form10q.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Draft #4
to
Audit
Committee
FORM
10-Q
(Mark
One)
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the quarterly period ended June 30, 2007
OR
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the transition period from ______ to ______
Commission
file number 333-75899
TRANSOCEAN
INC.
(Exact
name of registrant as specified in its charter)
Cayman
Islands
|
66-0582307
|
(State
or other jurisdiction of
incorporation or organization)
|
(I.R.S.
Employer Identification
No.)
|
|
|
4
Greenway Plaza
|
|
Houston,
Texas
|
77046
|
(Address
of principal executive offices)
|
(Zip
Code)
|
Registrant’s
telephone number, including area code: (713)
232-7500
Indicate
by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or
15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or
for
such shorter period that the registrant was required to file such reports),
and
(2) has been subject to such filing requirements for the past 90 days.
Yes x
No o
Indicate
by check mark whether the
registrant is a large accelerated filer, an accelerated filer, or a
non-accelerated filer. See definition of “accelerated filer and large
accelerated filer” in Rule 12b-2 of the Exchange Act.
Large
Accelerated Filer
x
|
Accelerated
Filer o
|
Non-accelerated
Filer o
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No x
As
of
July 27, 2007, 290,199,014 ordinary shares, par value $0.01 per share, were
outstanding.
INDEX
TO FORM 10-Q
QUARTER
ENDED JUNE 30, 2007
|
|
|
Page
|
|
|
|
|
PART
I - FINANCIAL INFORMATION
|
|
|
|
|
|
|
Item
1.
|
Financial
Statements (Unaudited)
|
|
|
|
|
|
|
|
Condensed
Consolidated Statements of Operations
|
|
|
|
|
1
|
|
|
|
|
|
|
Condensed
Consolidated Balance Sheets
|
|
|
|
|
2
|
|
|
|
|
|
|
Condensed
Consolidated Statements of Cash Flows
|
|
|
|
|
3
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial
|
|
|
|
|
16
|
|
|
|
|
|
Item
3.
|
|
32
|
|
|
|
|
|
Item
4.
|
|
32
|
|
|
|
|
PART
II - OTHER INFORMATION
|
|
|
|
|
|
|
Item
1.
|
|
33
|
|
|
|
|
|
Item
1A.
|
|
34
|
|
|
|
|
|
|
|
36
|
|
|
|
|
|
Item
4.
|
|
36
|
|
|
|
|
|
Item
6.
|
|
37
|
PART
I - FINANCIAL INFORMATION
Item
1. Financial Statements
TRANSOCEAN
INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(In
millions, except per share data)
(Unaudited)
|
|
Three
months ended June 30,
|
|
|
Six
months ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Operating
revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract
drilling revenues
|
|
$ |
1,360
|
|
|
$ |
828
|
|
|
$ |
2,633
|
|
|
$ |
1,607
|
|
Other
revenues
|
|
|
74
|
|
|
|
26
|
|
|
|
129
|
|
|
|
64
|
|
|
|
|
1,434
|
|
|
|
854
|
|
|
|
2,762
|
|
|
|
1,671
|
|
Costs
and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
and maintenance
|
|
|
627
|
|
|
|
549
|
|
|
|
1,195
|
|
|
|
1,024
|
|
Depreciation
|
|
|
101
|
|
|
|
102
|
|
|
|
201
|
|
|
|
204
|
|
General
and administrative
|
|
|
29
|
|
|
|
25
|
|
|
|
55
|
|
|
|
45
|
|
|
|
|
757
|
|
|
|
676
|
|
|
|
1,451
|
|
|
|
1,273
|
|
Gain
(loss) from disposal of assets, net
|
|
|
(1 |
) |
|
|
111
|
|
|
|
22
|
|
|
|
175
|
|
Operating
income
|
|
|
676
|
|
|
|
289
|
|
|
|
1,333
|
|
|
|
573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense), net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
5
|
|
|
|
5
|
|
|
|
10
|
|
|
|
10
|
|
Interest
expense, net of amounts capitalized
|
|
|
(33 |
) |
|
|
(20 |
) |
|
|
(70 |
) |
|
|
(44 |
) |
Other,
net
|
|
|
(5 |
) |
|
|
1
|
|
|
|
8
|
|
|
|
2
|
|
|
|
|
(33 |
) |
|
|
(14 |
) |
|
|
(52 |
) |
|
|
(32 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes and minority interest
|
|
|
643
|
|
|
|
275
|
|
|
|
1,281
|
|
|
|
541
|
|
Income
tax expense
|
|
|
93
|
|
|
|
26
|
|
|
|
178
|
|
|
|
86
|
|
Minority
interest
|
|
|
1
|
|
|
|
−
|
|
|
|
1
|
|
|
|
−
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
549
|
|
|
$ |
249
|
|
|
$ |
1,102
|
|
|
$ |
455
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
1.91
|
|
|
$ |
0.77
|
|
|
$ |
3.81
|
|
|
$ |
1.40
|
|
Diluted
|
|
$ |
1.84
|
|
|
$ |
0.75
|
|
|
$ |
3.67
|
|
|
$ |
1.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
288
|
|
|
|
324
|
|
|
|
289
|
|
|
|
325
|
|
Diluted
|
|
|
300
|
|
|
|
336
|
|
|
|
301
|
|
|
|
337
|
|
See
accompanying notes.
TRANSOCEAN
INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(In
millions, except share data)
|
|
June
30,
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
445
|
|
|
$ |
467
|
|
Accounts
receivable, net of allowance for doubtful accounts of $30and $26
at June
30, 2007 and December 31, 2006, respectively
|
|
|
1,184
|
|
|
|
946
|
|
Materials
and supplies, net of allowance for obsolescence of $21 and $19 at
June 30,
2007 and December 31, 2006, respectively
|
|
|
177
|
|
|
|
160
|
|
Deferred
income taxes, net
|
|
|
20
|
|
|
|
16
|
|
Other
current assets
|
|
|
67
|
|
|
|
67
|
|
Total
current assets
|
|
|
1,893
|
|
|
|
1,656
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment
|
|
|
11,152
|
|
|
|
10,539
|
|
Less
accumulated depreciation
|
|
|
3,392
|
|
|
|
3,213
|
|
Property
and equipment, net
|
|
|
7,760
|
|
|
|
7,326
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
2,195
|
|
|
|
2,195
|
|
Other
assets
|
|
|
301
|
|
|
|
299
|
|
Total
assets
|
|
$ |
12,149
|
|
|
$ |
11,476
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
369
|
|
|
$ |
477
|
|
Accrued
income taxes
|
|
|
132
|
|
|
|
98
|
|
Debt
due within one year
|
|
|
18
|
|
|
|
95
|
|
Other
current liabilities
|
|
|
475
|
|
|
|
369
|
|
Total
current liabilities
|
|
|
994
|
|
|
|
1,039
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
3,046
|
|
|
|
3,200
|
|
Deferred
income taxes, net
|
|
|
51
|
|
|
|
54
|
|
Other
long-term liabilities
|
|
|
579
|
|
|
|
343
|
|
Total
long-term liabilities
|
|
|
3,676
|
|
|
|
3,597
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest
|
|
|
1
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
Preference
shares, $0.10 par value; 50,000,000 shares authorized, none issued
and
outstanding
|
|
|
−
|
|
|
|
−
|
|
Ordinary
shares, $0.01 par value; 800,000,000 shares authorized, 289,280,582
and
292,454,457 shares issued and outstanding at June 30, 2007 and December
31, 2006, respectively
|
|
|
3
|
|
|
|
3
|
|
Additional
paid-in capital
|
|
|
7,728
|
|
|
|
8,044
|
|
Accumulated
other comprehensive loss
|
|
|
(30 |
) |
|
|
(30 |
) |
Accumulated
deficit
|
|
|
(223 |
) |
|
|
(1,181 |
) |
Total
shareholders’ equity
|
|
|
7,478
|
|
|
|
6,836
|
|
Total
liabilities and shareholders’ equity
|
|
$ |
12,149
|
|
|
$ |
11,476
|
|
TRANSOCEAN
INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In
millions)
(Unaudited)
|
|
Three
months ended June 30,
|
|
|
Six
months ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Cash
flows from operating activities
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
549
|
|
|
$ |
249
|
|
|
$ |
1,102
|
|
|
$ |
455
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
101
|
|
|
|
102
|
|
|
|
201
|
|
|
|
204
|
|
Share-based
compensation expense
|
|
|
9
|
|
|
|
5
|
|
|
|
19
|
|
|
|
8
|
|
Deferred
income taxes
|
|
|
(5 |
) |
|
|
(9 |
) |
|
|
(7 |
) |
|
|
25
|
|
Equity
in (earnings) losses of unconsolidated affiliates
|
|
|
2
|
|
|
|
(3 |
) |
|
|
3
|
|
|
|
(3 |
) |
(Gain)
loss from disposal of assets, net
|
|
|
1
|
|
|
|
(111 |
) |
|
|
(22 |
) |
|
|
(175 |
) |
Deferred
revenues, net
|
|
|
4
|
|
|
|
11
|
|
|
|
38
|
|
|
|
20
|
|
Deferred
expenses, net
|
|
|
(6 |
) |
|
|
(47 |
) |
|
|
(13 |
) |
|
|
(55 |
) |
Tax
benefit from exercise of stock options to purchase and vesting of
ordinary
shares under share-based compensation plans
|
|
|
–
|
|
|
|
(8 |
) |
|
|
–
|
|
|
|
(8 |
) |
Other
long-term liabilities
|
|
|
5
|
|
|
|
14
|
|
|
|
12
|
|
|
|
21
|
|
Other,
net
|
|
|
3
|
|
|
|
3
|
|
|
|
1
|
|
|
|
4
|
|
Changes
in operating assets and liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(99 |
) |
|
|
(33 |
) |
|
|
(238 |
) |
|
|
(104 |
) |
Other
current assets
|
|
|
(28 |
) |
|
|
(50 |
) |
|
|
(32 |
) |
|
|
(51 |
) |
Accounts
payable and other current liabilities
|
|
|
57
|
|
|
|
47
|
|
|
|
140
|
|
|
|
91
|
|
Income
taxes receivable/payable, net
|
|
|
14
|
|
|
|
6
|
|
|
|
57
|
|
|
|
12
|
|
Net
cash provided by operating activities
|
|
|
607
|
|
|
|
176
|
|
|
|
1,261
|
|
|
|
444
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(290 |
) |
|
|
(98 |
) |
|
|
(755 |
) |
|
|
(276 |
) |
Proceeds
from disposal of assets, net
|
|
|
2
|
|
|
|
121
|
|
|
|
41
|
|
|
|
203
|
|
Joint
ventures and other investments, net
|
|
|
–
|
|
|
|
–
|
|
|
|
(3 |
) |
|
|
–
|
|
Net
cash provided by (used in) investing activities
|
|
|
(288 |
) |
|
|
23
|
|
|
|
(717 |
) |
|
|
(73 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving
Credit Facility, net
|
|
|
(190 |
) |
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Repayments
on the Term Credit Facility
|
|
|
(230 |
) |
|
|
–
|
|
|
|
(230 |
) |
|
|
–
|
|
Proceeds
from issuance of ordinary shares under share-based compensation plans,
net
|
|
|
40
|
|
|
|
21
|
|
|
|
55
|
|
|
|
66
|
|
Repurchase
of ordinary shares
|
|
|
–
|
|
|
|
(400 |
) |
|
|
(400 |
) |
|
|
(600 |
) |
Other,
net
|
|
|
4
|
|
|
|
–
|
|
|
|
9
|
|
|
|
–
|
|
Net
cash used in financing activities
|
|
|
(376 |
) |
|
|
(379 |
) |
|
|
(566 |
) |
|
|
(534 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
decrease in cash and cash equivalents
|
|
|
(57 |
) |
|
|
(180 |
) |
|
|
(22 |
) |
|
|
(163 |
) |
Cash
and cash equivalents at beginning of period
|
|
|
502
|
|
|
|
462
|
|
|
|
467
|
|
|
|
445
|
|
Cash
and cash equivalents at end of period
|
|
$ |
445
|
|
|
$ |
282
|
|
|
$ |
445
|
|
|
$ |
282
|
|
See
accompanying notes.
TRANSOCEAN
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED STATEMENTS
(Unaudited)
Note
1―Nature
of Business and Principles of Consolidation
Transocean
Inc. (together with its subsidiaries and predecessors, unless the context
requires otherwise, “Transocean,” “we,” “us” or “our”) is a leading
international provider of offshore contract drilling services for oil and gas
wells. We contract our drilling rigs, related equipment and work crews primarily
on a dayrate basis to drill oil and gas wells. We also provide additional
services, including integrated services. At June 30, 2007, we owned, had partial
ownership interests in or operated 82 mobile offshore drilling units. As of
this
date, our fleet consisted of 33 High-Specification semisubmersibles and
drillships (“High-Specification Floaters”), 20 Other Floaters, 25 Jackups and
four Other Rigs. We also have four High-Specification Floaters under
construction. See Note 3—Drilling Fleet Expansion and Upgrades.
For
investments in joint ventures and other entities that do not meet the criteria
of a variable interest entity or where we are not deemed to be the primary
beneficiary for accounting purposes of those entities that meet the variable
interest entity criteria, we use the equity method of accounting where our
ownership is between 20 percent and 50 percent or where our ownership is more
than 50 percent and we do not have significant control over the unconsolidated
affiliate. We use the cost method of accounting for investments in
unconsolidated affiliates where our ownership is less than 20 percent and where
we do not have significant influence over the unconsolidated affiliate. We
consolidate those investments that meet the criteria of a variable interest
entity where we are deemed to be the primary beneficiary for accounting purposes
and for entities in which we have a majority voting interest. Intercompany
transactions and accounts are eliminated.
Note
2―Summary
of Significant Accounting Policies
Basis
of Presentation—Our
accompanying condensed consolidated financial statements have been prepared
without audit in accordance with accounting principles generally accepted in
the
United States for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange
Commission (“SEC”). Accordingly, pursuant to such rules and regulations, these
financial statements do not include all disclosures required by accounting
principles generally accepted in the U.S. for complete financial statements.
The
condensed consolidated financial statements reflect all adjustments, which
are,
in the opinion of management, necessary for a fair presentation of financial
position, results of operations and cash flows for the interim periods. Such
adjustments are considered to be of a normal recurring nature unless otherwise
identified. Operating results for the three and six months ended June 30, 2007
are not necessarily indicative of the results that may be expected for the
year
ending December 31, 2007 or for any future period. The accompanying condensed
consolidated financial statements and notes thereto should be read in
conjunction with the audited consolidated financial statements and notes thereto
included in our Annual Report on Form 10-K for the year ended December 31,
2006.
Accounting
Estimates—The preparation of financial statements in conformity with
accounting principles generally accepted in the U.S. requires management to
make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues, expenses and disclosure of contingent assets and
liabilities. On an ongoing basis, we evaluate our estimates, including those
related to bad debts, materials and supplies obsolescence, investments,
intangible assets and goodwill, property and equipment and other long-lived
assets, income taxes, workers’ insurance, share-based compensation, pensions and
other postretirement benefits, other employment benefits and contingent
liabilities. We base our estimates on historical experience and on various
other
assumptions we believe are reasonable under the circumstances, the results
of
which form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources. Actual results
could differ from such estimates.
Total
Comprehensive Income—Total comprehensive income for the three and six
months ended June 30, 2007 was $549 million and $1,102 million, respectively,
while the total comprehensive income for the three and six months ended June
30,
2006 was $249 million and $455 million, respectively. There were no other
comprehensive income items that were material for any of the periods
presented.
TRANSOCEAN
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED STATEMENTS (Continued)
(Unaudited)
Capitalized
Interest—We capitalize interest costs for qualifying construction and
upgrade projects. We capitalized interest costs on construction work in progress
of $15 million and $28 million for the three and six months ended June 30,
2007,
respectively. Capitalized interest for the three and six months ended June
30,
2006 was $2 million for each period.
Segments—We
operate in one business segment, which consists of floaters, jackups and other
rigs used in support of offshore drilling activities and offshore support
services. Our fleet operates in a single, global market for the provision of
contract drilling services. The location of our rigs and the allocation of
resources to build or upgrade rigs are determined by the activities and needs
of
our customers.
Share-Based
Compensation—On January 1, 2006, we adopted the Financial Accounting
Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”)
No. 123 (revised 2004), Share-Based Payment (“SFAS 123R”)
using the modified prospective method. Share-based compensation expense for
the
three and six months ended June 30, 2007 was $9 million ($7 million, or
$0.02 per diluted share, net of tax) and $19 million ($16 million, or $0.05
per
diluted share, net of tax), respectively. Share-based compensation expense
for the three and six months ended June 30, 2006 was $5 million or $0.01
per diluted share, which had an immaterial tax effect, and $8 million ($7
million, or $0.02 per diluted share, net of tax), respectively. In addition
to
the compensation cost recognition requirements, SFAS 123R requires tax deduction
benefits in excess of recognized compensation cost to be reported as a financing
cash flow. We reported financing cash flows related to tax deduction benefits
of
$5 million and $9 million for the three and six months ended June 30, 2007,
with
no comparable cash flows for the three and six months ended June 30,
2006.
Income
Taxes—In June 2006, the
FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes—an interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48
clarifies the accounting for income taxes recognized in an entity’s financial
statements in accordance with SFAS No. 109, Accounting for Income
Taxes. It prescribes a minimum recognition threshold and measurement
attribute for recognizing and measuring the benefit of tax positions taken
or
expected to be taken in a tax return. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition. FIN 48 is effective for fiscal years
beginning after December 15, 2006. We adopted this interpretation on January
1,
2007. The cumulative effect adjustment upon adoption of FIN 48 resulted in
a
$146 million increase in our other long-term liabilities and a corresponding
increase in the beginning balance of our accumulated deficit, primarily related
to the ongoing dispute with Norway regarding certain restructuring transactions
undertaken in 2001 and 2002. See Note 6―Income
Taxes.
In
June 2006, the FASB reached consensus on Emerging Issues Task Force
(“EITF”) Issue No. 06-3, “How Taxes Collected From Customers and Remitted to
Governmental Authorities Should Be Presented in the Income Statement” (“EITF
06-3”). The scope of EITF 06-3 includes any tax assessed by a governmental
authority that is directly imposed on a revenue-producing transaction between
a
seller and a customer, including sales, use, value added and excise taxes.
EITF
06-3 provides that a company may adopt a policy of presenting taxes in the
consolidated statement of operations on either a gross or net basis. If such
taxes are significant, and are presented on a gross basis, the amounts of those
taxes should be disclosed. The consensus on EITF 06-3 is effective for the
interim and annual reporting periods beginning after December 15, 2006. We
adopted EITF 06-3 on January 1, 2007. We record taxes collected from our
customers and remitted to governmental authorities on a net basis in our
consolidated statement of operations and our adoption had no effect on our
consolidated balance sheet, statement of operations or cash flows.
New
Accounting
Pronouncements—In September 2006, the FASB issued SFAS No. 157, Fair
Value Measurements (“SFAS 157”). SFAS 157 defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles,
and expands disclosures about fair value measurements. SFAS 157 applies under
other accounting pronouncements that require or permit fair value measurements
because the FASB previously concluded in those accounting pronouncements that
fair value is the relevant measurement attribute. Accordingly, SFAS 157 does
not
require any new fair value measurements. SFAS 157 is effective for fiscal years
beginning after November 15, 2007. We will be required to adopt SFAS 157 in
the
first quarter of fiscal year 2008. Management is currently evaluating the
requirements of SFAS 157 and has not yet determined the impact on the
consolidated financial statements.
TRANSOCEAN
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED STATEMENTS (Continued)
(Unaudited)
In
February 2007, the FASB issued SFAS
No. 159, The Fair Value Option for Financial Assets and Financial
Liabilities (“SFAS 159”). SFAS 159 provides companies with an option to
report selected financial assets and liabilities at fair value. It also
establishes presentation and disclosure requirements designed to facilitate
comparisons between companies that choose different measurement attributes
for
similar types of assets and liabilities. SFAS 159 is effective as of the
beginning of the first fiscal year beginning after November 15, 2007. We will
be
required to adopt SFAS 159 in the first quarter of fiscal year 2008. Management
is currently evaluating the requirements of SFAS 159 and has not yet determined
the impact on the consolidated financial statements.
Reclassifications—Certain
reclassifications have been made to prior period amounts to conform with the
current period’s presentation. These reclassifications did not have a material
effect on our condensed consolidated financial statements.
Note
3―Drilling Fleet Expansion and
Upgrades
Capital
expenditures, including capitalized interest, totaled $755 million during the
six months ended June 30, 2007 and included $443 million spent on the
construction of four enhanced Enterprise-class drillships and $102 million
on
two Sedco 700-series rig upgrades. Construction work in progress,
recorded in property and equipment, was $1.5 billion and $1.0 billion at June
30, 2007 and December 31, 2006, respectively.
In
June
2007, we were awarded a drilling contract for a fourth enhanced Enterprise-class
drillship. We estimate total capital expenditure for the construction of this
rig to be approximately $640 million, excluding capitalized interest. We expect
the rig to be contributed to a joint venture in which we will retain a 65
percent ownership interest. This rig is expected to be operational in the third
quarter of 2010.
Capital
expenditures, including capitalized interest, totaled $276 million during the
six months ended June 30, 2006 and included $96 million spent on the
construction of an enhanced Enterprise-class drillship and $59 million on two
Sedco 700-series rig upgrades.
Note
4―Asset
Dispositions
During
the six months ended June 30,
2007, we completed the sale of the tender rig Charley Graves for net
proceeds of $33 million and recognized a gain on the sale of $23 million ($20
million, or $0.07 per diluted share, net of tax).
During
the six months ended June 30,
2006, we sold two of our Other Floaters (Peregrine III and
Transocean Explorer), a swamp barge (Searex XII) and a
platform rig. We received net proceeds from these sales of $209 million and
recognized gains on the sales of $175 million ($153 million, or $0.46 per
diluted share, net of tax).
Note
5―Repurchase
of Ordinary Shares
In
October 2005, our board of directors authorized the repurchase of up to $2.0
billion of our ordinary shares. The repurchase program does not have an
established expiration date and may be suspended or discontinued at any time.
Under the program, repurchased shares are constructively retired and returned
to
unissued status.
In
May 2006, our board of directors
authorized an increase in the overall amount of ordinary shares that may be
repurchased under our share repurchase program from $2.0 billion to $4.0
billion.
TRANSOCEAN
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED STATEMENTS (Continued)
(Unaudited)
A
summary of the aggregate ordinary
shares repurchased and retired for the three and six months ended June 30,
2007
and 2006 is as follows (in millions, except per share data):
|
|
Three
months ended June 30,
|
|
|
Six
months ended
June
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value
of shares
|
|
$ |
–
|
|
|
$ |
400
|
|
|
$ |
400
|
|
|
$ |
600
|
|
Number
of shares
|
|
|
–
|
|
|
|
5.2
|
|
|
|
5.2
|
|
|
|
7.8
|
|
Average
purchase price per share
|
|
$ |
–
|
|
|
$ |
76.23
|
|
|
$ |
77.39
|
|
|
$ |
76.66
|
|
Total
consideration paid to repurchase
the shares was recorded in shareholders’ equity as a reduction in ordinary
shares and additional paid-in capital. Such consideration was funded with
existing cash balances and borrowings under our Revolving Credit Facility.
At
June 30, 2007, we still had authority to repurchase $600 million of our ordinary
shares under our share repurchase program; however, any such repurchases would
require the consent of GlobalSantaFe Corporation pursuant to the Merger
Agreement (see Note 13—Subsequent Events–Merger with GlobalSantaFe
Corporation).
Note
6―Income
Taxes
We
are a
Cayman Islands company and we are not subject to income tax in the Cayman
Islands. We operate through our various subsidiaries in a number of countries
throughout the world. Income taxes have been provided based upon the tax laws
and rates in the countries in which operations are conducted and income is
earned. There is no expected relationship between the provision for or benefit
from income taxes and income or loss before income taxes because the countries
in which we operate have taxation regimes that vary not only with respect to
nominal rate, but also in terms of the availability of deductions, credits
and
other benefits. Variations also arise when income earned and taxed in a
particular country or countries fluctuates from year to year.
The
estimated annual effective tax rate for the six months ended June 30, 2007
and
June 30, 2006 was based on estimated annual income before income taxes for
each
period after adjusting for certain items such as net gains on rig sales and
discrete items. The company will continue to recognize interest and penalties
related to unrecognized tax benefits as income tax expense.
At
January 1, 2007, the total unrecognized tax benefit related to uncertain tax
positions was $303 million, of which $294 million would affect the effective
tax
rate if recognized. These amounts included $84 million and $83 million of
interest and penalties, respectively. During the quarter ended June 30, 2007,
the total unrecognized tax benefits increased by $16 million, including $7
million of interest and penalties. The total unrecognized tax benefit at June
30, 2007 was $328 million, of which $319 million would affect the effective
tax
rate if recognized.
Our
income tax returns are subject to review and examination in the many various
jurisdictions in which we operate. It is reasonably possible that the
unrecognized tax benefits related to uncertain tax positions will materially
change within the next 12 months although it is not possible to estimate the
impact of such a change.
Our
2004
and 2005 U.S. federal income tax returns are currently under examination by
the
U.S. Internal Revenue Service (“IRS”). Our 2006 income tax return and certain
net operating losses generated in 2000 through 2003 are subject to examination.
We believe our returns are materially correct as filed, and we intend to
vigorously defend against any proposed changes. While we cannot predict or
provide assurance as to the final outcome, we do not expect the ultimate
liability resulting from any examination to have a material adverse effect
on
our consolidated financial position, results of operations or cash
flows.
TRANSOCEAN
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED STATEMENTS (Continued)
(Unaudited)
Norwegian
civil tax and criminal authorities are investigating certain transactions
undertaken in 2001 and 2002. Further, in the second quarter of 2007, the
Norwegian authorities expanded the investigation and are seeking certain records
located in the United Kingdom related to a separate Norway subsidiary that
was
previously subject to tax in Norway. In June 2006, we filed a formal protest
with respect to a notification from the Norwegian tax authorities regarding
their intent to propose adjustments to taxable income related to the 2001 and
2002 restructuring. These proposed assessments would result in an increase
in
tax of approximately $265 million, plus interest, and the authorities further
indicated they intend to impose penalties, which could range from 15 to 60
percent of the assessments. We believe the Norwegian authorities are
contemplating a separate tax assessment of approximately $110 million related
to
the 2001 dividend, plus interest and a penalty, which could range from 15 to
60
percent of the assessment. The Norwegian tax authorities initiated inquiries
in
September 2004 and in March 2005 took action to obtain additional information
regarding these transactions pursuant to a Norwegian court order. We have
continued to respond to information requests from the authorities. We plan
to
vigorously contest any assertions by the Norwegian authorities in connection
with the restructuring transactions or dividend and any increase in the scope
of
the current investigation. On January 1, 2007, as part of our implementation
of
FIN 48, we recorded a long-term liability of $142 million related to these
issues. Since January 1, 2007, the long-term liability has increased
to $152 million due to the accrual of interest and exchange rate fluctuations.
While we cannot predict or provide assurance as to the final outcome of these
proceedings, we do not expect the ultimate resolution of these matters to have
a
material adverse effect on our consolidated financial position or results of
operations although it may have a material adverse effect on our consolidated
cash flows.
Our
tax
returns in the other major jurisdictions in which we operate are generally
subject to examination for periods ranging from three to six years. We have
agreed to extensions beyond the statute of limitations in two jurisdictions
for
up to 12 years. Tax authorities in certain jurisdictions are examining our
tax
returns and in some cases have issued assessments. We are defending our tax
positions in those jurisdictions. While we cannot predict or provide assurance
as to the final outcome of these proceedings, we do not expect the ultimate
liability to have a material adverse effect on our consolidated financial
position, results of operations or cash flows.
Note
7―Debt
Debt,
net
of unamortized discounts, premiums and fair value adjustments, is comprised
of
the following (in millions):
|
|
June
30,
2007
|
|
|
December
31,
2006
|
|
|
|
|
|
|
|
|
Term
Credit Facility due August 2008
|
|
$ |
470
|
|
|
$ |
700
|
|
Floating
Rate Notes due September 2008
|
|
|
1,000
|
|
|
|
1,000
|
|
6.625%
Notes due April 2011
|
|
|
179
|
|
|
|
180
|
|
7.375%
Senior Notes due April 2018
|
|
|
247
|
|
|
|
247
|
|
Zero
Coupon Convertible Debentures due May 2020 (put options
exercisable May 2008 and May 2013) (a)
|
|
|
18
|
|
|
|
18
|
|
1.5%
Convertible Debentures due May 2021 (put options exercisable May
2011 and
May 2016)
|
|
|
400
|
|
|
|
400
|
|
8%
Debentures due April 2027
|
|
|
57
|
|
|
|
57
|
|
7.45%
Notes due April 2027 (b)
|
|
|
95
|
|
|
|
95
|
|
7.5%
Notes due April 2031
|
|
|
598
|
|
|
|
598
|
|
Total
debt
|
|
|
3,064
|
|
|
|
3,295
|
|
Less
debt due within one year (a)(b)
|
|
|
18
|
|
|
|
95
|
|
Total
long-term debt
|
|
$ |
3,046
|
|
|
$ |
3,200
|
|
TRANSOCEAN
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED STATEMENTS (Continued)
(Unaudited)
(a)
|
The
Zero Coupon Convertible Debentures are classified as debt due within
one
year at June 30, 2007 since the bondholders have the right to require
us
to repurchase the debentures in May
2008.
|
(b)
|
The
7.45% Notes were classified as debt due within one year at December
31,
2006 since holders had the option to require us to repurchase the
notes in
April 2007. As of March 31, 2007, we reclassified these notes as
long-term
debt, as no holders had notified us of their intent to exercise their
option by the required notification date of March 15,
2007.
|
The
scheduled maturity of our debt assumes the bondholders exercise their options
to
require us to repurchase the Zero Coupon Convertible Debentures and 1.5%
Convertible Debentures in May 2008 and May 2011, respectively. All amounts
are
stated at face value, except for the Zero Coupon Convertible Debentures, which
are included at the price we would be required to pay should the bondholders
exercise their right to require us to repurchase the debentures in May 2008.
The
scheduled maturities are as follows (in millions):
Twelve
months ending June 30,
|
|
|
|
2008
|
|
$ |
19
|
|
2009
|
|
|
1,470
|
|
2010
|
|
|
–
|
|
2011
|
|
|
565
|
|
2012
|
|
|
–
|
|
Thereafter
|
|
|
1,004
|
|
Total
|
|
$ |
3,058
|
|
Revolving
Credit Facility—In July 2005, we entered into a $500 million, five-year
revolving credit agreement (“Revolving Credit Facility”). In May 2006, we
increased the credit limit on the facility from $500 million to $1.0 billion
and
extended the maturity date by one year from July 2010 to July 2011. In June
2007, we extended the maturity on the facility by one year from July 2011 to
July 2012 and clarified the method pursuant to which we may insure our fleet
(see Note 9―Contingencies–Retained
Risk). The Revolving Credit Facility bears interest, at our option, at a base
rate or at the London Interbank Offered Rate (“LIBOR”) plus a margin that can
vary from 0.19 percent to 0.58 percent depending on our non-credit enhanced
senior unsecured public debt rating (“Debt Rating”). A facility fee, varying
from 0.06 percent to 0.17 percent depending on our Debt Rating, is incurred
on
the daily amount of the underlying commitment, whether used or unused,
throughout the term of the facility. A utilization fee, varying from 0.05
percent to 0.10 percent depending on our Debt Rating, is payable if amounts
outstanding under the Revolving Credit Facility are greater than or equal to
50
percent of the total underlying commitment. At June 30, 2007, the applicable
margin, facility fee and utilization fee were 0.225 percent, 0.075 percent
and
0.100 percent, respectively. The Revolving Credit Facility requires compliance
with various covenants and provisions customary for agreements of this nature,
including a debt to total tangible capitalization ratio, as defined by the
Revolving Credit Facility, of not greater than 60 percent. At June 30, 2007,
we
had no borrowings outstanding and $1 billion remained available under this
facility.
Debt
Conversion—Holders of our Zero Coupon Convertible Debentures have the
option to require us to convert their debentures into our ordinary shares at
any
time prior to maturity. In May 2007, we issued 1,223 ordinary shares in exchange
for $150,000 aggregate principal amount of debentures that were converted at
a
conversion rate of 8.1566 ordinary shares per $1,000 debenture.
TRANSOCEAN
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED STATEMENTS (Continued)
(Unaudited)
Note
8―Earnings
Per Share
The
reconciliation of the numerator and
denominator used for the computation of basic and diluted earnings per share
is
as follows (in millions, except per share data):
|
|
Three
months ended June 30,
|
|
|
Six
months ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator
for basic earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income for basic earnings per share
|
|
$ |
549
|
|
|
$ |
249
|
|
|
$ |
1,102
|
|
|
$ |
455
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator
for diluted earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
549
|
|
|
$ |
249
|
|
|
$ |
1,102
|
|
|
$ |
455
|
|
Add
back interest expense on the 1.5% convertible debentures
|
|
|
2
|
|
|
|
2
|
|
|
|
4
|
|
|
|
3
|
|
Net
income for diluted earnings per share
|
|
$ |
551
|
|
|
$ |
251
|
|
|
$ |
1,106
|
|
|
$ |
458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
for diluted earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
shares outstanding for basic earnings per share
|
|
|
288
|
|
|
|
324
|
|
|
|
289
|
|
|
|
325
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
stock options and unvested stock grants
|
|
|
3
|
|
|
|
4
|
|
|
|
3
|
|
|
|
4
|
|
Warrants
to purchase ordinary shares
|
|
|
3
|
|
|
|
3
|
|
|
|
3
|
|
|
|
3
|
|
1.5%
convertible debentures
|
|
|
6
|
|
|
|
5
|
|
|
|
6
|
|
|
|
5
|
|
Adjusted
weighted-average shares and assumed conversions for diluted earnings
per
share
|
|
|
300
|
|
|
|
336
|
|
|
|
301
|
|
|
|
337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
1.91
|
|
|
$ |
0.77
|
|
|
$ |
3.81
|
|
|
$ |
1.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
1.84
|
|
|
$ |
0.75
|
|
|
$ |
3.67
|
|
|
$ |
1.36
|
|
The
effect of the Zero Coupon Convertible Debentures on the calculation of Net
income for diluted earnings per share and Adjusted weighted-average shares
and
assumed conversions for diluted earnings per share are not presented because
it
is not material for any of the periods presented.
Note
9―Contingencies
Legal
Proceedings—Several of our subsidiaries have been named, along with
numerous unaffiliated defendants, in several complaints that have been filed
in
the Circuit Courts of the State of Mississippi involving over 700 persons that
allege personal injury arising out of asbestos exposure in the course of their
employment by some of these defendants between 1965 and 1986. The complaints
also name as defendants certain of TODCO's subsidiaries to whom we may owe
indemnity. Further, the complaints name other unaffiliated defendant companies,
including companies that allegedly manufactured drilling related products
containing asbestos. The complaints allege that the defendant drilling
contractors used those asbestos-containing products in offshore drilling
operations, land based drilling operations and in drilling structures, drilling
rigs, vessels and other equipment and assert claims based on, among other
things, negligence and strict liability, and claims authorized under the Jones
Act. The plaintiffs generally seek awards of unspecified compensatory and
punitive damages. We have not yet been able to conduct extensive discovery
nor
determine the number of plaintiffs that were employed by our subsidiaries or
otherwise have any connection with our drilling operations. We intend to defend
ourselves vigorously and, based on the limited information available to us
at
this time, we do not expect the liability, if any, resulting from these matters
to have a material adverse effect on our consolidated financial position,
results of operations or cash flows.
TRANSOCEAN
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED STATEMENTS (Continued)
(Unaudited)
In
1990
and 1991, two of our subsidiaries were served with various assessments
collectively valued at approximately $12 million from the municipality of Rio
de
Janeiro, Brazil to collect a municipal tax on services. We believe that neither
subsidiary is liable for the taxes and have contested the assessments in the
Brazilian administrative and court systems. We have received several adverse
rulings by various courts with respect to a June 1991 assessment, which is
valued at approximately $11 million. We initially tried to challenge the
assessment by means of a writ of mandamus. However, we did not receive
an injunction in the above-mentioned writ and the government is attempting
to
enforce the judgment on this assessment (the amount claimed is approximately
$28
million, which exceeds the amount we believe is at issue). In response, we
have presented a specific motion to stay the execution based on a $28
million guarantee in the form of oil barrels provided on our
behalf by the Brazilian government-controlled oil company, Petrobras. We
received a favorable ruling in connection with a disputed August 1990
assessment, and the government has lost what is expected to be its final appeal
with respect to that ruling. We also are awaiting a ruling from the Taxpayer's
Council in connection with an October 1990 assessment. If our defenses are
ultimately unsuccessful, we believe that Petrobras has a contractual obligation
to reimburse us for municipal tax payments. We do not expect the liability,
if
any, resulting from these assessments to have a material adverse effect on
our
consolidated financial position, results of operations or cash
flows.
The
Indian Customs Department, Mumbai alleged in July 1999 that the initial entry
into India in 1988 and other subsequent movements of the Trident II
jackup rig operated by the subsidiary constituted imports and exports for which
proper customs procedures were not followed and sought payment of customs duties
of approximately $31 million based on an alleged 1998 rig value of $49 million,
plus interest and penalties, and confiscation of the rig. In January 2000,
the
Customs Department found that we had imported the rig improperly and
intentionally concealed the import from the authorities, and directed us to
pay
certain other fees and penalties in addition to the amount of customs duties
owed. We appealed the Customs Department ruling and an appellate tribunal
granted our request that the confiscation be stayed pending the appeal. The
appellate tribunal also found that the rig was imported without proper
documentation or payment of duties and sustained our position regarding the
value of the rig at the time of import as $13 million and ruled that subsequent
movements of the rig were not liable to import documentation or duties, thus
limiting our exposure as to custom duties to approximately $6 million. The
Mumbai High Court’s decision in 2006, together with the Supreme Court of India’s
decision in February 2007 to dismiss the leave to appeal petition filed by
the
Customs Department, have effectively affirmed the appellate ruling. We and
our
customer agreed to pursue and obtained the issuance of the required
documentation from the Ministry of Petroleum that, if accepted by the Customs
Department, would reduce the duty to nil. The Customs Department did not accept
the documentation or agree to refund the duties already paid. We are pursuing
our remedies against the Customs Department and our customer. We do not expect
the liability, if any, resulting from this matter to have a material adverse
effect on our consolidated financial position, results of operations or cash
flows.
One
of
our subsidiaries is involved in an action with respect to a customs matter
relating to the Sedco 710 semisubmersible drilling rig. Prior to our
merger with Sedco Forex, this drilling rig, which was working for Petrobras
in
Brazil at the time, had been admitted into the country on a temporary basis
under authority granted to a Schlumberger entity. Prior to the Sedco Forex
merger, the drilling contract with Petrobras was transferred from the
Schlumberger entity to an entity that would become one of our subsidiaries,
but
Schlumberger did not transfer the temporary import permit to any of our
subsidiaries. In early 2000, the drilling contract was extended for another
year. On January 10, 2000, the temporary import permit granted to the
Schlumberger entity expired, and renewal filings were not made until later
that
January. In April 2000, the Brazilian customs authorities cancelled the
temporary import permit. The Schlumberger entity filed an action in the
Brazilian federal court of Campos for the purpose of extending the temporary
admission. Other proceedings were also initiated in order to secure the transfer
of the temporary admission to our subsidiary. Ultimately, the court permitted
the transfer of the temporary admission from Schlumberger to our subsidiary
but
did not rule on whether the temporary admission could be extended without the
payment of a financial penalty. During the first quarter of 2004, the Brazilian
customs authorities issued an assessment totaling approximately $117 million
at
that time against our subsidiary. The first level Brazilian court ruled in
April
2007 that the temporary admission granted to our subsidiary had expired which
allowed the Brazilian customs authorities to execute on their assessment.
Following this ruling, the Brazilian customs authorities issued a revised
assessment against our subsidiary. As of July 30, 2007, the U.S. dollar
equivalent of this assessment was approximately $185 million in aggregate,
including interest, which we contest. We are not certain as to the basis for
the
increase in the amount of the assessment. We intend to continue to aggressively
contest this matter and we have appealed the first level Brazilian court’s
ruling to a higher level court in Brazil. There may be further judicial or
administrative proceedings that result from this matter. While the court has
granted us the right to continue our appeal without the posting of a bond,
it is
possible that we may be required to post a bond for up to the full amount of
the
assessment in connection with these proceedings. We have also put Schlumberger
on notice that we consider any assessment to be solely the responsibility of
Schlumberger, not our subsidiary. Nevertheless, we expect that the Brazilian
customs authorities will continue to seek to recover the assessment solely
from
our subsidiary, not Schlumberger. Schlumberger has denied any responsibility
for
this matter, but remains a party to the proceedings. We do not expect the
liability, if any, resulting from this matter to have a material adverse effect
on our consolidated financial position, results of operations or cash
flows.
TRANSOCEAN
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED STATEMENTS (Continued)
(Unaudited)
In
the third quarter of 2006, we
received tax assessments of approximately $114 million from the state tax
authorities of Rio de Janeiro in Brazil against one of our Brazilian
subsidiaries for customs taxes on equipment imported into the state in
connection with our operations. The assessments resulted from a preliminary
finding by these authorities that our subsidiary’s record keeping practices were
deficient. We continue to review documents related to the assessments, and
while
our review is not complete, we currently believe that the substantial majority
of these assessments are without merit. We filed an initial response with the
Rio de Janeiro tax authorities on September 9, 2006 refuting these
additional tax assessments. While we cannot predict or provide assurance as
to
the final outcome of these proceedings, we do not expect it to have a material
adverse effect on our consolidated financial position, results of operations
or
cash flows.
We
are
involved in a number of other lawsuits, all of which have arisen in the ordinary
course of our business. We do not expect the liability, if any, resulting from
these matters to have a material adverse effect on our consolidated financial
position, results of operations or cash flows. We are also involved in various
tax matters
(see Note
6―Income Taxes).
Retained
Risk—We have renewed our insurance coverages for the 12 month period
beginning May 1, 2007. Under the new program, we generally maintain a $125
million per occurrence deductible on our hull and machinery, which is subject
to
an aggregate deductible of $250 million. In addition, we maintain a $10 million
per occurrence deductible on crew personal injury liability and $5 million
per
occurrence deductible on third party property claims, which together are subject
to an aggregate deductible of $50 million that is applied to any occurrence
in
excess of the per occurrence deductible until the aggregate deductible is
exhausted.
At
present, the insured value of our drilling rig fleet is approximately $22
billion in aggregate. We also carry $950 million of third-party liability
coverage exclusive of the personal injury liability deductibles, third -party
property liability deductibles and retention amounts described above. We retain
the risk through self-insurance for any losses in excess of the $950 million
limit. We do not generally have commercial market insurance coverage for
physical damage losses to the Transocean fleet due to hurricanes in the U.S.
Gulf of Mexico and war perils worldwide. We do not carry insurance for loss
of revenue. In the opinion of management, adequate accruals have been made
based
on known and estimated losses related to such exposures.
Letters
of Credit and Surety Bonds—We had letters of credit outstanding totaling
$410 million and $405 million at June 30, 2007 and December 31, 2006,
respectively. These letters of credit guarantee various contract bidding and
performance activities under various uncommitted lines provided by several
banks.
TRANSOCEAN
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED STATEMENTS (Continued)
(Unaudited)
As
is
customary in the contract drilling business, we also have various surety bonds
in place that secure customs obligations relating to the importation of our
rigs
and certain performance and other obligations. Surety bonds outstanding totaled
$8 million and $6 million at June 30, 2007 and December 31, 2006,
respectively.
Note
10―Stock
Warrants
At
June 30, 2007, there were 203,900
warrants outstanding to purchase 3,568,250 ordinary shares at an exercise price
of $19.00 per share. The warrants expire on May 1, 2009. On March 1, 2006,
we
issued 333,039 ordinary shares related to a cashless exercise of 25,100
warrants. See Note 13—Subsequent Events–Stock Warrants.
Note
11―Retirement
Plans and Other Postemployment Benefits
Defined
Benefit Pension Plans—We have several defined benefit pension plans, both
funded and unfunded, covering substantially all of our U.S. employees. We also
have various defined benefit plans in Norway, Nigeria, Egypt and Indonesia
that
cover our employees and certain frozen plans acquired in connection with the
R&B Falcon merger that cover certain current and former employees. Net
periodic benefit cost for these defined benefit pension plans includes the
following components (in millions):
|
|
Three
months ended
June
30,
|
|
|
Six months
ended
June
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Components
of net periodic benefit cost (a)
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
6
|
|
|
$ |
5
|
|
|
$ |
11
|
|
|
$ |
10
|
|
Interest
cost
|
|
|
5
|
|
|
|
5
|
|
|
|
10
|
|
|
|
10
|
|
Expected
return on plan assets
|
|
|
(6 |
) |
|
|
(5 |
) |
|
|
(11 |
) |
|
|
(10 |
) |
Amortization
of prior period service cost
|
|
|
1
|
|
|
|
1
|
|
|
|
1
|
|
|
|
–
|
|
Recognized
net actuarial losses
|
|
|
1
|
|
|
|
1
|
|
|
|
2
|
|
|
|
3
|
|
Net
periodic benefit cost
|
|
$ |
7
|
|
|
$ |
7
|
|
|
$ |
13
|
|
|
$ |
13
|
|
______________
|
(a)
|
Amounts
are before income tax effect.
|
We
contributed approximately $5 million to the defined benefit pension plans during
the six months ended June 30, 2007. We expect to make an additional contribution
of approximately $18 million to our defined benefit pension plans in the
remaining six months of 2007, which we expect will be funded from cash flow
from
operations.
Postretirement
Benefits Other Than
Pensions (“OPEB”)—We have several unfunded contributory and noncontributory
OPEB plans covering substantially all of our U.S. employees. Net periodic
benefit costs for these other postretirement plans and their components,
including service cost, interest cost, amortization of prior service cost and
recognized net actuarial losses, were less than $1 million for each of the
three
and six months ended June 30, 2007 and 2006.
We
contributed approximately $1 million to the other postretirement benefit plans
during the six months ended June 30, 2007. We expect to make an additional
contribution of approximately $1 million to the other postretirement benefit
plans in the remaining six months of 2007, which we expect will be funded from
cash flow from operations.
Note
12—Supplementary Cash Flow Information
Non-cash
investing activities for the six months ended June 30, 2007 and 2006 included
$70 million and $44 million, respectively, related to accruals of capital
expenditures. The accruals have been reflected in the consolidated balance
sheet
as an increase in property and equipment, net and accounts payable.
TRANSOCEAN
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED STATEMENTS (Continued)
(Unaudited)
Cash
payments for interest were $95 million and $47 million for the six months ended
June 30, 2007 and 2006, respectively. Cash payments for income taxes, net,
were
$118 million, and $50 million for the six months ended June 30, 2007 and 2006,
respectively.
Note
13―Subsequent
Events
TODCO
Tax Sharing Agreement (“TSA”)—On July 11, 2007, Hercules Offshore, Inc.
(“Hercules”) completed the acquisition of TODCO (the “TODCO
Acquisition”). The TSA requires Hercules to make an accelerated
change of control payment to our wholly owned subsidiary, Transocean Holdings
Inc. (“Transocean Holdings”), within 30 days of the date of the acquisition as a
result of the deemed utilization of TODCO’s pre-IPO tax benefits. The amount of
the accelerated payment owing to Transocean Holdings is calculated by
multiplying 80 percent by the then remaining pre-IPO tax benefits at the
effective date of the TODCO Acquisition. The accelerated payment is estimated
to
be approximately $129 million, or 80 percent of the estimated remaining unused
pre-IPO tax benefits as of July 11, 2007. Additionally, the TSA requires
Hercules to make additional payments to Transocean Holdings based on a portion
of the tax benefit from the exercise of certain compensatory stock options
to
acquire our ordinary shares by TODCO’s current and former employees and
directors, when and if those options are exercised. We estimate that the amount
of payments to Transocean Holdings related to compensatory options that remain
outstanding at June 30, 2007, assuming a Transocean share price of $105.98
per
share at the time of exercise of the compensatory options (the actual price
of
our ordinary shares at the close of trading on June 29, 2007), will be
approximately $22 million. However, there can be no assurance as to the amount
and timing of any payment which Transocean Holdings may receive. In addition,
any future reduction of the pre-IPO tax benefits by the U.S. taxing authorities
upon examination of the TODCO tax returns may require Transocean Holdings to
reimburse TODCO for some of the amounts previously paid. We expect to recognize
approximately $290 million related to the TSA as other income in the third
quarter of 2007.
Merger
with GlobalSantaFe Corporation—On July 21, 2007, we entered into an
Agreement and Plan of Merger (the “Merger Agreement”) with GlobalSantaFe
Corporation (“GlobalSantaFe”) and Transocean Worldwide Inc., a direct wholly
owned subsidiary of Transocean (“Merger Sub”). Under the terms of the Merger
Agreement, GlobalSantaFe will merge with Merger Sub by way of a scheme of
arrangement qualifying as an amalgamation under Cayman Islands law, with Merger
Sub continuing as the surviving corporation (the “Merger”). Immediately prior to
the effective time of the Merger, each of our outstanding ordinary shares (the
“Transocean Ordinary Shares”) will be reclassified by way of a scheme of
arrangement under Cayman Islands law into (1) 0.6996 Transocean Ordinary Shares
and (2) $33.03 in cash (the “Reclassification” and, together with the Merger,
the “Transactions”). At the effective time of the Merger, each outstanding
ordinary share of GlobalSantaFe (the “GlobalSantaFe Ordinary Shares”) will be
exchanged for (1) 0.4757 Transocean Ordinary Shares (after giving effect to
the
Reclassification) and (2) $22.46 in cash.
The
Reclassification and the Merger have been approved by our board of directors
and
the Merger has been approved by GlobalSantaFe’s board of directors. Consummation
of the Transactions is subject to various conditions, including, among others,
(1) approval by the shareholders of GlobalSantaFe of the Merger and approval
by
our shareholders of the Reclassification, the issuance of our ordinary shares
in
the Merger and certain amendments to our charter documents, in each case
pursuant to the requirements specified in the Agreement, (2) the receipt of
required regulatory clearances, including the expiration of the
Hart-Scott-Rodino waiting period and foreign competition clearances, (3) the
receipt of financing sufficient to enable us to deliver the cash consideration
in connection with the Transactions, (4) the accuracy of representations and
warranties as of the closing date, including the absence of any material adverse
effect with respect to our or GlobalSantaFe’s business, as applicable, and (5)
other customary closing conditions. The closing of the Transactions will occur
on the first business day immediately following the day on which all of the
conditions to the Transactions contained in the Merger Agreement have been
fulfilled or waived or on such other date as we and GlobalSantaFe may agree.
We
estimate that the closing of the Merger will take place on or before December
31, 2007.
TRANSOCEAN
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED STATEMENTS (Continued)
(Unaudited)
We
have
obtained financing commitments for the Transactions, the aggregate proceeds
of
which will be sufficient for us upon closing to pay the aggregate cash
consideration to the holders of currently outstanding ordinary shares of our
company and GlobalSantaFe in connection with the Transactions. On July 21,
2007,
we and GlobalSantaFe entered into a commitment letter (the “Commitment Letter”),
pursuant to which Goldman Sachs Credit Partners L.P. (“GSCP”), Lehman Commercial
Paper Inc., Lehman Brothers Commercial Bank, Lehman Brothers Inc. and Lehman
Brothers Holdings Inc. (collectively, the “Lehman Lenders”) have committed to
provide financing for the Transactions. The Commitment Letter provides for
a $15
billion senior unsecured bridge loan facility due one year after closing, $10
billion of which is to be provided by GSCP and $5 billion of which is to be
provided by the Lehman Lenders.
GSCP’s
and the Lehman Lenders’ commitments are subject to the satisfaction of certain
conditions, including the execution of satisfactory documentation and the
absence of a Material Adverse Effect (as defined in the Agreement).
We
currently intend to allow warrant holders to receive, upon exercise following
the Reclassification, 0.6996 of our ordinary shares and $33.03 (i.e., the same
consideration that a warrant holder would have owned immediately after the
Reclassification if the warrant holder had exercised its warrant immediately
before the Reclassification) for each ordinary share for which the warrants
were
previously exercisable, at an exercise price of $19 per ordinary share for
which
the warrants were exercisable prior to the Reclassification.
Prior
to
consummation of the Transactions, we currently expect to call for redemption
our
Zero Coupon Convertible Debentures due May 2020 and our 1.5% Convertible
Debentures due 2021.
Stock
Warrants—During July 2007, we issued 861,700 ordinary shares and we
received approximately $16 million in cash related to the exercise of 49,240
warrants.
Item
2. Management’s Discussion and Analysis of Financial Condition
and Results of Operations
Forward-Looking
Information
The
statements included in this
quarterly report regarding future financial performance and results of
operations and other statements that are not historical facts are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Forward-looking statements in this quarterly report include, but are not limited
to, statements about the following subjects:
· contract
commencements,
· contract
option
exercises,
· revenues,
· expenses,
· results
of
operations,
· commodity
prices,
· customer
drilling
programs,
· supply
and
demand,
· utilization
rates,
· dayrates,
· contract
backlog,
· the
timing and
closing of the GlobalSantaFe merger and related transactions,
· consideration
payable in connection with the GlobalSantaFe merger and related
transactions,
· effects
and results
of the GlobalSantaFe merger and related transactions,
· planned
shipyard
projects and rig mobilizations and their effects,
· newbuild
projects
and opportunities,
· the
upgrade projects
for the Sedco 700–series semisubmersible rigs,
·
other
major
upgrades,
·
the
potential purchase of
an ownership interest in a joint venture that will own the
fourth Enterprise-class drillship,
· the
potential
purchase of an interest in a joint venture with Pacific Drilling
and joint
venture terms,
· contract
awards,
· drillship
delivery
dates,
· expected
downtime,
· insurance
proceeds,
· cash
investments of
our wholly-owned captive insurance company,
· future
activity in
the deepwater, mid-water and the jackup market sectors,
· market
outlook for
our various geographical operating sectors,
· capacity
constraints
for ultra-deepwater rigs and other rig classes,
|
|
· effects
of new rigs
on the market,
· income
related to
and any payments to be received under the TODCO tax sharing
agreement,
· uses
of excess cash,
including ordinary share repurchases,
· the
timing and
funding of share repurchases,
· issuance
of new
debt,
· debt
reduction,
· planned
asset
sales,
· timing
of asset
sales,
· proceeds
from asset
sales,
· our
effective tax
rate,
· changes
in tax laws,
treaties and regulations,
· tax
assessments,
· our
other
expectations with regard to market outlook,
· operations
in
international markets,
· the
level of
expected capital expenditures,
· results
and effects
of legal proceedings and governmental audits and assessments,
· adequacy
of
insurance,
· liabilities
for tax
issues, including those associated with our activities in Brazil,
Norway
and the United States,
· liquidity,
· cash
flow from
operations,
· adequacy
of cash
flow for our obligations,
· effects
of
accounting changes,
· adoption
of
accounting policies,
· pension
plan and
other postretirement benefit plan contributions,
· benefit
payments,
and
· the
timing and cost
of completion of capital projects.
|
Forward-looking
statements in this
quarterly report are identifiable by use of the following words and other
similar expressions among others:
· “anticipates”
· “believes”
· “budgets”
· “could”
· “estimates”
· “expects”
· “forecasts”
· “intends”
|
|
· “may”
· “might”
· “plans”
· “predicts”
· “projects”
· “scheduled”
· “should”
|
Such
statements are subject to numerous risks, uncertainties and assumptions,
including, but not limited to:
|
·
|
those
described under “Item 1A. Risk Factors” included herein and in our Annual
Report on Form 10–K for the year ended December 31, 2006 and our Quarterly
Report on Form 10-Q for the quarterly period ended March 31,
2007,
|
|
·
|
the
adequacy of sources of liquidity,
|
|
·
|
costs,
delays and other difficulties related to the proposed merger and
related
transactions with GlobalSantaFe (including the satisfaction of
closing
conditions),
|
|
·
|
our
inability to obtain regulatory clearances and shareholder approval
and
satisfy closing conditions for the GlobalSantaFe merger and related
transactions,
|
|
·
|
our
inability to obtain contracts for the drillships we are marketing
under
our marketing and purchase option agreement with Pacific Drilling,
negotiate definitive agreements and satisfy closing
conditions,
|
|
·
|
the
effect and results of litigation, tax audits and contingencies,
and
|
|
·
|
other
factors discussed in this quarterly report and in our other filings
with
the SEC, which are available free of charge on the SEC’s website at
www.sec.gov.
|
Should
one or more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
indicated.
All
subsequent written and oral
forward-looking statements attributable to us or to persons acting on our behalf
are expressly qualified in their entirety by reference to these risks and
uncertainties. You should not place undue reliance on forward-looking
statements. Each forward-looking statement speaks only as of the date of the
particular statement, and we undertake no obligation to publicly update or
revise any forward-looking statements.
The
following information should be read in conjunction with the unaudited condensed
consolidated financial statements included under “Item 1. Financial Statements”
herein and the audited consolidated financial statements and the notes thereto
and “Item 7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations” included in our Annual Report on Form 10-K for the year
ended December 31, 2006.
Overview
Transocean
Inc. (together with its subsidiaries and predecessors, unless the context
requires otherwise, “Transocean,” “we,” “us” or “our”) is a leading
international provider of offshore contract drilling services for oil and gas
wells. As of July 31, 2007, we owned, had partial ownership interests in or
operated 82 mobile offshore drilling units. As of this date, our fleet consisted
of 33 High-Specification semisubmersibles and drillships (“High-Specification
Floaters”), 20 Other Floaters, 25 Jackups and four Other Rigs. We also have four
High-Specification Floaters under construction.
Our
mobile offshore drilling fleet is considered one of the most modern and
versatile fleets in the world. Our primary business is to contract these
drilling rigs, related equipment and work crews primarily on a dayrate basis
to
drill oil and gas wells. We specialize in technically demanding segments of
the
offshore drilling business with a particular focus on deepwater and harsh
environment drilling services. We also provide additional services, including
integrated services.
Key
measures of our total company results of operations and financial condition
are
as follows (in millions, except average daily revenue and
percentages):
|
|
Three
months ended
June
30,
|
|
|
|
|
|
Six months
ended
June
30,
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
daily revenue (a)(b)
|
|
$ |
202,400
|
|
|
$ |
129,000
|
|
|
$ |
73,400
|
|
|
$ |
200,200
|
|
|
$ |
124,300
|
|
|
$ |
75,900
|
|
Utilization
(b)(c)
|
|
|
91 |
% |
|
|
81 |
% |
|
N/A
|
|
|
|
90 |
% |
|
|
81 |
% |
|
N/A
|
|
Statement
of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
revenues
|
|
$ |
1,434
|
|
|
$ |
854
|
|
|
$ |
580
|
|
|
$ |
2,762
|
|
|
$ |
1,671
|
|
|
$ |
1,091
|
|
Operating
and maintenance expense
|
|
|
627
|
|
|
|
549
|
|
|
|
78
|
|
|
|
1,195
|
|
|
|
1,024
|
|
|
|
171
|
|
Operating
income
|
|
|
676
|
|
|
|
289
|
|
|
|
387
|
|
|
|
1,333
|
|
|
|
573
|
|
|
|
760
|
|
Net
income
|
|
|
549
|
|
|
|
249
|
|
|
|
300
|
|
|
|
1,102
|
|
|
|
455
|
|
|
|
647
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June
30,
2007
|
|
|
December
31,
2006
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
Sheet (at end of period)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
445
|
|
|
$ |
467
|
|
|
$ |
(22 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
|
12,149
|
|
|
|
11,476
|
|
|
|
673
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
debt
|
|
|
3,064
|
|
|
|
3,295
|
|
|
|
(231 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
_____________________
“N/A”
means not applicable
|
(a)
|
Average
daily revenue is defined as contract drilling revenue earned per
revenue
earning day. A revenue earning day is defined as a day for which
a rig
earns dayrate after commencement of
operations.
|
|
(b)
|
Excludes
a drillship engaged in scientific geological coring activities, the
Joides Resolution, that is owned by a joint venture in which we
have a 50 percent interest and is accounted for under the equity
method of
accounting.
|
|
(c)
|
Utilization
is the total actual number of revenue earning days as a percentage
of the
total number of calendar days in the
period.
|
We
continue to experience strong demand
for all of our asset classes, which has resulted in high utilization and
historically high dayrates. We are seeing leading dayrates at or near record
levels for most rig classes and customer interest for multi-year contracts.
Interest in High-Specification Floaters remains particularly
strong.
A
shortage of qualified personnel in
our industry is driving up compensation costs and suppliers are increasing
prices as their backlogs grow. These labor and vendor cost increases, while
meaningful, are not expected to be significant in comparison with our expected
increase in revenue for 2007 and beyond.
Our
revenues for the six months ended June 30, 2007 increased from the prior year
period primarily as a result of increased activity and higher dayrates. Our
operating and maintenance expenses for the same period increased primarily
as a
result of higher labor and rig maintenance costs in connection with such
increased activity (see “—Operating Results”). In addition, our financial
results for the six months ended June 30, 2007 included the recognition of
gains
on the sale of the tender rig Charley Graves (see “—Significant
Events”). Cash decreased during the six months ended June 30, 2007 primarily as
a result of repayments on our Term Credit Facility, increased capital
expenditures and repurchases of our ordinary shares, partially offset by
proceeds received from the sale of assets, exercises of stock options and cash
provided by operating activities.
We
operate in one business segment, which consists of floaters, jackups and other
rigs used in support of offshore drilling activities and offshore support
services on a worldwide basis. Our fleet operates in a single, global market
for
the provision of contract drilling services. The location of our rigs and the
allocation of resources to build or upgrade rigs are determined by the
activities and needs of our customers.
We
categorize our fleet as follows: (1) “High-Specification Floaters,” consisting
of our “Ultra-Deepwater Floaters,” “Other Deepwater Floaters” and “Other
High-Specification Floaters,” (2) “Other Floaters,” (3) “Jackups” and (4) “Other
Rigs.” Within our High-Specification Floaters category, we consider our
Ultra-Deepwater Floaters to be the semisubmersibles Deepwater Horizon,
Cajun Express, Deepwater Nautilus, Sedco
Energy and Sedco Express and the drillships Deepwater
Discovery, Deepwater Expedition, Deepwater Frontier,
Deepwater Millennium, Deepwater Pathfinder, Discoverer
Deep Seas, Discoverer Enterprise and Discoverer Spirit.
These rigs have high-pressure mud pumps and a water depth capability of 7,500
feet or greater. The Other Deepwater Floaters are generally those other
semisubmersible rigs and drillships that have a water depth capacity of at
least
4,500 feet. The Other High-Specification Floaters, built as fourth-generation
rigs in the mid to late 1980s, are capable of drilling in harsh environments
and
have greater displacement than previously constructed rigs resulting in larger
variable load capacity, more useable deck space and better motion
characteristics. The Other Floaters category is generally comprised of those
non-high-specification floaters with a water depth capacity of less than 4,500
feet. The Jackups category consists of our jackup fleet, and the Other Rigs
category consists of other rigs that are of a different type or use. These
categories reflect how we view, and how we believe our investors and the
industry generally view, our fleet.
Significant
Events
TODCO
Tax Sharing Agreement (“TSA”)—On July 11, 2007, Hercules Offshore, Inc.
(“Hercules”) completed the acquisition of TODCO. The TSA requires Hercules to
make an accelerated change of control payment to Transocean Holdings within
30
days of the date of the acquisition as a result of the deemed utilization of
TODCO’s pre-IPO tax benefits. We expect to recognize approximately $290 million
related to the accelerated payment and the previously mentioned 2006 and 2007
tax year payments as other income in the third quarter of 2007. See Notes to
Condensed Consolidated Statements Note 13—Subsequent Events–TODCO Tax Sharing
Agreement.
Merger
with GlobalSantaFe Corporation—On July 21, 2007, we entered into an
Agreement and Plan of Merger with GlobalSantaFe Corporation and Transocean
Worldwide Inc., our direct wholly owned subsidiary. Subject
to obtaining regulatory clearances, shareholder approval and satisfying or
waiving all other closing conditions, we
estimate that the closing of the merger will take place on or before December
31, 2007. See Notes to Condensed Consolidated Statements Note 13—Subsequent
Events–Merger with GlobalSantaFe Corporation.
Construction
Program—In June 2007, we were awarded a drilling contract requiring the
construction of a fourth enhanced Enterprise-class drillship. We expect the
rig
to be contributed to a joint venture in which we expect to retain a 65 percent
ownership interest. The newbuild is expected to commence operations during
the
third quarter of 2010. See “—Outlook–Drilling Market.”
Repurchase
of Ordinary Shares—During the six months ended June 30, 2007, we
repurchased and retired 5.2 million of our ordinary shares at a total cost
of
$400 million. See “—Liquidity and Capital Resources–Sources and Uses of
Liquidity.”
Outlook
Drilling
Market—Demand for offshore drilling capacity continues to be strong,
particularly for rigs capable of drilling in deepwater. Our High-Specification
Floater fleet is fully committed in 2007 and 2008. We have only one rig
remaining in the Other Floater fleet that has any available uncommitted time
in
2007 and six rigs remaining in this fleet that have any available
uncommitted time in 2008. We have two jackup rigs that have uncommitted time
in
2007, and 12 jackup rigs that have uncommitted time in 2008.
We
have been successful in building contract backlog within our High-Specification
Floater fleet with 27 of our 38 current and future High-Specification Floaters,
including the four newbuilds and the two Sedco 700-series deepwater
upgrades, contracted into or beyond 2010 as of July 31, 2007. These 27 units
include 10 of our 13 current Ultra-Deepwater Floaters and our four new rigs
currently under construction with long term contracts upon delivery. Our total
contract backlog of approximately $21 billion as of July 31, 2007 includes
approximately $16 billion of backlog represented by our High-Specification
Floaters. We believe the long-term outlook for deepwater capable rigs continues
to be strong.
In
April
2007, we entered into a marketing and purchase option agreement with Pacific
Drilling Limited that provides us with the exclusive marketing right for two
newbuild Ultra-Deepwater Floaters with expected delivery dates in 2009 as well
as an option to purchase a 50 percent interest in a joint venture company
through which we and Pacific Drilling would own the drillships. We anticipate
providing construction advisory services during the period of the option,
construction management services upon exercise of the option and operating
management services once the drillships begin operations. The
exclusive marketing right and purchase option granted to us by Pacific Drilling
will terminate on November 30, 2007 but can be extended by four
months. We may elect to exercise the option in our sole discretion
and anticipate exercising the option once we have secured a drilling contract
or
contracts of sufficient value. The purchase price for the 50 percent joint
venture interest is 50 percent of the documented costs at the time of exercise.
The closing of the transaction is conditioned on the satisfaction of customary
closing conditions and the negotiation of definitive joint venture documents.
The agreement with Pacific Drilling contemplates that, beginning three years
after the closing, Pacific Drilling will have the right to exchange its interest
in the joint venture for our ordinary shares or cash.
In
June 2007, we were awarded a
five-year drilling contract for a fourth enhanced Enterprise-class drillship.
The enhanced Enterprise-class drillship is expected to be owned and operated
by
a joint venture which is expected to be 65 percent owned by us and 35 percent
owned by an Angolan partner. We estimate total capital expenditure for the
construction of this rig to be approximately $640 million, excluding capitalized
interest. We currently expect this rig to begin operations in Angola during
the
third quarter of 2010, after construction in South Korea followed by sea trials,
mobilization to Angola and customer acceptance.
Future
demand for deepwater capable rigs should benefit from successful drilling
efforts in the lower tertiary trend of the U.S. Gulf of Mexico; the discovery
of
light oil and non-associated gas in the deepwaters of Brazil; continued
exploration success in the deepwaters offshore India; the recent discovery
in
the deepwaters of the South China Sea; and the exploration activity in the
Orphan Basin offshore Eastern Canada. Additionally, the continued exploration
success in the deepwaters of West Africa, the opening of additional deepwater
acreage in the U.S. Gulf of Mexico and the announced plans by Pemex for ultra
deepwater drilling in Mexican waters of the Gulf of Mexico support our
optimistic outlook for long term contracts and favorable dayrates in the
deepwater drilling market sector. As of July 31, 2007, none of our
High-Specification Floater fleet contract days are uncommitted for the remainder
of 2007 and 2008, while approximately 11 percent and 40 percent are uncommitted
in 2009 and 2010, respectively.
Our
Other Floater fleet, comprised of 20 semisubmersible rigs, is largely committed
to contracts that extend through 2007, and we continue to see customer demand
for both short term and multi-year contracts for these units. As of July 31,
2007, three percent of our Other Floater fleet contract days are
uncommitted for the remainder of 2007, while approximately 17
percent, 53 percent and 78 percent are uncommitted in 2008, 2009 and
2010, respectively.
We
expect
to remain at or near full utilization for our Jackup fleet in 2007. We believe
that Asia, India and the Middle East will remain the primary sources of
incremental demand for jackup rigs in the near to intermediate term, but there
are a large number of new jackup rigs under construction
without drilling contracts that are scheduled to be
delivered in 2008 and 2009. While our near term outlook for the jackup
market sector remains strong, we do not know what impact, if any, that
this increase in supply will have on this market sector in the intermediate
and long term. As of July 31, 2007, four percent of our Jackup fleet contract
days are uncommitted for the remainder of 2007, while approximately 28
percent, 54 percent and 84 percent are uncommitted in 2008, 2009 and
2010, respectively.
We
expect
our out-of-service time for the second half of 2007 to be in line with the
out-of-service time we incurred during the first half of 2007.
We
expect
each of the following items to contribute to a continued increase in our
revenues for the second half of 2007:
|
·
|
the
commencement of new contracts with higher dayrates, primarily on
our
High-Specification Floaters and Other
Floaters;
|
|
·
|
the
scheduled return to operations of the Sedco 702 in November 2007
after completion of its upgrade that began in April 2006;
and
|
|
·
|
the
completion of two full quarters of operations related to the five
integrated services contracts in India and the Jack Bates in
Australia.
|
We
expect
each of the following items to contribute to a continued increase in our
operating and maintenance costs for the second half of 2007:
|
·
|
normal
industry inflation with respect to our shipyard projects, maintenance
programs and labor costs;
|
|
·
|
an
anticipated increase in activity due to the completion of two full
quarters of operations by the Jack Bates in Australia and
the five integrated services contracts in India and the commencement
of
operations of the upgraded Sedco 702 in Nigeria;
and
|
|
·
|
our
investments in a number of recruitment, retention and personnel
development initiatives related to the manning of the crews of the
two
deepwater upgrades, the four newbuild rigs under construction and
our
efforts to mitigate expected personnel
attrition.
|
We
have seven existing contracts with fixed-priced or capped options for dayrates
that we believe are less than current market dayrates. We expect that four
of
these fixed-price contract options will be exercised by our customers in the
second half of 2007 and 2008, which would preclude us from taking full advantage
of any increased market rates for rigs subject to these contract options.
Well-in-progress or similar provisions in our existing contracts may delay
the
start of higher dayrates in subsequent contracts, and some of the delays have
been and could be significant.
Our
operations are geographically dispersed in oil and gas exploration and
development areas throughout the world. Rigs can be moved from one region to
another, but the cost of moving a rig and the availability of rig-moving vessels
may cause the supply and demand balance to vary somewhat between regions.
However, significant variations between regions do not tend to persist long-term
because of rig mobility. Consequently, we operate in a single, global offshore
drilling market.
Insurance
Matters—We
periodically evaluate our hull and machinery and third-party liability insurance
limits and self-insured retentions. Effective May 1, 2007, we renewed our hull
and machinery and third-party liability insurance coverages. Subject to large
self-insured retentions, we carry hull and machinery insurance covering physical
damage to the rigs for operational risks worldwide, and we carry liability
insurance covering damage to third parties. However, we do not generally have
commercial market insurance coverage for physical damage losses to the
Transocean fleet due to hurricanes in the U.S. Gulf of Mexico and war perils
worldwide. Additionally, we do not carry insurance for loss of revenue. In
the opinion of management, adequate accruals have been made based on known
and
estimated losses related to such exposures. See Notes to Condensed Consolidated
Statements Note 9―Contingencies–Retained
Risk.
Tax
Matters—We are a Cayman Islands company and we operate through our various
subsidiaries in a number of countries throughout the world. Consequently, we
are
subject to changes in tax laws, treaties and regulations in and between the
countries in which we operate. A material change in these tax laws, treaties
or
regulations in any of the countries in which we operate could result in a higher
or lower effective tax rate on our worldwide earnings.
Our
tax
returns in the major jurisdictions in which we operate worldwide are generally
subject to examination for periods ranging from three to six years. We have
agreed to extensions beyond the statute of limitations in two jurisdictions
for
up to 12 years. Tax authorities in certain jurisdictions are examining our
tax
returns and in some cases have issued assessments. We are defending our tax
positions in those jurisdictions. While we cannot predict or provide assurance
as to the final outcome of these proceedings, we do not expect the ultimate
liability to have a material adverse effect on our consolidated financial
position, results of operations or cash flows.
Norwegian
civil tax and criminal authorities are investigating certain transactions
undertaken in 2001 and 2002. Further, in the second quarter of 2007,
the Norwegian authorities expanded the investigation and are seeking certain
records located in the United Kingdom related to a separate Norway subsidiary
that was previously subject to tax in Norway. In June 2006, we
filed a formal protest with respect to a notification by the Norwegian tax
authorities of their intent to propose assessments that would result in an
increase in tax of approximately $265 million, plus interest related to the
2001
and 2002 restructuring transactions. The authorities also indicated
they intend to impose penalties which could range from 15 to 60 percent of
the
assessment. We believe the authorities are contemplating a separate
assessment of approximately $110 million related to a 2001 dividend payment,
plus interest and a penalty, which could range from 15 to 60 percent of the
assessment. The authorities initiated inquiries in September 2004 and in
March
2005 obtained additional information pursuant to a Norwegian court
order. We have continued to respond to information requests from the
authorities. We plan to vigorously contest any assertions by the Norwegian
authorities in connection with the restructuring transactions or dividend
and
any increase in the scope of the current investigation. On January 1,
2007, as part of our implementation of FIN 48, we recorded a long-term liability
of $142 million related to these issues. Since January 1, 2007, the
long-term liability has increased to $152 million due to the accrual of interest
and exchange rate fluctuations. While we cannot predict or provide
assurance as to the final outcome of these proceedings, we do not expect
the
ultimate resolution of these matters to have a material adverse effect on
our
consolidated financial position or results of operations although it may
have a
material adverse effect on our consolidated cash flows. See Notes to
Condensed Consolidated Statements Note 6—Income Taxes.
TODCO
Tax Sharing Agreement—Our wholly owned subsidiary, Transocean Holdings Inc.
(“Transocean Holdings”), entered into a tax sharing agreement with TODCO dated
February 4, 2004 in connection with the initial public offering of TODCO’s
ordinary shares on February 10, 2004 (the “TODCO IPO”). The tax sharing
agreement was amended and restated on November 27, 2006 (the “TSA”) as part of a
negotiated settlement of disputes between Transocean Holdings and TODCO over
the
terms of the original tax sharing agreement. The TSA governs Transocean
Holdings’ and TODCO’s respective rights, responsibilities and obligations with
respect to taxes and tax benefits, the filing of tax returns, the control of
tax
audits and other tax matters. Under the TSA, most U.S. federal, state, local
and
foreign income taxes and income tax benefits that accrued on or before the
closing of the TODCO IPO (including income taxes and income tax benefits
attributable to the TODCO business) are for the account of Transocean Holdings.
Accordingly, Transocean Holdings generally is liable for any income taxes that
accrued on or before the closing of the TODCO IPO, but TODCO generally must
pay
Transocean Holdings for the amount of any income tax benefits created on or
before the closing of the TODCO IPO (“pre-IPO tax benefits”) that it uses or
absorbs on a return with respect to a period after the closing of the TODCO
IPO. As of July 31, 2007, Transocean Holdings had received $118
million and $55 million in payments with respect to estimated pre-IPO tax
benefits (including tax benefits from the exercise of certain compensatory
stock
options to acquire Transocean ordinary shares by TODCO’s current and former
employees and directors) that TODCO estimated that it had used for the 2006
and
2007 tax years, respectively.
Pursuant
to the terms of the TSA, if there is a change of control of TODCO, as described
in the TSA, all remaining unused pre-IPO tax benefits are deemed to have been
utilized immediately before the change of control. As a result, an accelerated
payment for the value of such tax benefits, less a specified discount, would
become due from TODCO or the surviving company to Transocean Holdings 30 days
after the change of control. However, payments relating to the tax benefit
from
exercises by current and former TODCO employees and directors of options to
acquire Transocean shares are excluded from the change of control provisions
and
continue to be due under the terms of the TSA without regard to the change
of
control.
On
July
11, 2007, Hercules Offshore, Inc. (“Hercules”) completed the acquisition of
TODCO (the “TODCO Acquisition”). The TSA requires Hercules to make an
accelerated change of control payment to Transocean Holdings within 30 days
of
the date of the acquisition as a result of the deemed utilization of TODCO’s
pre-IPO tax benefits. We expect to recognize approximately $290 million related
to the accelerated payment and the previously mentioned 2006 and 2007 tax year
payments as other income in the third quarter of 2007. See Notes to Condensed
Consolidated Statements Note 13—Subsequent Events–TODCO Tax Sharing
Agreement.
Regulatory
Matters—On July 25, 2007, our legal representatives met with the U.S.
Department of Justice (the “DOJ”) in response to a notice we received requesting
such a meeting regarding our engagement of Panalpina, Inc. for freight
forwarding and other services in the United States and abroad. The DOJ has
informed us that it is conducting an investigation of alleged Foreign Corrupt
Practices Act violations by oil service companies who used Panalpina Inc.
and
other brokers in Nigeria and other parts of the world. We are developing an
investigative plan which will allow us to promptly review and produce relevant
and responsive information requested by the DOJ.
Performance
and Other Key Indicators
Contract
Backlog—The following table reflects our contract backlog as of June 30,
2007, March 31, 2007 and June 30, 2006 and reflects firm commitments only,
typically represented by signed drilling contracts. Backlog is indicative
of the full contractual dayrate. The amount of actual revenue earned and the
actual periods during which revenues are earned will be different than the
amounts and periods shown in the tables below due to various factors including
shipyard and maintenance projects, other downtime and other factors that result
in lower applicable dayrates than the full contractual operating dayrate, as
well as the ability of our customers to terminate contracts under certain
circumstances. Our contract backlog is calculated by multiplying the contracted
operating dayrate by the number of days remaining in the firm contract period,
excluding revenues for mobilization, demobilization, client recharges and
contract preparation and such amounts are not expected to be significant to
our
contract drilling revenues.
|
|
June
30,
2007
|
|
|
March
31,
2007
|
|
|
June
30,
2006
|
|
|
|
(In
millions)
|
|
Contract
Backlog
|
|
|
|
|
|
|
|
|
|
High-Specification
Floaters
|
|
$ |
15,296
|
|
|
$ |
14,911
|
|
|
$ |
13,516
|
|
Other
Floaters
|
|
|
4,000
|
|
|
|
4,335
|
|
|
|
2,607
|
|
Jackups
|
|
|
1,834
|
|
|
|
2,049
|
|
|
|
2,237
|
|
Other
Rigs
|
|
|
57
|
|
|
|
72
|
|
|
|
101
|
|
Total
|
|
$ |
21,187
|
|
|
$ |
21,367
|
|
|
$ |
18,461
|
|
Fleet
Utilization and Average Daily Revenue—The following table shows our average
daily revenue and utilization for each of the three months ended on June 30,
2007, March 31, 2007 and June 30, 2006. See “—Overview” for a definition of
average daily revenue, revenue earning day and utilization.
|
|
Three
months ended
|
|
|
|
June
30,
2007
|
|
|
March
31,
2007
|
|
|
June
30,
2006
|
|
Average
Daily Revenue
|
|
|
|
|
|
|
|
|
|
High-Specification
Floaters
|
|
|
|
|
|
|
|
|
|
Ultra-Deepwater
Floaters
|
|
$ |
288,900
|
|
|
$ |
301,400
|
|
|
$ |
216,500
|
|
Other
Deepwater Floaters
|
|
$ |
228,400
|
|
|
$ |
235,800
|
|
|
$ |
190,200
|
|
Other
High-Specification Floaters
|
|
$ |
286,900
|
|
|
$ |
238,800
|
|
|
$ |
174,700
|
|
Total
High-Specification Floaters
|
|
$ |
262,100
|
|
|
$ |
264,800
|
|
|
$ |
199,300
|
|
Other
Floaters
|
|
$ |
226,300
|
|
|
$ |
223,700
|
|
|
$ |
118,200
|
|
Jackups
|
|
$ |
117,900
|
|
|
$ |
104,600
|
|
|
$ |
73,000
|
|
Other
Rigs
|
|
$ |
57,200
|
|
|
$ |
50,300
|
|
|
$ |
47,500
|
|
Total
Drilling Fleet
|
|
$ |
202,400
|
|
|
$ |
198,000
|
|
|
$ |
129,000
|
|
|
|
|
|
Utilization
|
|
|
|
High-Specification
Floaters
|
|
|
|
Ultra-Deepwater
Floaters
|
|
|
98 |
% |
|
|
97 |
% |
|
|
89 |
% |
Other
Deepwater Floaters
|
|
|
82 |
% |
|
|
77 |
% |
|
|
70 |
% |
Other
High-Specification Floaters
|
|
|
99 |
% |
|
|
99 |
% |
|
|
98 |
% |
Total
High-Specification Floaters
|
|
|
90 |
% |
|
|
87 |
% |
|
|
81 |
% |
Other
Floaters
|
|
|
98 |
% |
|
|
94 |
% |
|
|
74 |
% |
Jackups
|
|
|
86 |
% |
|
|
83 |
% |
|
|
93 |
% |
Other
Rigs
|
|
|
100 |
% |
|
|
100 |
% |
|
|
62 |
% |
Total
Drilling Fleet
|
|
|
91 |
% |
|
|
88 |
% |
|
|
81 |
% |
Liquidity
and Capital Resources
Sources
and Uses of Cash
Our
primary source of cash during the first six months of 2007 was our cash flows
from operations. Our primary uses of cash were repurchases of our ordinary
shares, capital expenditures and repayments of borrowings under our Term Credit
Facility. At June 30, 2007, we had $445 million in cash and cash
equivalents.
|
|
Six
months ended
June
30,
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
|
(In
millions)
|
|
Net
cash from operating activities
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
1,102
|
|
|
$ |
455
|
|
|
$ |
647
|
|
Depreciation
|
|
|
201
|
|
|
|
204
|
|
|
|
(3 |
) |
Other
non-cash items
|
|
|
31
|
|
|
|
(163 |
) |
|
|
194
|
|
Working
capital
|
|
|
(73 |
) |
|
|
(52 |
) |
|
|
(21 |
) |
|
|
$ |
1,261
|
|
|
$ |
444
|
|
|
$ |
817
|
|
Net
cash
provided by operating activities increased by $817 million due to more cash
generated from net income.
|
|
Six
months ended
June
30,
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
|
(In
millions)
|
|
Net
cash from investing activities
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
$ |
(755 |
) |
|
$ |
(276 |
) |
|
$ |
(479 |
) |
Proceeds
from disposal of assets, net
|
|
|
41
|
|
|
|
203
|
|
|
|
(162 |
) |
Joint
ventures and other investments, net
|
|
|
(3 |
) |
|
|
–
|
|
|
|
(3 |
) |
|
|
$ |
(717 |
) |
|
$ |
(73 |
) |
|
$ |
(644 |
) |
Capital
expenditures increased by $479 million over the corresponding prior year period,
primarily due to the construction of four enhanced Enterprise-class drillships,
the two Sedco 700-series deepwater upgrades and other equipment
replaced and upgraded on our existing rigs. In addition, proceeds from asset
sales were lower in the first six months of 2007 during which only one drilling
unit was sold as compared to the same period in 2006 during which four drilling
units were sold.
|
|
Six
months ended
June
30,
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
|
(In
millions)
|
|
Net
cash from financing activities
|
|
|
|
|
|
|
|
|
|
Repayments
on the Term Credit Facility
|
|
$ |
(230 |
) |
|
$ |
–
|
|
|
$ |
(230 |
) |
Repurchase
of ordinary shares
|
|
|
(400 |
) |
|
|
(600 |
) |
|
|
200
|
|
Net
proceeds from issuance of ordinary shares under share-based compensation
plans
|
|
|
55
|
|
|
|
66
|
|
|
|
(11 |
) |
Other,
net
|
|
|
9
|
|
|
|
–
|
|
|
|
9
|
|
|
|
$ |
(566 |
) |
|
$ |
(534 |
) |
|
$ |
(32 |
) |
Net
cash
used in financing activities increased due to repayments on our Term Credit
Facility in the first six months of 2007, partially offset by a decrease in
repurchases of ordinary shares in the first six months of 2007 compared to
the
same period in 2006. See
“―Sources
and Uses of Liquidity.”
Capital
Expenditures and Dispositions
From
time
to time, we review possible acquisitions of businesses and drilling rigs and
may
in the future make significant capital commitments for such purposes. We may
also consider investments related to major rig upgrades or new rig construction
if generally supported by firm contracts. Any such acquisition, upgrade or
new
rig construction could involve the payment by us of a substantial amount of
cash
or the issuance of a substantial number of additional ordinary shares or other
securities. In July 2007, we entered into an Agreement and Plan of Merger with
GlobalSantaFe Corporation. During 2006 and the first six months of 2007, we were awarded drilling
contracts for four newbuild deepwater drilling rigs and are currently in
discussions with various clients for potential other deepwater drilling
contracts related to new deepwater drilling rigs. In addition, from time to
time, we review possible dispositions of drilling units.
Capital
expenditures—Capital expenditures, including capitalized interest of $28
million, totaled $755 million during the six months ended June 30, 2007,
including $443 million for the construction of four enhanced Enterprise-class
drillships and $102 million for the upgrade of two of our Sedco
700-series rigs.
During
2007, we expect capital expenditures to be approximately $1.5 billion, including
approximately $895 million for the construction of four deepwater drillships
and
approximately $285 million for the deepwater upgrade of two of our Sedco
700-series rigs. The level of our capital expenditures is partly dependent
upon the actual level of operational and contracting activity. These expected
capital expenditures do not include amounts that would be incurred in connection
with any of our other possible newbuild opportunities or the merger with
GlobalSantaFe Corporation.
As
with
any major shipyard project that takes place over an extended period of time,
the
actual costs, timing of expenditures and project completion date may vary from
our estimates based on numerous factors, including actual contract terms,
weather, exchange rates, shipyard labor conditions and the market demand for
components and resources required for drilling unit construction.
We
intend
to fund the cash requirements relating to our capital expenditures through
existing cash balances, cash generated from operations and asset sales. We
also
have available credit under our Revolving Credit Facility (see “—Sources and
Uses of Liquidity”) and may utilize other commercial bank or capital market
financings.
Dispositions—During
the six months ended June 30, 2007, we completed the sale of the tender
rig Charley Graves for net proceeds of $33 million and
recognized a gain on the sale of $23 million.
Sources
and Uses of Liquidity
We
expect
to use existing cash balances, cash flows from operations, proceeds from the
issuance of debt and proceeds from asset sales to fulfill anticipated
obligations such as scheduled debt maturities, capital expenditures and working
capital needs. From time to time, we may also use bank lines of credit to
maintain liquidity for short-term cash needs.
When
cash
on hand, cash flows from operations and proceeds from asset sales exceed our
expected liquidity needs, including major upgrades, new rig construction and/or
asset acquisitions, we may use a portion of such cash to repurchase our ordinary
shares. We may also continue to consider allowing cash balances to increase
and
the reduction of debt prior to scheduled maturities.
In
May 2006, our board of directors
authorized an increase in the amount of ordinary shares which we may repurchase
pursuant to our share repurchase program from $2.0 billion, which was previously
authorized and announced in October 2005, to $4.0 billion. The ordinary shares
may be repurchased from time to time in open market or private transactions.
Decisions to repurchase shares are based upon our ongoing capital requirements,
the price of our shares, regulatory considerations, cash flow generation,
general market conditions and other factors. We plan to fund any future share
repurchases under the program from current and future cash balances and we
could
also use debt to fund those share repurchases. The repurchase program does
not
have an established expiration date and may be suspended or discontinued at
any
time. There can be no assurance regarding the number of shares that will be
repurchased under the program. Under the program, repurchased shares are retired
and returned to unissued status. The Merger Agreement with GlobalSantaFe
restricts our repurchase of our ordinary shares without the consent of
GlobalSantaFe.
During
the six months ended June 30,
2007, we repurchased and retired $400 million of our ordinary shares, which
amounted to approximately 5.2 million ordinary shares at an average purchase
price of $77.39 per share. Total consideration paid to repurchase the shares
was
recorded in shareholders’ equity as a reduction in ordinary shares and
additional paid-in capital. Such consideration was funded with existing cash
balances and borrowings under our Revolving Credit Facility. At July 31, 2007,
after prior repurchases, we had authority to repurchase an additional $600
million of our ordinary shares under the program; however, any such repurchases
would require the prior written consent of GlobalSantaFe Corporation pursuant
to
the Merger Agreement.
Debt
Conversion—Holders of our Zero Coupon Convertible Debentures have the
option to require us to convert their debentures into our ordinary shares at
any
time prior to maturity. In May 2007, we issued 1,223 ordinary shares in exchange
for $150,000 aggregate principal amount of debentures that were converted at
a
conversion rate of 8.1566 ordinary shares per $1,000 debenture. Prior to
consummation of the Transactions, we currently expect to call for redemption
our
Zero Coupon Convertible Debentures due May 2020 and our 1.5% Convertible
Debentures due 2021.
We
have
access to a bank line of credit under a $1.0 billion, five-year revolving credit
agreement expiring July 2012 (the “Revolving Credit Facility”). At July 31, 2007
we had no amounts outstanding under this facility.
The
Revolving Credit Facility and Term
Credit Facility require compliance with various covenants and provisions
customary for agreements of this nature, including a debt to total tangible
capitalization ratio, as defined by the credit agreements, not greater than
60
percent. Other provisions of the credit agreements include limitations on
creating liens, incurring subsidiary debt, transactions with affiliates,
sale/leaseback transactions and mergers and sale of substantially all assets.
Should we fail to comply with these covenants, we would be in default and may
lose access to these facilities. We are also subject to various covenants under
the indentures pursuant to which our public debt was issued, including
restrictions on creating liens, engaging in sale/leaseback transactions and
engaging in certain merger, consolidation or reorganization transactions. A
default under our public debt could trigger a default under our credit
agreements and, if not waived by the lenders, could cause us to lose access
to
these facilities.
In
April
2001, the SEC declared effective our shelf registration statement on Form S–3
for the proposed offering from time to time of up to $2.0 billion in gross
proceeds of senior or subordinated debt securities, preference shares, ordinary
shares and warrants to purchase debt securities, preference shares, ordinary
shares or other securities. At July 31, 2007, $600 million in gross proceeds
of
securities remained unissued under the shelf registration
statement.
Our
access to debt and equity markets may be reduced or closed to us due to a
variety of events, including, among others, credit rating agency downgrades
of
our debt, industry conditions, general economic conditions, market conditions
and market perceptions of us and our industry.
As
is
customary in the contract drilling business, we also have various surety bonds
in place that secure customs obligations relating to the importation of our
rigs
and certain performance and other obligations.
We
have
established a wholly-owned captive insurance company which insures various
risks
of our operating subsidiaries. Access to the cash investments of the captive
insurance company may be limited due to local regulatory restrictions. These
cash investments are expected to rise to approximately $45 million by the end
of
2007 as the level of premiums paid to the captive insurance company continues
to
increase.
Contractual
Obligations
Other
than with respect to the contractual obligations set forth below, there have
been no material changes from the contractual obligations as previously
disclosed in “Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations” of our Annual Report on Form 10-K for the
year ended December 31, 2006.
Our
contractual obligations included in the table below are at face value (in
millions).
|
|
For
the years ending December 31,
|
|
|
|
Total
|
|
|
2007
|
|
|
2008-2009
|
|
|
2010-2011
|
|
|
Thereafter
|
|
|
|
|
|
|
|
Purchase
obligations
|
|
$ |
2,249
|
|
|
$ |
871
|
|
|
$ |
1,256
|
|
|
$ |
122
|
|
|
$ |
–
|
|
As
of
June 30, 2007, the total unrecognized tax benefit related to uncertain tax
positions, net of prepayments was $292 million. Due to the high degree of
uncertainty regarding the timing of future cash outflows associated with the
liabilities recognized in this balance, we are unable to make reasonably
reliable estimates of the period of cash settlement with the respective taxing
authorities.
Operating
Results
Quarter
ended June 30, 2007 compared to
quarter ended June 30, 2006
Following
is an analysis of our operating results. See “—Overview” for a definition of
revenue earning days, utilization and average daily revenue.
|
|
Three
months ended
|
|
|
|
|
|
|
|
|
|
June
30,
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
%
Change
|
|
|
|
(In
millions, except day amounts and percentages)
|
|
|
|
|
|
Revenue
earning days
|
|
|
6,719
|
|
|
|
6,420
|
|
|
|
299
|
|
|
|
5 |
% |
Utilization
|
|
|
91 |
% |
|
|
81 |
% |
|
N/A
|
|
|
|
10 |
% |
Average
daily revenue
|
|
$ |
202,400
|
|
|
$ |
129,000
|
|
|
$ |
73,400
|
|
|
|
57 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract
drilling revenues
|
|
$ |
1,360
|
|
|
$ |
828
|
|
|
$ |
532
|
|
|
|
64 |
% |
Other
revenues
|
|
|
74
|
|
|
|
26
|
|
|
|
48
|
|
|
N/M
|
|
|
|
|
1,434
|
|
|
|
854
|
|
|
|
580
|
|
|
|
68 |
% |
Operating
and maintenance expense
|
|
|
(627 |
) |
|
|
(549 |
) |
|
|
(78 |
) |
|
|
(14 |
)% |
Depreciation
|
|
|
(101 |
) |
|
|
(102 |
) |
|
|
1
|
|
|
|
1 |
% |
General
and administrative expense
|
|
|
(29 |
) |
|
|
(25 |
) |
|
|
(4 |
) |
|
|
(16 |
)% |
Gain
(loss) from disposal of assets, net
|
|
|
(1 |
) |
|
|
111
|
|
|
|
(112 |
) |
|
N/M
|
|
Operating
income
|
|
|
676
|
|
|
|
289
|
|
|
|
387
|
|
|
N/M
|
|
Other
income (expense), net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
5
|
|
|
|
5
|
|
|
|
−
|
|
|
|
−
|
|
Interest
expense, net of amounts capitalized
|
|
|
(33 |
) |
|
|
(20 |
) |
|
|
(13 |
) |
|
|
(65 |
)% |
Other,
net
|
|
|
(5 |
) |
|
|
1
|
|
|
|
(6 |
) |
|
N/M
|
|
Income
tax expense
|
|
|
(93 |
) |
|
|
(26 |
) |
|
|
(67 |
) |
|
N/M
|
|
Minority
interest
|
|
|
(1 |
) |
|
|
−
|
|
|
|
(1 |
) |
|
|
(100 |
)% |
Net
income
|
|
$ |
549
|
|
|
$ |
249
|
|
|
$ |
300
|
|
|
N/M
|
|
_________________
“N/A”
means not applicable
“N/M”
means not meaningful
Contract
drilling revenues increased
primarily due to higher average daily revenue across the fleet. Revenues
from eight rigs that were out of service in 2006 contributed $130 million and
the reactivation of three Other Floaters during 2006 contributed to higher
utilization in those asset classes and increased revenue by $82 million.
Partially offsetting these increases were lower revenues of $29 million due
to four rigs that were out of service for a portion of 2007
for shipyard, mobilization or maintenance projects and lower revenues
of $8 million resulting from two rigs that were operating at the time of their
sale in the third quarter of 2006 and first quarter of 2007.
Other
revenues for the three months ended June 30, 2007 increased $48 million
primarily due to a $41 million increase in integrated services revenue and
a $7
million increase in client reimbursable revenue.
Operating
and maintenance expenses increased by $78 million primarily from expenses
related to reactivated rigs, higher labor costs, vendor price increases,
increased integrated service activity and higher client reimbursable costs.
These increases were partially offset by $38 million of reactivation costs
in
the second quarter of 2006, with no comparable amounts in the second quarter
of
2007.
The
increase in general and administrative expense was primarily attributable to
increased personnel-related expenses of $4 million.
During
the three months ended June 30, 2007, we recognized an immaterial net loss
related to the disposal of other assets. During the three months ended June
30,
2006, we recognized net gains of $111 million related to the sale of two rigs
and the disposal of other assets.
The
increase in interest expense included $24 million that was primarily
attributable to higher debt levels arising from the issuance of debt and
borrowings under credit facilities subsequent to the second quarter of 2006.
Partially offsetting this increase was a reduction of $13 million related to
an
increase in capitalized interest in the second quarter of 2007 compared to
the
same period in 2006.
We
operate internationally and provide for income taxes based on the tax laws
and
rates in the countries in which we operate and earn income. There is no expected
relationship between the provision for income taxes and income before income
taxes. The estimated annual effective tax rates at June 30, 2007 and 2006 were
14.9 percent and 17.7 percent, respectively, based on estimated 2007 and 2006
annual income before income taxes after adjusting for certain items such as
a
portion of net gains on sales of assets. The tax effect, if any, of the excluded
items as well as settlements of prior year tax liabilities and changes in prior
year tax estimates are all treated as discrete period tax expenses or benefits.
For the three months ended June 30, 2007, the impact of the various discrete
period tax items was a net benefit of $11 million, related to changes in prior
year estimates, resulting in a tax rate of 14.4 percent on earnings before
income taxes. For the three months ended June 30, 2006, the impact of the
various discrete items was a net benefit of $3 million, related to changes
in
prior year estimates, resulting in a tax rate of 9.4 percent on earnings before
income taxes.
Six
months ended June 30, 2007 compared
to six months ended June 30, 2006
Following
is an analysis of our operating results. See “—Overview” for a definition of
revenue earning days, utilization and average daily revenue.
|
|
Six
months ended
|
|
|
|
|
|
|
|
|
|
June
30,
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
%
Change
|
|
|
|
(In
millions, except day amounts and percentages)
|
|
|
|
|
|
Revenue
earning days
|
|
|
13,149
|
|
|
|
12,931
|
|
|
|
218
|
|
|
|
2 |
% |
Utilization
|
|
|
90 |
% |
|
|
81 |
% |
|
N/A
|
|
|
|
9 |
% |
Average
daily revenue
|
|
$ |
200,200
|
|
|
$ |
124,300
|
|
|
$ |
75,900
|
|
|
|
61 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract
drilling revenues
|
|
$ |
2,633
|
|
|
$ |
1,607
|
|
|
$ |
1,026
|
|
|
|
64 |
% |
Other
revenues
|
|
|
129
|
|
|
|
64
|
|
|
|
65
|
|
|
N/M
|
|
|
|
|
2,762
|
|
|
|
1,671
|
|
|
|
1,091
|
|
|
|
65 |
% |
Operating
and maintenance expense
|
|
|
(1,195 |
) |
|
|
(1,024 |
) |
|
|
(171 |
) |
|
|
(17 |
)% |
Depreciation
|
|
|
(201 |
) |
|
|
(204 |
) |
|
|
3
|
|
|
|
1 |
% |
General
and administrative expense
|
|
|
(55 |
) |
|
|
(45 |
) |
|
|
(10 |
) |
|
|
(22 |
)% |
Gain
(loss) from disposal of assets, net
|
|
|
22
|
|
|
|
175
|
|
|
|
(153 |
) |
|
|
(87 |
)% |
Operating
income
|
|
|
1,333
|
|
|
|
573
|
|
|
|
760
|
|
|
N/M
|
|
Other
income (expense), net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
10
|
|
|
|
10
|
|
|
|
−
|
|
|
|
−
|
|
Interest
expense, net of amounts capitalized
|
|
|
(70 |
) |
|
|
(44 |
) |
|
|
(26 |
) |
|
|
(59 |
)% |
Other,
net
|
|
|
8
|
|
|
|
2
|
|
|
|
6
|
|
|
N/M
|
|
Income
tax expense
|
|
|
(178 |
) |
|
|
(86 |
) |
|
|
(92 |
) |
|
N/M
|
|
Minority
interest
|
|
|
(1 |
) |
|
|
−
|
|
|
|
(1 |
) |
|
|
(100 |
)% |
Net
income
|
|
$ |
1,102
|
|
|
$ |
455
|
|
|
$ |
647
|
|
|
N/M
|
|
_________________
“N/A”
means not applicable
“N/M”
means not meaningful
Contract
drilling revenues increased
primarily due to higher average daily revenue across the fleet. Revenues from
seven rigs that were out of service in 2006 contributed $233 million and
reactivation of one Other Deepwater Floater and three Other Floaters during
2006 contributed to higher utilization in those asset classes and increased
revenue by $161 million. Partially offsetting these increases were lower
revenues of $49 million on five rigs that were out of service for a portion
of
2007 for shipyard, mobilization or maintenance projects and lower revenues
of
$16 million from rigs sold in 2006 and 2007.
Other
revenues for the six months ended June 30, 2007 increased $65 million primarily
due to a $54 million increase in integrated services revenue and a $11 million
increase in client reimbursable revenue.
Operating
and maintenance expenses increased by $171 million. This increase was primarily
driven by expenses related to reactivated rigs, higher labor costs and vendor
price increases. Also contributing to the increase were higher integrated
services costs of $46 million and higher reimbursable expenses, in line with
the
higher level of reimbursable revenue. These increases were partially offset
by
the costs incurred in 2006 of $57 million and $12 million, respectively, for
the
reactivation of four of our rigs and the repair of two of our rigs that incurred
hurricane damage.
The
increase in general and administrative expense was primarily attributable to
increased personnel-related expenses of $10 million.
During
the six months ended June 30, 2007, we recognized a net gain of $22 million
related to a rig sale and disposal of other assets. During the six months ended
June 30, 2006, we recognized net gains of $175 million related to the sale
of
four rigs and disposal of other assets.
The
increase in interest expense included $50 million that was primarily
attributable to higher debt levels arising from the issuance of debt and
borrowings under credit facilities subsequent to the six months ended June
30,
2006. Partially offsetting this increase was a reduction of $25 million related
to an increase in capitalized interest during the six months ended June 30,
2007
compared to the same period in 2006.
The
increase in other, net was primarily due to $16 million of income recognized
in
connection with the settlement of our patent litigation with GlobalSantaFe
Corporation, partially offset by a $4 million foreign exchange loss and $3
million equity in the losses of unconsolidated affiliates during the six months
ended June 30, 2007.
We
operate internationally and provide for income taxes based on the tax laws
and
rates in the countries in which we operate and earn income. There is no expected
relationship between the provision for income taxes and income before income
taxes. The estimated annual effective tax rates at June 30, 2007 and 2006 were
14.9 percent and 17.7 percent, respectively, based on estimated 2007 and 2006
annual income before income taxes after adjusting for certain items such as
a
portion of net gains on sales of assets. The tax effect, if any, of the excluded
items as well as settlements of prior year tax liabilities and changes in prior
year tax estimates are all treated as discrete period tax expenses or benefits.
For the six months ended June 30, 2007, the impact of the various discrete
period tax items was a net benefit of $10 million, related to the net gains
on
rig sales and changes in prior year estimates, resulting in a tax rate of 13.9
percent on earnings before income taxes. For the six months ended June 30,
2006,
the impact of the various discrete items was a net expense of $21 million,
related to the net gains on rig sales and changes in prior year estimates,
resulting in a tax rate of 15.9 percent on earnings before income
taxes.
Critical
Accounting Estimates
Our
discussion and analysis of our financial condition and results of operations
are
based upon our condensed consolidated financial statements. This discussion
should be read in conjunction with disclosures included in the notes to our
condensed consolidated financial statements related to estimates, contingencies
and new accounting pronouncements. Significant accounting policies are discussed
in Note 2 to our condensed consolidated financial statements included elsewhere
and in Note 2 to our consolidated financial statements in our Annual Report
on
Form 10-K for the year ended December 31, 2006.
The
preparation of our financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues,
expenses and related disclosure of contingent assets and liabilities. On an
on-going basis, we evaluate our estimates, including those related to bad debts,
materials and supplies obsolescence, investments, property and equipment,
intangible assets and goodwill, income taxes, workers’ insurance, share-based
compensation, pensions and other post-retirement and employment benefits and
contingent liabilities. We base our estimates on historical experience and
on
various other assumptions that we believe are reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent
from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.
For
a
discussion of the critical accounting estimates that we use in the preparation
of our condensed consolidated financial statements, see "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
our
Annual Report on Form 10-K for the year ended December 31, 2006. There have
been
no material changes to these estimates during the six months ended June 30,
2007. These estimates require significant judgments and estimates used in the
preparation of our consolidated financial statements. Management has discussed
each of these critical accounting estimates with the audit committee of the
board of directors.
Share-Based
Compensation
On
January 1, 2006, we adopted FASB Statement of Financial Accounting Standards
(“SFAS”) 123 (revised 2004), Share-Based Payment (“SFAS 123R”) using
the modified prospective method. Adoption of the new standards did not have
a
material effect on our consolidated financial position, results of operations
or
cash flows.
New
Accounting Pronouncements
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS
No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157 defines fair
value, establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value measurements.
SFAS 157 applies under other accounting pronouncements that require or permit
fair value measurements because the FASB previously concluded in those
accounting pronouncements that fair value is the relevant measurement attribute.
Accordingly, SFAS 157 does not require any new fair value measurements. SFAS
157
is effective for fiscal years beginning after November 15, 2007. We will be
required to adopt SFAS 157 in the first quarter of fiscal year 2008. Management
is currently evaluating the requirements of SFAS 157 and has not yet determined
the impact on the consolidated financial statements.
In
February 2007, the FASB issued SFAS
No. 159, The Fair Value Option for Financial Assets and Financial
Liabilities (“SFAS 159”). SFAS 159 provides companies with an option to
report selected financial assets and liabilities at fair value. It also
establishes presentation and disclosure requirements designed to facilitate
comparisons between companies that choose different measurement attributes
for
similar types of assets and liabilities. SFAS 159 is effective as of the
beginning of the first fiscal year beginning after November 15, 2007. We will
be
required to adopt SFAS 159 in the first quarter of fiscal year 2008. Management
is currently evaluating the requirements of SFAS 159 and has not yet determined
the impact on the consolidated financial statements.
ITEM
3. Quantitative and Qualitative Disclosures About Market
Risk
Interest
Rate Risk
Our
exposure to market risk for changes
in interest rates relates primarily to our long-term and short-term debt. The
table below presents scheduled debt maturities in U.S. dollars and related
weighted-average interest rates for each of the 12-months ending June 30
relating to debt obligations as of June 30, 2007. Weighted-average variable
rates are based on London Interbank Offered Rate (“LIBOR”) rates at June 30,
2007, plus applicable margins.
At
June 30, 2007 (in millions, except
interest rate percentages):
|
|
Scheduled
Maturity Date (a) (b)
|
|
|
Fair
Value
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
Thereafter
|
|
|
Total
|
|
|
6/30/07
|
|
Total
debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
rate
|
|
$ |
19
|
|
|
$ |
−
|
|
|
$ |
−
|
|
|
$ |
565
|
|
|
$ |
−
|
|
|
$ |
1,004
|
|
|
$ |
1,588
|
|
|
$ |
1,880
|
|
Average
interest rate
|
|
|
2.8 |
% |
|
|
− |
% |
|
|
− |
% |
|
|
3.0 |
% |
|
|
− |
% |
|
|
7.5 |
% |
|
|
5.8 |
% |
|
|
|
|
Variable
rate
|
|
$ |
−
|
|
|
$ |
1,470
|
|
|
$ |
−
|
|
|
$ |
−
|
|
|
$ |
−
|
|
|
$ |
−
|
|
|
$ |
1,470
|
|
|
$ |
1,470
|
|
Average
interest rate
|
|
|
− |
% |
|
|
5.6 |
% |
|
|
− |
% |
|
|
− |
% |
|
|
− |
% |
|
|
− |
% |
|
|
5.6 |
% |
|
|
|
|
__________________________
(a)
|
Maturity
dates of the face value of our debt assume the put options on the
Zero
Coupon Convertible Debentures and the 1.5% Convertible Debentures
will be
exercised in May 2008 and May 2011,
respectively.
|
(b)
|
Expected
maturity amounts are based on the face value of
debt.
|
At
June 30, 2007, we had approximately
$1.5 billion of variable rate debt at face value (48 percent of total debt
at
face value). This variable rate debt represented the Term Credit Facility and
the Floating Rate Notes issued during 2006. At December 31, 2006, we
had approximately $1.7 billion of variable rate debt outstanding. Based upon
the
June 30, 2007 and December 31, 2006 variable rate debt outstanding amounts,
a
one percentage point change in interest rates would result in a corresponding
change in interest expense of approximately $15 million and $17 million per
year, respectively. In addition, a large part of our cash investments would
earn
commensurately higher rates of return if interest rates increase. Using June
30,
2007 and December 31, 2006 cash investment levels, a one percentage point change
in interest rates would result in a corresponding change in interest income
of
approximately $2 million and $3 million, respectively.
Foreign
Exchange Risk
Our
international operations expose us to foreign exchange risk. These matters
have
been previously discussed and reported in our Annual Report on Form 10-K for
the
year ended December 31, 2006. There have been no material changes to these
previously reported matters during the six months ended June 30,
2007.
ITEM
4. Controls and Procedures
In
accordance with Exchange Act Rules 13a-15 and 15d-15, we carried out an
evaluation, under the supervision and with the participation of management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of our disclosure controls and procedures as of the end of the
period covered by this report. Based on that evaluation, our Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls
and
procedures were effective as of June 30, 2007 to provide reasonable assurance
that information required to be disclosed in our reports filed or submitted
under the Exchange Act was (i) accumulated and communicated to our management,
including our Chief Executive Officer and our Chief Financial Officer, to allow
timely decisions regarding required disclosure and (ii) recorded, processed,
summarized and reported within the time periods specified in the Securities
and
Exchange Commission’s rules and forms.
There
were no changes to our internal
controls during the six months ended June 30, 2007 that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
PART
II - OTHER INFORMATION
Item
1. Legal Proceedings
One
of
our subsidiaries is involved in an action with respect to a customs matter
relating to the Sedco 710 semisubmersible drilling rig. Prior to our
merger with Sedco Forex, this drilling rig, which was working for Petrobras
in
Brazil at the time, had been admitted into the country on a temporary basis
under authority granted to a Schlumberger entity. Prior to the Sedco Forex
merger, the drilling contract with Petrobras was transferred from the
Schlumberger entity to an entity that would become one of our subsidiaries,
but
Schlumberger did not transfer the temporary import permit to any of our
subsidiaries. In early 2000, the drilling contract was extended for another
year. On January 10, 2000, the temporary import permit granted to the
Schlumberger entity expired, and renewal filings were not made until later
that
January. In April 2000, the Brazilian customs authorities cancelled the
temporary import permit. The Schlumberger entity filed an action in the
Brazilian federal court of Campos for the purpose of extending the temporary
admission. Other proceedings were also initiated in order to secure the transfer
of the temporary admission to our subsidiary. Ultimately, the court permitted
the transfer of the temporary admission from Schlumberger to our subsidiary
but
did not rule on whether the temporary admission could be extended without the
payment of a financial penalty. During the first quarter of 2004, the Brazilian
customs authorities issued an assessment totaling approximately $117 million
at
that time against our subsidiary. The first level Brazilian court ruled in
April
2007 that the temporary admission granted to our subsidiary had expired which
allowed the Brazilian customs authorities to execute on their assessment.
Following this ruling, the Brazilian customs authorities issued a revised
assessment against our subsidiary. As of July 30, 2007, the U.S. dollar
equivalent of this assessment was approximately $185 million in aggregate.
We
are not certain as to the basis for the increase in the amount of the
assessment. We intend to continue to aggressively contest this matter and we
have appealed the first level Brazilian court’s ruling to a higher level court
in Brazil. There may be further judicial or administrative proceedings that
result from this matter. While the court has granted us the right to continue
our appeal without the posting of a bond, it is possible that we may be required
to post a bond for up to the full amount of the assessment in connection with
these proceedings. We have also put Schlumberger on notice that we consider
any
assessment to be solely the responsibility of Schlumberger, not our subsidiary.
Nevertheless, we expect that the Brazilian customs authorities will continue
to
seek to recover the assessment solely from our subsidiary, not Schlumberger.
Schlumberger has denied any responsibility for this matter, but remains a party
to the proceedings. We do not expect the liability, if any, resulting from
this
matter to have a material adverse effect on our consolidated financial position,
results of operations or cash flows.
In
the third quarter of 2006, we
received tax assessments of approximately $114 million from the state tax
authorities of Rio de Janeiro in Brazil against one of our Brazilian
subsidiaries for customs taxes on equipment imported into the state in
connection with our operations. The assessments resulted from a preliminary
finding by these authorities that our subsidiary’s record keeping practices were
deficient. We continue to review documents related to the assessments, and
while
our review is not complete, we currently believe that the substantial majority
of these assessments are without merit. We filed an initial response with the
Rio de Janeiro tax authorities on September 9, 2006 refuting these
additional tax assessments. While we cannot predict or provide assurance as
to
the final outcome of these proceedings, we do not expect it to have a material
adverse effect on our consolidated financial position, results of operations
or
cash flows.
We
have certain other actions or claims
pending that have been previously discussed and reported in our Annual Report
on
Form 10-K for the year ended December 31, 2006 and our other reports filed
with
the Securities and Exchange Commission. There have been no material developments
in these previously reported matters. We are involved in a number of other
lawsuits, all of which have arisen in the ordinary course of our business.
We do
not expect the liability, if any, resulting from these other lawsuits to have
a
material adverse effect on our current consolidated financial position, results
of operations or cash flows. We are also involved in various tax matters as
described in “Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
―Outlook–Tax Matters.” We cannot predict with certainty the outcome or
effect of any of the matters specifically described above or of any such other
pending or threatened litigation or legal proceedings. There can be no assurance
that our beliefs or expectations as to the outcome or effect of any lawsuit
or
other matters will prove correct and the eventual outcome of these matters
could
materially differ from management’s current estimates.
Other
than with respect to the risk factors set forth below, which
include risk factors related to
our proposed merger with GlobalSantaFe and the Reclassification (see Notes to
Condensed Consolidated Statements
Note 13—Subsequent
Events–Merger with
GlobalSantaFe Corporation), there have been no material changes
from the risk factors as previously disclosed in “Item 1A. Risk Factors” of our
Annual Report on Form 10-K for the year ended December 31, 2006, as updated
by
“Item 1A. Risk Factors” of our Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 2007.
Risks
Relating to the Merger with GlobalSantaFe and the Reclassification (the “Transactions”)
Failure
to complete the Transactions could negatively impact the market price of our
ordinary shares and financial results.
Completion
of the proposed Transactions is subject to various conditions, including, among
others, approval by our shareholders and GlobalSantaFe’s shareholders and
obtaining regulatory clearances and financing sufficient to enable us to deliver
the cash consideration to our shareholders and the shareholders of GlobalSantaFe
payable by virtue of the Transactions. If these or other conditions are not
satisfied, we may not be able to complete the Transactions, and such failure
may
have other adverse consequences. If the Transactions are not completed, we
will
be subject to a number of risks, including the following:
|
·
|
the
market price of our ordinary shares may decline to the extent that
the
current market price of our shares reflects a market assumption that
the
Transactions will be completed; and
|
|
·
|
in
specified circumstances, if the Transactions are not completed, we
must
pay GlobalSantaFe either a termination fee of $300 million or up
to $30
million in expense reimbursement instead of the termination
fee.
|
Whether
or not we complete the Transactions, we may experience diminished productivity
due to the impact of the Transactions on our current and prospective employees,
key management, customers, suppliers and business
partners.
Our
management may be required to devote substantial time to activities related
to
the Transactions, which could otherwise be devoted to pursuing other beneficial
business opportunities.
Our
current and prospective employees may, furthermore, be uncertain about their
future roles and relationships with us following the completion of the
Transactions. This uncertainty may also affect our productivity or adversely
affect our ability to attract and retain key management and
employees.
Our
customers and business partners may not be as willing to continue to do business
with us on the same or similar terms pending the completion of the Transactions,
which would materially and adversely affect our business and results of
operations.
Until
the Transactions are completed or the Merger Agreement is terminated, under
certain circumstances, we may not be able to enter into a merger or business
combination with another party on favorable terms because of restrictions in
the
Merger Agreement.
Unless
and until the Transactions are completed or the Merger Agreement is terminated,
subject to specified exceptions (which are discussed in more detail in the
Merger Agreement), we are restricted from soliciting, initiating or knowingly
encouraging any inquiry, proposal or offer for an alternative transaction with
any person or entity other than GlobalSantaFe. Subject to specified conditions,
including the requirement that we have complied in all material respects with
these non-solicitation provisions, we may enter into an agreement with respect
to a superior proposal. However, in that event, we are required to pay
GlobalSantaFe a termination fee of $300 million. As a result of these
restrictions, we may not be able to enter into an agreement with respect to
an
alternative transaction on more favorable terms without incurring a potentially
significant liability to GlobalSantaFe.
While
the Transactions are pending we may be subject to restrictions on the conduct
of
our business.
The
Merger Agreement restricts us from taking specified actions without
GlobalSantaFe’s prior approval, including, among other things, making certain
significant acquisitions, dispositions or investments, making certain
significant capital expenditures, declaring dividends, and repurchasing
shares.
Risks
Relating to Our Business
A
loss of a major tax dispute or a successful challenge to our tax structure
could
result in a significant loss or in a higher tax rate on our worldwide earnings
or both.
We
are a
Cayman Islands company and also operate through various subsidiaries around
the
world. Our income tax returns are subject to review and examination in the
various jurisdictions in which we operate. We accrue for income tax
contingencies that we believe are probable exposures and our income taxes are
based upon how we are structured in countries around the world. If any tax
authority successfully challenges our operational structure, intercompany
pricing policies, the tax presence of key Transocean entities in certain
countries, or if the terms of certain income tax treaties are changed in a
manner that is adverse to our structure, or if we lose a material dispute in
any
country, including the U.S. and Norway, our effective tax rate on our worldwide
earnings could increase substantially and our financial results could be
materially adversely affected.
A
change in tax laws, treaties or regulations, or their interpretation, of any
country in which we operate could result in a higher or lower tax rate on our
worldwide earnings.
We
operate worldwide through our various subsidiaries in a number of countries
throughout the world. Consequently, we are subject to tax laws, treaties and
regulations in and between the countries in which we operate. A
change in those tax laws, treaties or regulations could result in a higher
or
lower effective tax rate on our worldwide earnings.
One
such
treaty is currently being renegotiated. If this renegotiation follows what
we believe is a recent trend, this likely would result in a change in the terms
of the treaty that is adverse to our structure which in turn would increase
our
effective tax rate and such increase could be material. We are studying
the effect of the treaty renegotiation with a view to determining what, if
any,
additional steps are appropriate to mitigate any potential impact of such
changes. We may not be able to fully, or partially, mitigate the impact of
this
or future changes in treaties.
Various
proposals have been made in recent years that, if enacted into law, could have
an adverse impact on the Company. Examples include, but are not limited
to, proposals which would broaden the circumstances in which a non-U.S. company
would be considered U.S. resident and a proposal which could limit treaty
benefits on certain payments by U.S. subsidiaries to non-U.S. affiliates.
Such legislation, if enacted, could cause a material increase in our tax
liability and effective tax rate.
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
Issuer
Purchases of Equity Securities
Period
|
|
(a)
Total Number
of
Shares
Purchased
(1)
|
|
|
(b)
Average Price
Paid
Per Share
|
|
|
(c)
Total Number
of
Shares
Purchased
as
Part
of Publicly
Announced
Plans
or
Programs
|
|
|
(d)
Maximum Number
(or
Approximate Dollar Value)
of
Shares that May Yet Be
Purchased
Under the Plans or
Programs
(2)
(in
millions)
|
|
April 2007
|
|
|
453
|
|
|
$ |
82.19
|
|
|
|
–
|
|
|
$ |
600
|
|
May 2007
|
|
|
1,290
|
|
|
$ |
89.71
|
|
|
|
–
|
|
|
$ |
600
|
|
June 2007
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
$ |
600
|
|
Total
|
|
|
1,743
|
|
|
$ |
87.75
|
|
|
|
–
|
|
|
$ |
600
|
|
(1)
|
Total
number of shares purchased in the second quarter of 2007
includes 1,743 shares withheld by us in satisfaction of
withholding taxes due upon the vesting of restricted shares granted
to our
employees under our Long-Term Incentive Plan to pay withholding taxes
due
upon vesting of a restricted share
award.
|
(2)
|
In
May 2006, our board of directors authorized an increase in the amount
of
ordinary shares which may be repurchased pursuant to our share repurchase
program from $2.0 billion, which was previously authorized and announced
in October 2005, to $4.0 billion. The shares may be repurchased from
time
to time in open market or private transactions. The repurchase program
does not have an established expiration date and may be suspended
or
discontinued at any time. Under the program, repurchased shares are
retired and returned to unissued status. From inception through June
30,
2007, we have repurchased a total of 46.9 million of our ordinary
shares
at an aggregate cost of $3.4 billion. The Merger Agreement with
GlobalSantaFe restricts our repurchase of our ordinary shares without
the
consent of GlobalSantaFe.
|
Item
4. Submission of Matters to a Vote of Security
Holders
At
the
Annual General Meeting of Transocean Inc. held on May 10, 2007, 247,182,533
shares were represented in person or by proxy out of 287,850,111 shares
outstanding and entitled to vote as of the record date, constituting a quorum.
The matters submitted to a vote of shareholders, as set forth in our proxy
statement relating to the meeting, and the corresponding voting results were
as
follows:
|
(i) With
respect to the election of Class II Director nominees as set forth
in our
proxy statement relating to the meeting, the following number of
votes
were cast:
|
Name
of Nominee for
Class
I Director
|
For
|
Against
|
Withheld/
Abstain
|
Robert
L. Long
|
244,643,663
|
484,449
|
2,054,421
|
Martin
B. McNamara
|
243,949,891
|
1,139,616
|
2,093,025
|
Robert
M. Sprague
|
244,547,156
|
576,220
|
2,059,157
|
J.
Michael Talbert
|
244,047,419
|
1,076,237
|
2,058,877
|
|
(ii)
With respect to the approval of our appointment of Ernst & Young LLP
as independent registered public accounting firm for 2007, the following
number of votes were cast:
|
For
|
Against/
Authority
Withheld
|
Exceptions/
Abstain
|
Broker
Non-Votes
|
244,012,412
|
1,322,531
|
1,847,590
|
−
|
The
following exhibits are filed in connection with this Report:
Number
|
Description
|
|
|
*2.1
|
Agreement
and Plan of Merger, dated as of July 21, 2007, among Transocean Inc.,
GlobalSantaFe Corporation and Transocean Worldwide Inc. (incorporated
by
reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed
on July 23, 2007)
|
|
|
*3.1
|
Memorandum
of Association of Transocean Inc., as amended (incorporated by reference
to Annex E to the Joint Proxy Statement/Prospectus dated October
30, 2000
included in a 424(b)(3) prospectus filed by us on November 1,
2000)
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*3.2
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Articles
of Association of Transocean Inc., as amended (incorporated by reference
to Annex F to the Joint Proxy Statement/Prospectus dated October
30, 2000
included in a 424(b)(3) prospectus filed by us on November 1,
2000)
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*3.3
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Certificate
of Incorporation on Change of Name to Transocean Inc. (incorporated
by
reference to Exhibit 3.3 to our Form 10-Q for the quarter ended June
30,
2002)
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*4.1
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Amendment
No. 2 to Revolving Credit Agreement, dated as of June 1, 2007, among
Transocean Inc., the lenders from time to time parties thereto, Citibank,
N.A., Bank of America, N.A., JPMorgan Chase Bank, N.A., The Royal
Bank of
Scotland plc and SunTrust Bank (incorporated by reference to Exhibit
4.1
to the Company’s Current Report on Form 8-K filed on June 4,
2007)
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*4.2
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Commitment
Letter, dated July 21, 2007, among Transocean Inc., GlobalSantaFe
Corporation, Goldman Sachs Credit Partners L.P., Lehman Brothers
Commercial Bank, Lehman Commercial Paper Inc. and Lehman Brothers
Inc.
(incorporated by reference to Exhibit 10.1 to the Company’s Current Report
on Form 8-K filed on July 23, 2007)
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*10.1
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Amendment
to Amended and Restated Long-Term Incentive Plan of Transocean Inc.
(incorporated by reference to Exhibit 10.2 to the Company’s Current Report
on Form 8-K filed on July 23, 2007)
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Terms
of July 2007 Employee Deferred Unit Awards
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CEO
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
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CFO
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
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CEO
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
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CFO
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
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*
Incorporated by reference as indicated.
†
Filed
herewith.
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf
by
the undersigned, thereunto duly authorized, on August 1, 2007.
TRANSOCEAN
INC.
By:
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/s/
Gregory L. Cauthen
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Gregory L. Cauthen
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Senior Vice President and Chief Financial Officer
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(Principal Financial Officer)
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By:
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/s/
David A. Tonnel
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David A. Tonnel
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Vice President and Controller
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(Principal Accounting Officer)
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