Transocean Inc. Reports Second Quarter 2008 Financial Results

Transocean Inc. (NYSE:RIG) today reported net income for the three months ended June 30, 2008 of $1.107 billion, or $3.45 per diluted share, compared to net income of $549 million, or $2.63 per diluted share for the three months ended June 30, 2007. Revenues for the second quarter of 2008 were $3.102 billion compared to $1.434 billion for the second quarter of 2007. For the six months ended June 30, 2008, net income totaled $2.296 billion, or $7.15 per diluted share, on revenues of $6.212 billion. For the same period last year, net income totaled $1.102 billion, or $5.24 per diluted share, on revenues of $2.762 billion. Net income for the first half of 2008 included after-tax charges of $31 million, or $0.10 per diluted share, resulting primarily from $25 million of discrete tax items, $3 million of merger-related costs and a $3 million loss from the early retirement of debt. For the same period last year, net income included after-tax gains of $33 million, or $0.15 per diluted share, resulting primarily from a $20 million gain on the sale of the tender rig Charley Graves and $13 million of discrete tax items during the first quarter 2007. On November 27, 2007, Transocean Inc. merged with GlobalSantaFe Corporation and reclassified its ordinary shares into cash and shares (the "Reclassification”). Reported results for the second quarter and first half of 2008 include a full three and six months, respectively, from GlobalSantaFe’s operations. Diluted earnings per share for the second quarter and first half of 2007 exclude GlobalSantaFe’s operations and are based on a weighted average diluted share count of 210 million and 211 million shares, respectively, which includes the effect of restating the historical diluted share count for the Reclassification. Operations Quarterly Review Revenues for the three months ended June 30, 2008 were $3.102 billion compared to revenues of $3.110 billion during the three months ended March 31, 2008. The $8 million quarter-to-quarter decrease in total revenues included $53 million of lower contract drilling revenues reflecting an increase in out-of-service time for planned shipyards, which were partially offset by an increase in average dayrates, and $34 million of lower non-cash contract drilling intangible revenues. These net declines were offset by a $79 million increase in other revenues, primarily from non-drilling activities. The average dayrate for the fleet increased four percent from $229,000 in the first quarter to $238,600 in the second quarter, primarily as a result of rigs commencing new contracts at higher dayrates in the second quarter. Operating and maintenance expenses for the three months ended June 30, 2008 were $1.364 billion compared to $1.157 billion for the prior three-month period. The $207 million increase in operating and maintenance expenses primarily reflects an increase in shipyard and maintenance projects as previously anticipated and scheduled pay increases. Depreciation, depletion and amortization totaled $337 million in the second quarter of 2008, a decline of 8.2 percent compared to $367 million in the first quarter of 2008. The quarter-to-quarter decrease in depreciation, depletion and amortization is related to recently sold rigs and rigs classified as held for sale. General and administrative expenses decreased 8.2 percent to $45 million in the second quarter of 2008 compared to $49 million in the prior three-month period. The decrease primarily reflects a reduction in merger-related compensation costs relative to the first quarter of 2008. Interest Expense and Liquidity Interest expense, net of amounts capitalized, for the second quarter of 2008 decreased to $111 million compared to $137 million for the first quarter of 2008. The decrease resulted primarily from a quarter-to-quarter reduction in total debt of approximately $1.316 billion. As of June 30, 2008, total debt was $15.279 billion compared to $16.6 billion as of March 31, 2008. Cash flow from operating activities totaled $1.011 billion for the second quarter of 2008 compared to $1.482 billion for the first quarter of 2008. Lower quarter-to-quarter cash flow during the second quarter of 2008 primarily reflects an increase in working capital and deferred expenses, as well as lower net income. Effective Tax Rate The Annual Effective Tax Rate(1) for the second quarter and first half of 2008 was 11.4 percent and 12.5 percent, respectively. The Effective Tax Rate(2) for the first half of 2008 was 13.5 percent, which reflects the impact of various discrete tax items totaling $25 million, primarily related to changes in estimates. The Effective Tax Rate(2) for the second quarter of 2008 was 11.2 percent. Conference Call Information Transocean will conduct a teleconference call at 10:00 a.m. Eastern Time on August 6, 2008. To participate, dial 913-312-1439 and refer to confirmation code 2830174 approximately five to 10 minutes prior to the scheduled start time of the call. In addition, the conference call will be simultaneously broadcast over the Internet in a listen-only mode and can be accessed by logging onto the company's website at www.deepwater.com and selecting "Investor Relations/News & Events/Webcasts & Presentations." A file containing four charts to be discussed during the conference call, titled "2Q08 Charts," has been posted to the company's website and can also be found by selecting "Investor Relations/News & Events/Webcasts & Presentations." The conference call may also be accessed via the Internet at www.CompanyBoardroom.com by typing in the company's New York Stock Exchange trading symbol, "RIG." A telephonic replay of the conference call should be available after 1:00 p.m. Eastern Time on August 6, 2008 and can be accessed by dialing 719-457-0820 and referring to the passcode 2830174. Also, a replay will be available through the Internet and can be accessed by visiting either of the above-referenced Worldwide Web addresses. Transocean Inc. is the world's largest offshore drilling contractor and the leading provider of drilling management services worldwide. With a fleet of 137 mobile offshore drilling units plus 10 announced ultra-deepwater newbuild units, the company's fleet is considered one of the most modern and versatile in the world due to its emphasis on technically demanding segments of the offshore drilling business. The company owns or operates a contract drilling fleet of 39 High-Specification Floaters (Ultra-Deepwater, Deepwater and Harsh-Environment semisubmersibles and drillships), 29 Midwater Floaters, 10 High-Specification Jackups, 55 Standard Jackups and other assets utilized in the support of offshore drilling activities worldwide. (1) Annual Effective Tax Rate is defined as income tax expense excluding various discrete items (such as changes in estimates and tax on items excluded from income before income taxes) divided by income before income taxes excluding gains on sales and similar items pursuant to Financial Accounting Standards Board Interpretation No. 18. See the accompanying schedule entitled "Supplemental Effective Tax Rate Analysis." (2) Effective Tax Rate is defined as income tax expense divided by income before income taxes. See the accompanying schedule entitled "Supplemental Effective Tax Rate Analysis." 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, 2008     2007 2008     2007 Operating revenues Contract drilling revenues $ 2,587 $ 1,360 $ 5,227 $ 2,633 Contract drilling intangible revenues 190 — 414 — Other revenues     325         74         571         129         3,102         1,434         6,212         2,762   Costs and expenses Operating and maintenance 1,364 627 2,521 1,195 Depreciation, depletion and amortization 337 101 704 201 General and administrative     45         29         94         55         1,746         757         3,319         1,451   Gain (loss) from disposal of assets, net     (6 )       (1 )       (3 )       22   Operating income     1,350         676         2,890         1,333     Other income (expense), net Interest income 10 5 23 10 Interest expense, net of amounts capitalized (111 ) (33 ) (248 ) (70 ) Other, net     (3 )       (5 )       (11 )       8         (104 )       (33 )       (236 )       (52 )   Income before income taxes and minority interest 1,246 643 2,654 1,281 Income tax expense 140 93 358 178 Minority interest     (1 )       1         —         1     Net income   $ 1,107       $ 549       $ 2,296       $ 1,102     Earnings per share Basic $ 3.48 $ 2.73 $ 7.22 $ 5.45 Diluted   $ 3.45       $ 2.63       $ 7.15       $ 5.24     Weighted average shares outstanding Basic 318 202 318 202 Diluted     321         210         321         211   TRANSOCEAN INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In millions, except share data)       June 30, December 31, 2008 2007 (Unaudited) ASSETS Cash and cash equivalents $ 976 $ 1,241 Accounts receivable, net of allowance for doubtful accounts of $62 and $50 at June 30, 2008 and December 31, 2007, respectively 2,478 2,370 Materials and supplies, net of allowance for obsolescence of $23 and $22 at June 30, 2008 and December 31, 2007, respectively 414 333 Deferred income taxes, net 84 119 Assets held for sale 567 — Other current assets     212         233   Total current assets     4,731         4,296     Property and equipment 24,661 24,545 Less accumulated depreciation     4,277         3,615   Property and equipment, net     20,384         20,930   Goodwill 8,351 8,219 Other assets     1,011         919   Total assets   $ 34,477       $ 34,364     LIABILITIES AND SHAREHOLDERS’ EQUITY   Accounts payable $ 861 $ 805 Accrued income taxes 182 99 Debt due within one year 2,145 6,172 Other current liabilities     732         826   Total current liabilities     3,920         7,902     Long-term debt 13,134 11,085 Deferred income taxes, net 734 681 Other long-term liabilities     1,719         2,125   Total long-term liabilities     15,587         13,891     Commitments and contingencies   Minority interest 5 5   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, 319,044,814 and 317,222,909 shares issued and outstanding at June 30, 2008 and December 31, 2007, respectively 3 3 Additional paid-in capital 10,907 10,799 Accumulated other comprehensive loss (47 ) (42 ) Retained earnings     4,102         1,806   Total shareholders’ equity     14,965         12,566   Total liabilities and shareholders’ equity   $ 34,477       $ 34,364   TRANSOCEAN INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In millions) (Unaudited)               Three months ended June 30, Six months ended June 30, 2008 2007 2008 2007 Cash flows from operating activities Net income $ 1,107 $ 549 $ 2,296 $ 1,102 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of drilling contract intangibles (190 ) — (414 ) — Depreciation, depletion and amortization 337 101 704 201 Share-based compensation expense 11 9 33 19 (Gain) loss from disposal of assets, net 6 1 3 (22 ) Deferred revenue, net 7 4 25 38 Deferred expenses, net (145 ) (6 ) (129 ) (13 ) Deferred income taxes (31 ) (5 ) (56 ) (7 ) Other, net (6 ) 5 (18 ) 4 Changes in operating assets and liabilities     (85 )       (51 )       49         (61 ) Net cash provided by operating activities     1,011         607         2,493         1,261     Cash flows from investing activities Capital expenditures (420 ) (290 ) (1,189 ) (755 ) Proceeds from disposal of assets, net 93 2 347 41 Joint ventures and other investments, net     —         —         (3 )       (3 ) Net cash used in investing activities     (327 )       (288 )       (845 )       (717 )   Cash flows from financing activities Borrowings (repayments) under commercial paper program, net (171 ) — 1,145 — Repayments under revolving credit facilities, net (180 ) (190 ) (1,500 ) — Proceeds from debt 75 — 2,051 — Repayments of debt (1,040 ) (230 ) (3,673 ) (230 ) Payments made upon exercise of warrants, net — — (4 ) — Proceeds from issuance of ordinary shares under share-based compensation plans, net 34 40 61 55 Repurchase of ordinary shares — — — (400 ) Tax benefit from issuance of ordinary shares under share-based compensation plans 8 4 11 9 Other, net     (1 )       —         (4 )       —   Net cash used in financing activities     (1,275 )       (376 )       (1,913 )       (566 ) Net decrease in cash and cash equivalents (591 ) (57 ) (265 ) (22 ) Cash and cash equivalents at beginning of period     1,567         502         1,241         467   Cash and cash equivalents at end of period   $ 976       $ 445       $ 976       $ 445   Transocean Inc. Fleet Operating Statistics   Operating Revenues ($ Millions) (1) Three months ended   Six months ended June 30, June 30, 2008   March 31, 2008   June 30, 2007 2008   2007 Contract Drilling Revenues High-Specification Floaters: Ultra Deepwater Floaters $ 558 $ 608 $ 336 $ 1,166 $ 676 Deepwater Floaters 377 325 256 702 498 Harsh Environment Floaters 168 150 126 318 236 Total High-Specification Floaters 1,103 1,083 718 2,186 1,410 Midwater Floaters 650 675 396 1,325 768 High-Specification Jackups 147 157 12 304 24 Standard Jackups 674 711 218 1,385 401 Other Rigs 13 14 16 27 30 Subtotal 2,587 2,640 1,360 5,227 2,633 Contract Intangible Revenue 190 224 0 414 0 Other Revenues Client Reimbursable Revenues 51 47 29 98 59 Integrated Services and Other 48 (52 ) 45 (4 ) 70 Drilling Management Services 208 227 0 435 0 Oil and Gas Properties 18 24 0 42 0 Subtotal 325 246 74 571 129 Total Company $ 3,102 $ 3,110 $ 1,434 $ 6,212 $ 2,762   Average Dayrates (1) Three months ended Six months ended June 30, June 30, 2008 March 31, 2008 June 30, 2007 2008 2007 High-Specification Floaters: Ultra Deepwater Floaters $ 390,400 $ 380,800 $ 288,900 $ 385,300 $ 295,100 Deepwater Floaters $ 317,400 $ 284,100 $ 212,600 $ 301,100 $ 215,800 Harsh Environment Floaters $ 379,400 $ 344,000 $ 288,500 $ 361,900 $ 267,300 Total High-Specification Floaters $ 360,500 $ 340,900 $ 256,100 $ 350,500 $ 257,200 Midwater Floaters $ 299,300 $ 292,300 $ 234,400 $ 295,700 $ 233,300 High-Specification Jackups $ 178,000 $ 173,800 $ 130,400 $ 175,800 $ 131,900 Standard Jackups $ 149,400 $ 146,200 $ 117,300 $ 147,700 $ 110,400 Other Rigs $ 48,400 $ 49,700 $ 57,200 $ 49,000 $ 53,700 Total Drilling Fleet $ 238,600 $ 229,000 $ 202,400 $ 233,700 $ 200,200   Utilization (1) Three months ended Six months ended June 30, June 30, 2008 March 31, 2008 June 30, 2007 2008 2007 High-Specification Floaters: Ultra Deepwater Floaters 87 % 98 % 98 % 92 % 97 % Deepwater Floaters 81 % 79 % 83 % 80 % 80 % Harsh Environment Floaters 98 % 96 % 96 % 97 % 98 % Total High-Specification Floaters 86 % 90 % 91 % 88 % 89 % Midwater Floaters 82 % 88 % 98 % 85 % 96 % High-Specification Jackups 91 % 99 % 100 % 95 % 100 % Standard Jackups 89 % 93 % 85 % 91 % 84 % Other Rigs 100 % 100 % 100 % 100 % 100 % Total Drilling Fleet 87 % 91 % 91 % 89 % 90 % (1) Average daily revenue is defined as contract drilling revenue earned per revenue earning day in the period. A revenue earning day is defined as a day for which a rig earns dayrate after commencement of operations. Utilization is defined as the total actual number of revenue earning days in the period as a percentage of the total number of calendar days in the period for all drilling rigs in our fleet. Transocean Inc. and Subsidiaries Non-GAAP Financial Measures and Reconciliations               Operating Income Before General and Administrative Expense to Field Operating Income (in millions)     Three months ended Six months ended June 30, March 31, June 30, June 30, June 30, 2008 2008 2007 2008 2007     Operating revenue $ 3,102 $ 3,110 $ 1,434 $ 6,212 $ 2,762 Operating and maintenance expense 1,364 1,157 627 2,521 1,195 Depreciation, depletion and amortization 337 367 101 704 201 (Gain) loss from disposal of assets, net   6   (3 )   1   3   (22 ) Operating income before general and administrative expense 1,395 1,589 705 2,984 1,388 Add back (subtract): Depreciation, depletion and amortization 337 367 101 704 201 (Gain) loss from disposal of assets, net   6   (3 )   1   3   (22 ) Field operating income $ 1,738 $ 1,953   $ 807 $ 3,691 $ 1,567   Transocean Inc. and Subsidiaries Supplemental Effective Tax Rate Analysis (In millions)                   Three months ended Six months ended Years ended Dec. 31, June 30, March 31, June 30, June 30, June 30, 2008   2008   2007 2008   2007 2007   2006 Income (Loss) before income taxes and minority interest $ 1,246 $ 1,408 $ 643 $ 2,654 $ 1,281 $ 3,384 $ 1,607 Add back (subtract): (Gain) loss on disposal of assets, net - - 1 - (22 ) (264 ) (410 ) Income from TODCO tax sharing agreement - - - - - (277 ) (51 ) Loss on retirement of debt 1   2 - 3 - 8 - GSF Merger related costs   3       1       -     4       -     82       -     Adjusted income before income taxes 1,250 1,411 644 2,661 1,259 2,933 1,146   Income tax expense 140 218 93 358 178 253 222 Add back (subtract): (Gain) loss on disposal of assets, net - - - - (3 ) (3 ) (24 ) GSF Merger related costs - - - - 15 - Changes in estimates (1)   2       (27 )     11     (25 )     13     101       14   Adjusted income tax expense (2) $ 142     $ 191     $ 104   $ 333     $ 188   $ 366     $ 212     Effective Tax Rate (3) 11.2 % 15.5 % 14.4 % 13.5 % 13.9 % 7.5 % 13.8 %   Annual Effective Tax Rate (4) 11.4 % 13.5 % 16.1 % 12.5 % 14.9 % 12.5 % 18.5 %   (1) Our estimates change as we file tax returns, settle disputes with tax authorities or become aware of other events and include changes in deferred taxes valuation allowances on deferred taxes and other tax liabilities.     (2) The three months ended June 30, 2008 include $ (30) million of additional tax expense (benefit) reflecting the catch-up effect of an increase (decrease) in the annual effective tax rate from the previous quarter estimate.     (3) Effective Tax Rate is income tax expense divided by income before income taxes.   (4) Annual Effective Tax Rate is income tax expense excluding various discrete items (such as changes in estimates and tax on items excluded from income before income taxes) divided by income before income taxes excluding gains on sales and similar items pursuant to Financial Accounting Standards Board Interpretation No. 18.