. Excluding these discrete items the Annual Effective Tax Rate(2) for the second quarter was 16.3 percent.

Update on Distribution Through Par Value Reduction

In May 2010, at our Annual General Meeting, our shareholders approved a cash distribution in the form of a par value reduction in the aggregate amount of CHF 3.44 per issued share, equal to approximately $3.19 using an exchange rate of USD 1.00 to CHF 1.08 as of the close of trading on June 30, 2010. We expect the cash distribution to be calculated and paid in four quarterly installments. Under Swiss law, upon satisfaction of all legal requirements, we must submit an application to the commercial register in the Canton of Zug to register the applicable par value reduction. We have submitted to the commercial register of the Canton of Zug our application for registration of the initial installment. The cantonal commercial register is currently reviewing our application, and although we believe that all registration requirements have been met, the Swiss authorities have indicated to us that the review process will take longer than customary in light of lawsuits filed in the U.S. and served on the company in Switzerland. They have indicated that they will seek guidance from the Swiss Federal Office of the Commercial Register on whether the requirements for the registration of the first installment have been met. Given the expected extended review of our application by the competent Swiss authorities, the payment of the first installment will be delayed. If the Swiss authorities disagree with our view that all registration requirements have been met, our ability to pay the distribution installments could be further delayed or restricted indefinitely. A delay of the first installment will likely also result in a delay of the remaining three installments, which were expected to be paid in October 2010, January 2011 and April 2011, subject to the satisfaction of the applicable Swiss legal requirements.

Update on Discussions with the U.S. Department of Justice

On June 28, 2010, we received a letter from the U.S. Department of Justice (DOJ) asking us to meet with them to discuss our financial responsibilities in connection with the Macondo well incident and requesting that we provide them certain financial and organizational information. The letter also requested that we provide the DOJ advance notice of certain corporate actions involving the transfer of cash or other assets outside the ordinary course of business. After preliminary discussions with the DOJ, we have voluntarily agreed to provide them with 30 days notice prior to repurchasing any additional shares under our share repurchase program and prior to making substantial cash payments out of our U.S. entities, other than in the ordinary course of business. We expect to engage in further discussions with the DOJ in the future.

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