Asset Impairment Offsets Drilling Revenue Growth at Transocean

Offshore drilling contractor Transocean recorded a net loss for third quarter 2012 despite seeing higher revenues primarily driven by ultra-deepwater revenue efficiency and lower out-of-service time.

The company reported Sunday a net loss attributable to controlling interest of $381 million for the three-month period ending Sept. 30, 2012, compared with a net loss attributable to controlling interest of $32 million, for the same period in 2011.

Transocean's third quarter results included $880 million in net unfavorable items; these items include $908 million in losses on impairment of assets included in discontinued operations primarily associated with Transocean's exit from the jackup market. In September, the company announced it would sell 37 jackups and one swamp barge to a Shelf Drilling International for approximately $1.05 billion.

The sale is on track to close in this year's fourth quarter, President and CEO Steven L. Newman told analysts during a Monday conference call. The company will still provide transition and operating services to Shelf through much of 2013, with some services likely to continue into 2014.

The net unfavorable items after tax also include a $48 million gain on the sale of two floaters, Discoverer 534 and Jim Cunningham, and a $20 million loss due to discrete taxes and other items.

Barclays Capital analyst James C. West noted that Transocean's contract drilling revenues of $2.3 billion fell 3 percent sequentially but was substantially higher than Barclays' estimate of $2.1 billion as better-than-expected ultra-deepwater, harsh environment floaters, high-specification jackups, and deepwater revenue all beat expectations, more than offsetting lower than expected mid-water revenue.

Average total day rates of $298,300 decreased from $305, 400 in the previous quarter, largely due to declines in the deepwater and mid-water floater day rates to $372,600 and $284, 800 respectively. Ultra-deepwater day rates were up modestly to $539,300 from $537,000 in the second quarter, while high-specification jackups rose to $156,700.

Total operating and maintenance expenses of approximately $1.338 billion dropped $43 million from the prior quarter and were below Barclays' estimate of $1.346 billion.

During the third quarter, Transocean made "meaningful progress" in its efforts to improve its operating results. Through thorough inspections, standardized maintenance and rigorous pre-deployment testing, the company improved its revenue efficiency to 94.3 percent from 88.5 percent a year ago. The revenue efficiency for Transocean's ultra-deepwater fleet also improved to 95.8 percent from 86.4 percent, Newman commented.

Transocean has a "clear objective" in its asset strategy to gradually reduce its exposure to lower specification assets and increase exposure to high-specification assets, including jackups and floating drilling rigs, Newman said. The company anticipates continued progress in selling individual non-core assets, including floaters and its remaining standard jackups.

In September, the company announced it would build four high-specification, ultra-deepwater drillships for Shell.

With sustained high levels of drilling activity worldwide and the addition of approximately 53 new ultra-deepwater drillships and 90 premium jackups over the next several years would likely result in accelerating cost inflation. As a result, Transocean expects to see evidence of this in its operating and maintenance costs. This includes higher labor costs reflecting competition for and retention of talent; the cost of training and deploying crews for new equipment; and higher costs for drilling equipment, spares and consumables.

Newman said that Transocean is well-prepared for the Macondo trials scheduled to begin next February.

"While we remain open to the possibility of a settlement with the DOJ [Department of Justice] and others, the favorable rulings we have received from the trail court on our insurance, our contractual indemnity from BP and our standing under the Clean Water Act and Oil Pollution Act emphasize the strengths of our case."

Transocean officials also were pleased with the decision by Brazil's Court of Justice to partially lift the preliminary injunction in relation to the Frade oil spill offshore Brazil in November 2011. The company continues to pursue all available alternatives to resolve the outstanding litigation related to the Frade incident.


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