TRANSOCEAN LTD. The following information should be read in conjunction with the information contained in "Part I. Item 1. Business," "Part I. Item 1A. Risk Factors" and the audited consolidated financial statements and the notes thereto included under "Item 8. Financial Statements and Supplementary Data" elsewhere in this annual report. The following discussion of our results of operations and liquidity and capital resources includes comparisons for the years endedDecember 31, 2019 and 2018. For a discussion of comparisons for our results of operations and liquidity and capital resources for the years ended 2018 and 2017, see "Part II. 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 endedDecember 31, 2018 , filed withthe United States ("U.S.")Securities and Exchange Commission onFebruary 19, 2019 . BusinessTransocean Ltd. (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 ofFebruary 12, 2020 , we owned or had partial ownership interests in and operated 45 mobile offshore drilling units, including 28 ultra-deepwater floaters, 14 harsh environment floaters and three midwater floaters. As ofFebruary 12, 2020 , we were constructing two ultra-deepwater drillships. We provide contract drilling services in a single, global operating segment, which involves contracting our mobile offshore drilling fleet, related equipment and work crews primarily on a dayrate basis to drill oil and gas wells. We specialize in technically demanding regions of the offshore drilling business with a particular focus on ultra-deepwater and harsh environment drilling services. Our drilling fleet is one of the most versatile fleets in the world, consisting of drillships and semisubmersible floaters used in support of offshore drilling activities and offshore support services on a worldwide basis. Our contract drilling services operations are geographically dispersed in oil and gas exploration and development areas throughout the world. Although rigs can be moved from one region to another, the cost of moving rigs and the availability of rig-moving vessels may cause the supply and demand balance to fluctuate somewhat between regions. Still, significant variations between regions do not tend to persist long term because of rig mobility. 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 operate, build or upgrade our rigs are determined by the activities and needs of our customers.
Significant Events
Debt issuances-OnFebruary 1, 2019 , we issued$550 million aggregate principal amount of 6.875% senior secured notes dueFebruary 2027 (the "6.875% Senior Secured Notes"), and we received$539 million aggregate cash proceeds, net of discount and issue costs. OnMay 24, 2019 , we issued$525 million aggregate principal amount of 5.375% senior secured notes dueMay 2023 (the "5.375% Senior Secured Notes"), and we received$517 million aggregate cash proceeds, net of discount and issue costs. OnJanuary 17, 2020 , we issued$750 million aggregate principal amount of 8.00% senior unsecured notes dueFebruary 2027 (the "8.00% Senior Notes"), and we received$743 million aggregate cash proceeds, net of issue costs. See "-Liquidity and Capital Resources-Sources and uses of liquidity." Early debt retirement-During the year endedDecember 31, 2019 , we completed cash tender offers to purchase certain notes (the "2019 Tendered Notes"). In the year endedDecember 31, 2019 , we made an aggregate cash payment of$522 million to settle the validly tendered 2019 Tendered Notes and recognized a loss of$18 million associated with the retirement of debt. See "-Liquidity and Capital Resources-Sources and uses of liquidity." During the year endedDecember 31, 2019 , we repurchased in the open market$434 million aggregate principal amount of certain of our debt securities. We made an aggregate cash payment of$449 million and recognized an aggregate net loss of$23 million associated with the retirement of such debt. See "-Operating Results" and "-Liquidity and Capital Resources-Sources and uses of liquidity." Debt redemption-OnJanuary 17, 2020 , we provided a notice to redeem in full our outstanding 9.00% senior notes dueJuly 2023 (the "9.00% Senior Notes"), and onFebruary 18, 2020 , we made a payment of$767 million , including the make-whole provision, to redeem the notes and in the three months endingMarch 31, 2020 , we expect to recognize a loss of approximately$66 million associated with the retirement of debt. See "-Liquidity and Capital Resources-Sources and uses of liquidity." Impairments-In the year endedDecember 31, 2019 , we recognized an aggregate loss of$583 million primarily associated with the impairment of three ultra-deepwater floaters, along with related assets, which we determined were impaired at the time we classified the assets as held for sale. See "-Operating Results." Fleet expansion-We hold a 33.0 percent interest inOrion Holdings (Cayman) Limited (together with its subsidiary, "Orion"), the company that, through its wholly owned subsidiary, owns the harsh environment floater Transocean Norge. InAugust 2019 , Orion completed construction of the rig and placed it into service. One of our subsidiaries operates the rig under a short-term bareboat charter to complete a six-well drilling contract for one of our customers. See "-Liquidity and Capital Resources-Drilling fleet." - 26 -
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InOctober 2019 , we agreed with Samsung Heavy Industries Co., Ltd. ("SHI") to cancel the construction contracts for two ultra-deepwater drillships in exchange for the parties terminating their respective obligations and liabilities under the contracts and our subsidiaries releasing to SHI their respective interests in the rigs. See "-Liquidity and Capital Resources-Drilling fleet." Dispositions-During the year endedDecember 31, 2019 , we completed the sale of six ultra-deepwater floaters, one harsh environment floater, two deepwater floaters and two midwater floaters, along with related assets, and we received$64 million in aggregate net cash proceeds. See "-Operating Results" and "-Liquidity and Capital Resources-Drilling fleet." Secured Credit Facility-InJune 2018 , we entered into a bank credit agreement, which established a$1.0 billion secured revolving credit facility (the "Secured Credit Facility"), and in the year endedDecember 31, 2019 , we amended the terms of the agreement to, among other changes, increase the borrowing capacity to$1.3 billion . See "-Liquidity and Capital Resources-Sources and uses of liquidity." Outlook
Drilling market-Our view of the offshore drilling floater market is positive and continues to improve, especially for the highest specification vessels.
Contracting activity has strengthened, as both fixture durations and dayrates are increasing. In the past five years, the offshore oil and gas industry has achieved structural efficiency gains that have substantially improved the economics of offshore development projects. These efficiency gains have resulted in project break-even oil prices in the range of$40 per barrel or below in many operating basins, which compares increasingly favorably to onshore shale prospects, and positively impacts our customers' investment decisions. Markets requiring high-specification harsh environment floating drilling rigs continue to see high utilization of the active fleet. Over the past year, opportunities have steadily increased for our drilling services, and we have recently observed escalating dayrates in almost all jurisdictions. In particular, we have seen a marked tightening in global demand for ultra-deepwater drilling rigs, especially in theAmericas andAustralia where dayrates continue to climb. As utilization for ultra-deepwater floaters grows, active supply is approaching full utilization in many regions, and tender activity has increased. As a result, we are seeing some of the highest dayrates since the beginning of the downturn in 2014, particularly for the latest generation and highest capability units. We expect this trend to continue through 2020 and beyond.
As of
Fleet status-We refer to the availability of our rigs in terms of the uncommitted fleet rate. The uncommitted fleet rate is defined as the number of uncommitted days divided by the total number of rig calendar days in the measurement period, expressed as a percentage. An uncommitted day is defined as a calendar day during which a rig is idle or stacked, is not contracted to a customer and is not committed to a shipyard. The uncommitted fleet rates exclude the effect of priced options.
As of
2020 2021 2022 2023 2024
Uncommitted fleet rate
Ultra-deepwater floaters 50 % 71 % 83 % 83 % 83 %
Harsh environment floaters 45 % 64 % 68 % 83 % 98 %
Midwater floaters 71 % 98 % 100 % 100 % 100 %
Performance and Other Key Indicators
Contract backlog-Contract backlog is defined as the maximum contractual operating dayrate multiplied by the number of days remaining in the firm contract period, excluding revenues for mobilization, demobilization, contract preparation, other incentive provisions or reimbursement revenues, which are not expected to be significant to our contract drilling revenues. The contract backlog represents the maximum contract drilling revenues that can be earned considering the contractual operating dayrate in effect during the firm contract period.
The contract backlog for our fleet was as follows:
February 14, October 17, February 11,
2020 2019 2019
Contract backlog (In millions)
Ultra-deepwater floaters $ 7,282 $ 7,643 $ 8,404
Harsh environment floaters 2,836 3,074 3,716
Midwater floaters 45 60 97
Total contract backlog $ 10,163 $ 10,777 $ 12,217
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Our contract backlog includes only firm commitments, which are represented by signed drilling contracts or, in some cases, by other definitive agreements awaiting contract execution. Our contract backlog includes amounts associated with our contracted newbuild unit that is currently under construction. The contractual operating dayrate may be higher than the actual dayrate we ultimately receive or an alternative contractual dayrate, such as a waiting-on-weather rate, repair rate, standby rate or force majeure rate, may apply under certain circumstances. The contractual operating dayrate may also be higher than the actual dayrate we ultimately receive because of a number of factors, including rig downtime or suspension of operations. In certain contracts, the dayrate may be reduced to zero if, for example, repairs extend beyond a stated period of time. Average contractual dayrate relative to our contract backlog is defined as the average maximum contractual operating dayrate to be earned per operating day in the measurement period. An operating day is defined as a day for which a rig is contracted to earn a dayrate during the firm contract period after operations commence. AtFebruary 14, 2020 , the contract backlog and average contractual dayrates for our fleet were as follows: For the years ending December 31, Total 2020 2021 2022 2023 Thereafter Contract backlog (In millions, except average dayrates) Ultra-deepwater floaters$ 7,282 $ 1,624 $ 1,299 $ 858 $ 860 $ 2,641 Harsh environment floaters 2,836 952 765 704 377 38 Midwater floaters 45 42 3 - - - Total contract backlog$ 10,163 $ 2,618 $ 2,067 $ 1,562 $ 1,237 $ 2,679 Average contractual dayrates Ultra-deepwater floaters$ 420,000 $ 325,000 $ 420,000 $ 471,000 $ 471,000 $ 471,000 Harsh environment floaters$ 396,000 $ 348,000 $ 419,000 $ 432,000 $ 428,000 $ 415,000 Midwater floaters$ 130,000 $ 130,000 $ 130,000 $ - $ - $ - Total fleet average$ 409,000 $ 325,000 $ 418,000 $ 453,000 $ 457,000 $ 471,000 The actual amounts of revenues earned and the actual periods during which revenues are earned will differ from the amounts and periods shown in the tables above due to various factors, including shipyard and maintenance projects, unplanned downtime and other factors that result in lower applicable dayrates than the full contractual operating dayrate. Additional factors that could affect the amount and timing of actual revenue to be recognized include customer liquidity issues and contract terminations, which may be available to our customers under certain circumstances. Average daily revenue-Average daily revenue is defined as contract drilling revenues, excluding revenues for contract terminations, reimbursements and contract intangible amortization, earned per operating day. An operating day is defined as a calendar day during which a rig is contracted to earn a dayrate during the firm contract period after commencement of operations. The average daily revenue for our fleet was as follows: Years ended December 31, 2019 2018 2017 Average daily revenue Ultra-deepwater floaters$ 337,900 $ 356,700 $ 472,400 Harsh environment floaters$ 298,500 $ 296,400 $ 235,900 Deepwater floaters $ -$ 186,700 $ 195,200 Midwater floaters$ 118,400 $ 99,900 $ 95,600
High-specification jackups $ - 152,900 143,900
Total fleet average daily revenue
Our average daily revenue fluctuates relative to market conditions and our
revenue efficiency. The average daily revenue may be affected by revenues for
lump sum bonuses or demobilization fees received from our customers. Our total
fleet average daily revenue is also affected by the mix of rig classes being
operated, as deepwater floaters, midwater floaters and high-specification
jackups are typically contracted at lower dayrates compared to ultra-deepwater
floaters and harsh environment floaters. We no longer operate deepwater
floaters or high-specification jackups. We include newbuilds in the calculation
when the rigs commence operations upon acceptance by the customer. We remove
rigs from the calculation upon disposal or classification as held for sale,
unless we continue to operate rigs subsequent to sale, in which case we remove
the rigs at the time of completion or novation of the contract.
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Revenue efficiency-Revenue efficiency is defined as actual contract drilling
revenues, excluding revenues for contract terminations and reimbursements, for
the measurement period divided by the maximum revenue calculated for the
measurement period, expressed as a percentage. Maximum revenue is defined as
the greatest amount of contract drilling revenues, excluding revenues for
contract terminations and reimbursements, the drilling unit could earn for the
measurement period, excluding amounts related to incentive provisions. The
revenue efficiency rates for our fleet were as follows:
Years ended December 31,
2019 2018 2017
Revenue efficiency
Ultra-deepwater floaters 99 % 96 % 96 %
Harsh environment floaters 95 % 94 % 96 %
Deepwater floaters - % 94 % 94 %
Midwater floaters 99 % 98 % 96 %
High-specification jackups - % 100 % 101 %Total fleet average revenue efficiency 97 % 95 % 96 %
Our revenue efficiency rate varies due to revenues earned under alternative
contractual dayrates, such as a waiting-on-weather rate, repair rate, standby
rate, force majeure rate or zero rate, that may apply under certain
circumstances. Our revenue efficiency rate is also affected by incentive
performance bonuses or penalties. We include newbuilds in the calculation when
the rigs commence operations upon acceptance by the customer. We exclude rigs
that are not operating under contract, such as those that are stacked.
Rig utilization-Rig utilization is defined as the total number of operating days
divided by the total number of rig calendar days in the measurement period,
expressed as a percentage. The rig utilization rates for our fleet were as
follows:
Years ended December 31,
2019 2018 2017
Rig utilization
Ultra-deepwater floaters 51 % 48 % 39 %
Harsh environment floaters 78 % 82 % 73 %
Deepwater floaters - % 93 % 73 %
Midwater floaters 37 % 41 % 38 %
High-specification jackups - % 97 % 61 %Total fleet average rig utilization 58 % 59 % 48 %
Our rig utilization rate declines as a result of idle and stacked rigs and
during shipyard and mobilization periods to the extent these rigs are not
earning revenues. We include newbuilds in the calculation when the rigs
commence operations upon acceptance by the customer. We remove rigs from the
calculation upon disposal, classification as held for sale. Accordingly, our
rig utilization can increase when idle or stacked units are removed from our
drilling fleet.
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Operating Results
Year ended
The following is an analysis of our operating results. See "-Performance and
Other Key Indicators" for definitions of operating days, average daily revenue,
revenue efficiency and rig utilization.
December 31,
2019 2018 Change % Change
(In millions, except day amounts and percentages)
Operating days 9,872 9,706 166 2 %
Average daily revenue $ 313,400 $ 296,200 $ 17,200 6 %
Revenue efficiency 97 % 95 %
Rig utilization 58 % 59 %
Contract drilling revenues $ 3,088 $ 3,018 $ 70 2 %
Operating and maintenance expense (2,140) (1,799) (341) (19) %
Depreciation and amortization expense (855) (818) (37) (5) %
General and administrative expense (193) (188) (5) (3) %
Loss on impairment (609) (1,464) 855 58 %
Loss on disposal of assets, net (12) - (12) nm
Operating loss (721) (1,251) 530 42 %
Other income (expense), net
Interest income 43 53 (10) (19) %
Interest expense, net of amounts capitalized (660) (620) (40) (6) % Loss on retirement of debt (41) (3) (38) nm Other, net 181 46 135 nm Loss before income tax expense (1,198) (1,775) 577 33 % Income tax expense (59) (228) 169 74 % Net loss$ (1,257) $ (2,003) $ 746 37 % "nm" means not meaningful. Contract drilling revenues-Contract drilling revenues increased for the year endedDecember 31, 2019 compared to the year endedDecember 31, 2018 primarily due to the following: (a) approximately$265 million resulting from operations acquired in the Ocean Rig UDW Inc. ("Ocean Rig"), aCayman Islands exempted company with limited liability andSonga Offshore SE ("Songa"), a European public company limited by shares, or societas Europaea, existing under the laws ofCyprus acquisitions, (b) approximately$95 million resulting from the reactivation of two rigs, (c) approximately$65 million resulting from higher revenue efficiency and (d) approximately$65 million resulting from the operations of a newbuild ultra-deepwater drillship and a harsh environment semisubmersible placed into service in 2018 and 2019, respectively. These increases were partially offset by the following: (a) approximately$190 million resulting from rigs sold or classified as held for sale, (b) approximately$125 million resulting from contract early terminations and cancellations recognized in the year endedDecember 31, 2018 , (c) approximately$65 million resulting from reduced activity and (d) approximately$45 million resulting from lower dayrates. Costs and expenses-Operating and maintenance expense increased for the year endedDecember 31, 2019 compared to the year endedDecember 31, 2018 , primarily due to the following: (a) approximately$265 million resulting from operations acquired in the Ocean Rig acquisition, including the reactivation of two rigs, (b) approximately$90 million resulting from shipyard activities, (c) approximately$45 million resulting from operations of a newbuild ultra-deepwater drillship and a harsh environment semisubmersible placed into service in 2018 and 2019, respectively and (d) approximately$40 million resulting from the reactivation of two rigs. These increases were partially offset by a decrease of approximately$95 million resulting from rigs sold or classified as held for sale. Depreciation and amortization expense increased for the year endedDecember 31, 2019 , compared to the year endedDecember 31, 2018 , primarily due to approximately$80 million resulting from the rigs acquired in the Songa and Ocean Rig acquisitions, partially offset by approximately$43 million resulting from rigs sold or classified as held for sale. General and administrative expense increased for the year endedDecember 31, 2019 , compared to the year endedDecember 31, 2018 , primarily due to the following: (a) approximately$10 million resulting from personnel and other costs related to Ocean Rig recognized in the year endedDecember 31, 2019 , (b) approximately$9 million resulting from increased legal and professional fees (c) approximately$7 million resulting from increased rent expense and (d) approximately$4 million resulting from recovery of legal fees recognized in the year endedDecember 31, 2018 . These increases were partially offset by the following decreases: (a) approximately$24 million resulting from acquisition costs recognized in the year endedDecember 31, 2018 and (b) approximately$4 million resulting from reduced personnel costs, primarily related to the early retirement of certain personnel in the year endedDecember 31, 2018 . Loss on impairment or disposal of assets-In the year endedDecember 31, 2019 , we recognized an aggregate loss of$583 million , primarily associated with certain assets that we determined were impaired at the time we classified them as held for sale, and - 30 - Table of Contents an aggregate loss of$26 million associated with the impairment of right-of-use assets and leasehold improvements. In the year endedDecember 31, 2018 , we recognized an aggregate loss of$999 million associated with certain assets that we determined were impaired at the time we classified them as held for sale and a loss of$462 million associated with the impairment of goodwill. In the year endedDecember 31, 2019 , we recognized an aggregate gain of$4 million associated with the sale of six ultra-deepwater floaters, one harsh environment floater, two deepwater floaters and two midwater floaters, along with related assets. In the year endedDecember 31, 2018 , we recognized an aggregate gain of$7 million associated with the sale of six ultra-deepwater floaters, one deepwater floater and one midwater floater, along with related assets. In the year endedDecember 31, 2019 and 2018, we recognized an aggregate loss of$16 million and$7 million , respectively, associated with the disposal of assets unrelated to rig sales. Other income and expense-Interest expense, net of amounts capitalized, increased in the year endedDecember 31, 2019 , compared to the year endedDecember 31, 2018 , primarily due to an increase of approximately$147 million primarily resulting from debt issued subsequent toJanuary 1, 2018 , partially offset by a decrease of approximately$104 million resulting from the retirement of debt as a result of scheduled maturities, the purchase of the 2019 Tendered Notes and our open market repurchases.
In the year ended
Other income, net, increased in the year endedDecember 31, 2019 , compared to the year endedDecember 31, 2018 , primarily due to the following: (a) a gain of$132 million resulting from termination of construction contracts in the year endedDecember 31, 2019 and (b) an net increase of$41 million resulting from currency exchange rate changes,$18 million of which resulted from reduced losses recognized on undesignated currency derivative instruments. Partially offsetting these increases was (a) reduced income of$34 million from our dual-activity patent and (b) reduced income of$6 million from non-service components of net periodic benefit costs. Income tax expense-In the years endedDecember 31, 2019 and 2018, our effective tax rate was (4.9) percent and (12.8) percent, respectively, based on loss before income tax expense. In the years endedDecember 31, 2019 and 2018, the effect of the various discrete period tax items represented a net tax benefit of$150 million and a net tax expense of$143 million , respectively. In the year endedDecember 31, 2019 , such discrete items included aU.S. tax law change, settlements and expirations of various uncertain tax positions and adjustments to our deferred taxes for operating structural changes made in theU.S. In the year endedDecember 31, 2018 , such discrete items were primarily related to theU.S. transition tax on non-U.S. earnings. In the years endedDecember 31, 2019 and 2018, our effective tax rate, excluding discrete items, was (30.7) percent and (29.2) percent, respectively, based on loss before income tax expense. Our effective tax rate decreased in the year endedDecember 31, 2019 compared to the year endedDecember 31, 2018 , primarily due to the recognition of significant uncertain tax benefits, partially offset by increased tax expense related to the adoption of a new operating structure, which will reduce our exposure to theU.S. base erosion and anti-abuse tax and other cash taxes in theU.S. To a lesser extent, our effective tax rate decreased due to changes in the relative blend of income from operations in certain jurisdictions. Due to factors related to our operating activities and organizational structure, our income tax expense does not change proportionally with our income before income taxes. Significant decreases in our income before income taxes typically lead to higher effective tax rates, while significant increases in income before income taxes can lead to lower effective tax rates, subject to the other factors impacting income tax expense noted above. With respect to the effective tax rate calculation for the year endedDecember 31, 2019 , a significant portion of our income tax expense was generated in countries in which income taxes are imposed on gross revenues, with the most significant of these countries beingAngola andIndia . Conversely, the countries in which we incurred the most significant income taxes during this period that were based on income before income tax include theU.S. ,Switzerland , theUnited Kingdom ("U.K.") andNorway . Our rig operating structures further complicate our tax calculations, especially in instances where we have more than one operating structure for the taxing jurisdiction and, thus, more than one method of calculating taxes depending on the operating structure utilized by the rig under the contract. For example, two rigs operating in the same country could generate significantly different provisions for income taxes if they are owned by two different subsidiaries that are subject to differing tax laws and regulations in the respective country of incorporation. See Notes to Consolidated Financial Statements-Note 12-Income Taxes. - 31 - Table of Contents
Liquidity and Capital Resources
Sources and uses of cash
At
Our primary uses of cash were as follows: (a) repayments of debt, (b) capital expenditures and (c) investments in unconsolidated affiliates.
Years ended
December 31,
2019 2018 Change
(In millions)
Cash flows from operating activities
Net loss $ (1,257) $ (2,003) $ 746
Non-cash items, net 1,898 2,432 (534)
Changes in operating assets and liabilities, net (301) 129
(430)
$ 340 $ 558 $ (218)
Net cash provided by operating activities decreased primarily due to increased
operating costs resulting from rig reactivations and increased cash interest
payments.
Years ended
December 31,
2019 2018 Change
(In millions)
Cash flows from investing activities
Capital expenditures $ (387) $ (184) $ (203)
Proceeds from disposal of assets, net 70 43 27
Cash paid in business combinations, net of unrestricted and restricted cash acquired - (883) 883 Investments in unconsolidated affiliates
(77) (107) 30
Proceeds from unrestricted and restricted short-term investments, net of deposits 123 334 (211)
Other, net 3 - 3
$ (268) $ (797) $ 529
Net cash used in investing activities decreased primarily due to (a) net cash
paid to acquire Songa and Ocean Rig in the year ended December 31, 2018 with no
comparable activity in the current year, (b) reduced investments in
unconsolidated affiliates, partially offset by (c) reduced proceeds from
maturities of unrestricted and restricted investments, net of deposits, and
(d) increased capital expenditures.
Years ended
December 31,
2019 2018 Change
(In millions)Cash flows from financing activities Proceeds from issuance of debt, net of discounts and issue costs
$ 1,056 $ 2,054 $ (998) Repayments of debt (1,325)
(2,105) 780 Proceeds from investments restricted for financing activities
- 26 (26)
Payments to terminate derivative instruments -
(92) 92
Other, net (43) (30) (13)
$ (312) $ (147) $ (165)
Net cash used in financing activities increased primarily due to (a) reduced
cash proceeds from the issuance of the 6.875% Senior Secured Notes and the
5.375% Senior Secured Notes in the year ended December 31, 2019 compared to net
cash proceeds from the issuance of the 5.875% senior secured notes due
January 2024 (the "5.875% Senior Secured Notes"), the 6.125% senior secured
notes due August 2025 (the "6.125% Senior Secured Notes") and the 7.25% senior
notes due November 2025 (the "7.25% Senior Notes") in the year ended
December 31, 2018 , partially offset by (b) decreased cash used to repay debt and
(c) cash paid to terminate certain derivative instruments assumed in the Songa
acquisition in the year ended December 31, 2018 with no comparable activity
in
the current year.
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Sources and uses of liquidity
Overview-We expect to use existing unrestricted cash balances, internally
generated cash flows, borrowings under the Secured Credit Facility, proceeds
from the disposal of assets or proceeds from the issuance of additional debt to
fulfill anticipated obligations, which may include capital expenditures, working
capital and other operational requirements, scheduled debt maturities or other
payments. We may also consider establishing additional financing arrangements
with banks or other capital providers. Subject to market conditions and other
factors, we may also be required to provide collateral for future financing
arrangements. In each case subject to then existing market conditions and to
our then expected liquidity needs, among other factors, we may continue to use a
portion of our internally generated cash flows and proceeds from asset sales to
reduce debt prior to scheduled maturities through debt repurchases, either in
the open market or in privately negotiated transactions, or through debt
redemptions or tender offers.
Our access to debt and equity markets may be limited due to a variety of events,
including, among others, credit rating agency downgrades of our debt ratings,
industry conditions, general economic conditions, market conditions and market
perceptions of us and our industry. The rating of our non-credit enhanced
senior unsecured long-term debt ("Debt Rating") is below investment grade. Such
Debt Rating has caused us to experience increased fees and interest rates under
agreements governing certain of our senior notes. Further downgrades may affect
or limit our ability to access debt markets in the future. Our ability to
access such markets may be severely restricted at a time when we would like, or
need, to access such markets, which could have an impact on our flexibility to
react to changing economic and business conditions. An economic downturn could
have an impact on the lenders participating in our credit facilities or on our
customers, causing them to fail to meet their obligations to us.
Our internally generated cash flows are directly related to our business and the
market sectors in which we operate. We have generated positive cash flows from
operating activities over recent years and, although we cannot provide
assurances, we currently expect that such cash flows will continue to be
positive over the next year. However, among other factors, if the drilling
market deteriorates, or if we experience poor operating results, or if we incur
expenses to, for example, reactivate, stack or otherwise assure the
marketability of our fleet, cash flows from operations may be reduced or
negative.
Secured Credit Facility-In June 2018 , we entered into a bank credit agreement,
which established our $1.0 billion Secured Credit Facility, and in the year
ended December 31, 2019 , we amended the terms of the agreement to, among other
changes, increase the borrowing capacity to $1.3 billion and add to and clarify
the lender parties and their respective commitments under the facility. The
Secured Credit Facility is scheduled to expire on the earlier of (i) June 22,
2023 and (ii) if greater than $300 million aggregate principal amount of our
9.00% Senior Notes due July 2023 remain outstanding in April 2023 , such date.
The Secured Credit Facility is guaranteed by Transocean Ltd. and certain
subsidiaries. The Secured Credit Facility is secured by, among other things, a
lien on the ultra-deepwater floaters Deepwater Asgard, Deepwater Invictus,
Deepwater Orion, Deepwater Skyros, Dhirubhai Deepwater KG2 and
Discoverer Inspiration and the harsh environment floaters Transocean Barents and
Transocean Spitsbergen. The Secured Credit Facility contains covenants that,
among other things, include maintenance of certain guarantee and collateral
coverage ratios, a maximum debt to capitalization ratio of 0.60 to 1.00 and
minimum liquidity of $500 million . The Secured Credit Facility also restricts
the ability of Transocean Ltd. and certain of our subsidiaries to, among other
things, merge, consolidate or otherwise make changes to the corporate structure,
incur liens, incur additional indebtedness, enter into transactions with
affiliates and pay dividends and other distributions. In order to borrow under
the Secured Credit Facility, we must, at the time of the borrowing request, not
be in default under the Secured Credit Facility and make certain representations
and warranties, including with respect to compliance with laws and solvency, to
the lenders. Repayment of borrowings under the Secured Credit Facility are
subject to acceleration upon the occurrence of an event of default. Under the
agreements governing certain of our debt and finance lease, we are also subject
to various covenants, 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 indentures, the
agreements governing our senior secured notes, our finance lease contract or any
other debt owed to unaffiliated entities that exceeds $125 million could trigger
a default under the Secured Credit Facility and, if not waived by the lenders,
could cause us to lose access to the Secured Credit Facility. At February 12,
2020 , we had no borrowings outstanding, $9 million of letters of credit issued,
and we had $1.3 billion of available borrowing capacity under the Secured Credit
Facility.
Debt issuances-On January 17, 2020 , we issued $750 million aggregate principal
amount of our 8.00% Senior Notes, and we received aggregate cash proceeds of
$743 million , net of issue costs. We may redeem all or a portion of the
8.00% Senior Notes on or prior to February 1, 2023 at a price equal to
100 percent of the aggregate principal amount plus a make-whole provision, and
subsequently, at specified redemption prices.
In February 2019 , we issued $550 million aggregate principal amount of
6.875% Senior Secured Notes, and we received aggregate cash proceeds of
$539 million , net of discount and issue costs. The indenture that governs the
6.875% Senior Secured Notes contains covenants that, among other things, limit
the ability of our subsidiaries that own or operate the collateral rig
Deepwater Poseidon to declare or pay dividends to their affiliates. We may
redeem all or a portion of the 6.875% Senior Secured Notes on or prior to
February 1, 2022 at a price equal to 100 percent of the aggregate principal
amount plus a make-whole provision, and subsequently, at specified redemption
prices.
In May 2019 , we issued $525 million aggregate principal amount of 5.375% Senior
Secured Notes, and we received aggregate cash proceeds of $517 million , net of
discount and issue costs. The indenture that governs the 5.375% Senior Secured
Notes contains covenants that, among other things, limit the ability of our
subsidiaries that own or operate the collateral rigs Transocean Endurance and
Transocean Equinox to declare or pay dividends to their affiliates. We may
redeem all or a portion of the 5.375% Senior Secured Notes on
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or prior to
In
The indentures that govern the 2018 Senior Secured Notes contain covenants that, among other things, limit the ability of our subsidiaries that own or operate the collateral rigs Transocean Enabler, Transocean Encourage and Deepwater Pontus to declare or pay dividends to their affiliates. We may redeem all or a portion of the 2018 Senior Secured Notes on or prior toJuly 15, 2021 andAugust 1, 2021 , respectively, at a price equal to 100 percent of the aggregate principal amount plus a make-whole provision and subsequently, at specified redemption prices. InOctober 2018 , we issued$750 million aggregate principal amount of 7.25% Senior Notes, and we received aggregate cash proceeds of$735 million , net of issue costs. We may redeem all or a portion of the 7.25% Senior Notes on or prior toNovember 1, 2021 at a price equal to 100 percent of the aggregate principal amount plus a make-whole provision, and subsequently, at specified redemption prices. We will be required to redeem our senior secured notes at a price equal to 100 percent of the aggregate principal amount without a make-whole provision, upon the occurrence of certain events related to the collateral rigs and the related drilling contracts. Early debt retirement-OnJanuary 17, 2020 , we provided a notice to redeem in full our outstanding 9.00% Senior Notes. OnFebruary 18, 2020 , we made a payment of$767 million , including the make-whole provision, to redeem the 9.00% Senior Notes, and in the three months endingMarch 31, 2020 , we expect to recognize a loss of approximately$66 million associated with the retirement of debt. OnFebruary 5, 2019 , we completed the 2019 Tender Offers to purchase for cash up to$700 million aggregate purchase price of the 2019 Tendered Notes, subject to the terms and conditions specified in the related offer to purchase. In the year endedDecember 31, 2019 , as a result of the 2019 Tender Offers, we made an aggregate cash payment of$522 million to settle the validly tendered 2019 Tendered Notes. In the years endedDecember 31, 2019 and 2018, we repurchased in the open market$434 million and$95 million aggregate principal amount of our debt securities, respectively, for an aggregate cash payment of$449 million and$95 million , respectively. In connection with the Songa acquisition, we assumed rights and obligations under certain credit agreements and a subscription agreement establishing two term loan facilities and a bond facility. In the year endedDecember 31, 2018 , we made an aggregate cash payment of$1.59 billion to repay the borrowings under the facilities and terminated the underlying credit agreements and subscription agreement. We also assumed the indebtedness related to two bond loans and we assumed the rights and obligations under a credit agreement for a secured borrowing facility. In the year endedDecember 31, 2018 , we made an aggregate cash payment equivalent to$67 million to repay the two bond loans and the borrowings outstanding under the secured borrowing facility, and we terminated the underlying credit agreement.
Business combinations-On
To
complete the acquisition, we issued 147.7 million shares and made an aggregate
cash payment of
OnJanuary 30, 2018 , we acquired an approximate 97.7 percent ownership interest in Songa. OnMarch 28, 2018 , we acquired the remaining shares not owned by us through a compulsory acquisition underCyprus law, and as a result, Songa became our wholly owned subsidiary. To complete these transactions, we issued 68.0 million shares as partial consideration for the acquisition of Songa shares. Additionally, we issued$863 million aggregate principal amount of 0.50% exchangeable senior bonds dueJanuary 30, 2023 (the "Exchangeable Bonds") as partial consideration for the acquisition of Songa shares and partial settlement of certain Songa indebtedness. Holders of the Exchangeable Bonds may convert the notes into shares ofTransocean Ltd. at any time prior to maturity at a rate of 97.29756 shares per$1,000 note, equivalent to a conversion price of$10.28 per share, subject to adjustment upon the occurrence of certain events. Holders of Exchangeable Bonds may require us to repurchase all or a portion of such holder's Exchangeable Bonds upon the occurrence of certain events. Investments in unconsolidated affiliates-We hold a 33.0 percent ownership interest in Orion, the company that owns the harsh environment floater Transocean Norge. In the years endedDecember 2019 and 2018, we made an aggregate cash contribution of$74 million and$91 million , respectively, to Orion. Additionally, in the years endedDecember 31, 2019 and 2018, we made an aggregate cash contribution of$3 million and$16 million , respectively, in certain companies that are involved in researching and developing technology to improve efficiency and reliability and to increase automation, sustainability and safety in drilling and other activities. Derivative instruments-In connection with the Songa acquisition, we acquired certain currency swaps that were denominated in Norwegian kroner. InFebruary 2018 , we made an aggregate cash payment of$92 million in connection with the settlement and termination of the currency swaps. Litigation settlements-OnMay 29, 2015 , together with thePlaintiff Steering Committee , we filed a settlement agreement (the "PSC Settlement Agreement") in which we agreed to pay to two classes of plaintiffs a total of$212 million in exchange for a release from all claims against us for damages related to the Macondo well incident. OnFebruary 15, 2017 , theU.S. District Court for theEastern District ofLouisiana (the "MDL Court") entered a final order and judgment approving the PSC Settlement Agreement, which is no longer subject
to
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appeal, and we subsequently made the required cash deposits into escrow accounts
established for settlement. In the years ended December 31, 2019 and 2018, the
MDL Court released $33 million and $58 million , respectively, from the escrow
account to make payments to plaintiffs. At December 31, 2019 , the aggregate
balance of our escrow account was $125 million .
Share repurchase program-In May 2009 , at our annual general meeting, our
shareholders approved and authorized our board of directors, at its discretion,
to repurchase an amount of our shares for cancellation with an aggregate
purchase price of up to CHF 3.5 billion . On February 12, 2010 , our board of
directors authorized our management to implement the share repurchase program.
At February 12, 2020 , the authorization remaining under the share repurchase
program was for the repurchase of up to CHF 3.2 billion , equivalent to
approximately $3.3 billion , of our outstanding shares. We intend to fund any
repurchases using available cash balances and cash from operating activities.
The share repurchase program could be suspended or discontinued by our board of
directors or company management, as applicable, at any time. We may decide,
based on our ongoing capital requirements, the price of our shares, regulatory
and tax considerations, cash flow generation, the amount and duration of our
contract backlog, general market conditions, debt rating considerations and
other factors, that we should retain cash, reduce debt, make capital investments
or acquisitions or otherwise use cash for general corporate purposes. Decisions
regarding the amount, if any, and timing of any share repurchases will be made
from time to time based on these factors. Any repurchased shares under the
share repurchase program would be held by us for cancellation by the
shareholders at a future general meeting of shareholders. See "Item 5. Market
for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases
of Equity Securities-Shareholder Matters."
Contractual obligations-At
For the years ending December 31,
Total 2020 2021 - 2022 2023 - 2024 Thereafter
(in millions)
Contractual obligations
Debt $ 9,361 $ 581 $ 1,243 $ 3,170 $ 4,367
Interest on debt 4,307 590 1,059 767 1,891
Finance lease liability 682 71 142 142 327
Operating lease liabilities 201 16 26 24 135
Purchase obligations 1,116 1,067 49 - -
Service agreement obligations 1,035 110 237 253 435
Total (a) $ 16,702 $ 2,435 $ 2,756 $ 4,356 $ 7,155 As of
plans represented an aggregate liability of
aggregate projected benefit obligation, net of the aggregate fair value of
plan assets. The carrying amount of this liability is affected by net
periodic benefit costs, funding contributions, participant demographics, plan (a) amendments, significant current and future assumptions, and returns on plan
assets. Due to the uncertainties resulting from these factors and since the
carrying amount is not representative of future liquidity requirements, we
have excluded this amount from the contractual obligations presented in the
table above. See Notes to Consolidated Financial
Statements-Note 14-Postemployment Benefit Plans.
As ofDecember 31, 2019 , our unrecognized tax benefits related to uncertain tax positions represented a liability of$175 million . Although a portion of these might settle or reverse in the coming year, there is a 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, and we excluded this amount from the contractual obligations presented in the table above. See Notes to Consolidated Financial Statements-Note 12-Income Taxes. Other commercial commitments-We have other commercial commitments that we are contractually obligated to fulfill with cash under certain circumstances. These commercial commitments include standby letters of credit and surety bonds that guarantee our performance as it relates to our drilling contracts, insurance, customs, tax and other obligations in various jurisdictions. Standby letters of credit are issued under various committed and uncommitted credit lines, some of which require cash collateral. AtDecember 31, 2019 , the aggregate cash collateral held by banks for letters of credit and surety bonds was$10 million . The obligations that are the subject of these standby letters of credit and surety bonds are primarily geographically concentrated inBrazil ,India andSpain . Obligations under these standby letters of credit and surety bonds are not normally called, as we typically comply with the underlying performance requirement.
At
For the
years ended
Total 2020 2021 - 2022 2023 - 2024 Thereafter
(in millions)
Other commercial commitments
Standby letters of credit $ 19 $ 19 $ - $ - $ -
Surety bonds 113 2 12 99 -
Total $ 132 $ 21 $ 12 $ 99 $ -
We have established a wholly owned captive insurance company to insure various
risks of our operating subsidiaries. Access to the cash and cash equivalents of
the captive insurance company may be limited due to local regulatory
restrictions. At December 31, 2019 , the captive insurance company held cash and
cash equivalents of $116 million , and such balance is expected to range from
$50 million to $136 million through December 31, 2020 . The balance of actual
cash and cash equivalents held by the captive insurance company varies,
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depending on the premiums paid to the captive insurance company and the timing and number of claims or dividends paid by the captive insurance company.
Drilling fleet
Expansion-From time to time, we review possible acquisitions of businesses and drilling rigs and may make significant future capital commitments for such purposes. We may also consider investments related to major rig upgrades, new rig construction, or the acquisition of a rig under construction. We may commit to such investment without first obtaining customer contracts. Any 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 shares or other securities. Our failure to secure drilling contracts for rigs under construction could have an adverse effect on our results of operations or cash flows. In the year endedDecember 31, 2018 , we completed the Songa and Ocean Rig acquisitions to strengthen our position as a leader in the ultra-deepwater and harsh environment drilling services by adding high-value assets. In the year endedDecember 31, 2018 , we also invested in a 33.0 percent ownership interest in Orion, the company that owns the harsh environment floater Transocean Norge. The Moss Maritime CS60 design is considered among the most capable semisubmersibles in the world. InAugust 2019 , Orion completed construction of the rig and placed it into service. One of our subsidiaries operates the rig under a short-term bareboat charter to complete a multiple-well drilling contract for one of our customers. See Notes to Consolidated Financial Statements-Note 4-Business Combinations and Note 5-Unconsolidated Affiliates. In the years endedDecember 31, 2019 and 2018, we made capital expenditures of$387 million and$184 million , respectively, including$129 million and$75 million , respectively, for our major construction projects. The historical and projected capital expenditures, capitalized interest and other cash or non-cash capital additions for our ongoing major construction projects were as follows: Total costs through December 31, For the years ending December 31, 2019 2020 2021 2022 Total (In millions) Deepwater Atlas (a) $ 329$ 512 $ 84 $ -$ 925 Deepwater Titan (b) 309 204 629 8 1,150 Total $ 638$ 716 $ 713 $ 8 $ 2,075 Deepwater Atlas, an ultra-deepwater drillship under construction at the
delivery of the ultra-deepwater drillship, we have included estimated costs
of $40 million to mobilize the rig to a location where it may be placed in
service.
Deepwater Titan, an ultra-deepwater drillship under construction at theestimates for an upgrade for two 20,000 pounds per square inch blowout
preventers and other equipment required by our customer.
The ultimate amount of our capital expenditures is partly dependent upon financial market conditions, the actual level of operational and contracting activity, the costs associated with the current regulatory environment and customer requested capital improvements and equipment for which the customer agrees to reimburse us. As with any major shipyard project that takes place over an extended period of time, the actual costs, the timing of expenditures and the project completion date may vary from estimates based on numerous factors, including actual contract terms, weather, exchange rates, shipyard labor conditions, availability of suppliers to recertify equipment 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 available cash balances, cash generated from operations and asset sales and financing arrangements with banks or other capital providers. We also have available credit under our Secured Credit Facility (see "-Sources and uses of liquidity"). Economic conditions could impact the availability of these sources of funding. Dispositions-From time to time, we may review the possible disposition of non-strategic drilling units. Considering recent market conditions, we have committed to plans to sell certain lower-specification drilling units for scrap value. During the years endedDecember 31, 2019 and 2018, we identified six and eight such drilling units, respectively, that we have sold for scrap value.
We
continue to evaluate the drilling units in our fleet and may identify additional lower-specification drilling units to be sold for scrap value.
During the year endedDecember 31, 2019 , we completed the sale of six ultra-deepwater floaters, one harsh environment floater, two deepwater floaters and two midwater floaters, along with related assets, and we received net cash proceeds of$64 million . During the year endedDecember 31, 2018 , we completed the sale of six ultra-deepwater floaters, one deepwater floater and one midwater floater, along with related assets, and we received net cash proceeds of$36 million .
Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements as of
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Related Party Transactions
We engage in certain related party transactions with Orion under a management
services agreement for the operation and maintenance of the harsh environment
floater Transocean Norge and a shipyard care agreement for the construction of
the rig. In the year ended December 31, 2019 , we received an aggregate cash
payment of $96 million , primarily related to the commissioning, preparation and
mobilization of Transocean Norge under the shipyard care agreement. We also
lease the rig under a short-term bareboat charter agreement, which is now
expected to expire in late 2020. In the year ended December 31, 2019 , we
recognized rent expense of $8 million , recorded in operating and maintenance
costs, and made an aggregate cash payment of $6 million under the bareboat
charter agreement. In the year ended December 31, 2019 , with other
unconsolidated affiliates, we made an aggregate cash payment of $7 million for
capital expenditures, primarily for equipment to improve reliability and reduce
emissions, and $4 million for research and development, recorded in general and
administrative costs. See Notes to Consolidated Financial
Statements-Note 5-Unconsolidated Affiliates.
Critical Accounting Policies and Estimates
Overview-We consider the following to be our critical accounting policies and estimates since they are very important to the portrayal of our financial condition and results and require our most subjective and complex judgments. We have discussed the development, selection and disclosure of such policies and estimates with the audit committee of our board of directors. For a discussion of our significant accounting policies, refer to our Notes to Consolidated Financial Statements-Note 2-Significant Accounting Policies. We prepare our consolidated financial statements in accordance with accounting principles generally accepted in theU.S. , which require us to make estimates that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures of contingent assets and liabilities. These estimates require significant judgments and assumptions. On an ongoing basis, we evaluate our estimates, including those related to our income taxes, property and equipment, assets held for sale, goodwill, contingencies, postemployment benefit plans, allowance for excess and obsolete materials and supplies, share-based compensation and allowance for doubtful accounts. 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 amounts of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. Income taxes-We are a Swiss corporation, operating through our various subsidiaries in a number of countries throughout the world. Our annual tax provision is based on expected taxable income, statutory rates, tax laws and tax planning opportunities available to us in the various jurisdictions in which we operate. The relationship between the provision for or benefit from income taxes and our income or loss before income taxes can vary significantly from period to period because the countries in which we operate have taxation regimes that vary with respect to the nominal tax rate and the availability of deductions, credits and other benefits. Consequently, our income tax expense does not change proportionally with our income before income taxes. Variations also arise when income earned and taxed in a particular country or countries fluctuates from year to year. The determination of our annual tax provision and evaluation of our tax positions involves interpretation of tax laws in the various jurisdictions and requires significant judgment and the use of estimates and assumptions regarding significant future events, such as the amount, timing and character of income, deductions and tax credits. Our tax liability in any given year could be affected by changes in tax laws, regulations, agreements, and treaties, currency exchange restrictions or our level of operations or profitability in each jurisdiction. Additionally, we operate in many jurisdictions where the tax laws relating to the offshore drilling industry are not well developed. Although our annual tax provision is based on the best information available at the time, a number of years may elapse before the tax liabilities in the various jurisdictions are ultimately determined. We establish liabilities for estimated tax exposures in our jurisdictions of operation, and the provisions and benefits resulting from changes to those liabilities are included in our annual tax provision along with related interest. Such tax exposures include potential challenges to permanent establishment positions, intercompany pricing, disposition transactions, and withholding tax rates and their applicability. These exposures may be affected by changes in applicable tax law or other factors, which could cause us to revise our prior estimates, and are generally resolved through the settlement of audits within these tax jurisdictions or by judicial means. AtDecember 31, 2019 and 2018, our unrecognized tax benefits were approximately$369 million and$514 million , respectively. We are undergoing examinations in a number of taxing jurisdictions for various fiscal years. We review our liabilities on an ongoing basis and, to the extent audits or other events cause us to adjust the liabilities accrued in prior periods, we recognize those adjustments in the period of the event. We do not believe it is possible to reasonably estimate the future impact of changes to the assumptions and estimates related to our annual tax provision because changes to our tax liabilities are dependent on numerous factors that cannot be reasonably projected. These factors include, among others, the amount and nature of additional taxes potentially asserted by local tax authorities; the willingness of local tax authorities to negotiate a fair settlement through an administrative process; the impartiality of the local courts; and the potential for changes in the taxes paid to one country that either produce, or fail to produce, offsetting tax changes in other countries. We do not provide for taxes on unremitted earnings of subsidiaries when we consider such earnings to be indefinitely reinvested. We recognize deferred taxes related to the earnings of certain subsidiaries that we do not consider to be indefinitely reinvested or that will not be indefinitely reinvested in the future. If we were to distribute from the unremitted earnings of these subsidiaries, we could be subject to taxes payable to various jurisdictions. If facts and circumstances cause us to change our expectations regarding future tax consequences, - 37 - Table of Contents
the resulting adjustments to our deferred tax balances could have a material effect on our consolidated statement of financial position, results of operations or cash flows.
Estimates, judgments and assumptions are required in determining whether deferred tax assets will be fully or partially realized. In evaluating our ability to realize deferred tax assets, we consider all available positive and negative evidence, including projected future taxable income and the existence of cumulative losses in recent years. We continually evaluate strategies that could allow for the future utilization of our deferred tax assets. When it is estimated to be more likely than not that all or some portion of certain deferred tax assets, such as foreign tax credit carryovers or net operating loss carryforwards, will not be realized, we establish a valuation allowance for the amount of the deferred tax assets that is considered to be unrealizable. During the years endedDecember 31, 2019 and 2018, in evaluating the projected realizability of our deferred tax assets, we considered our consolidated cumulative loss incurred over the recent three-year period, which has limited our ability to consider other subjective evidence, such as projected contract activity rather than contract backlog. See Notes to Consolidated Financial Statements-Note 12-Income Taxes. Property and equipment-The recognition of our property and equipment, consisting primarily of offshore drilling rigs and related equipment, requires us to apply judgment related to estimates and assumptions for cost capitalization, useful lives and salvage values of our rigs. AtDecember 31, 2019 and 2018, the carrying amount of our property and equipment was$18.8 billion and$20.4 billion , respectively, representing 78 percent and 80 percent, respectively, of our total assets. Capitalized costs-We capitalize costs incurred to enhance, improve and extend the useful lives of our property and equipment and expense costs incurred to repair and maintain the existing condition of our rigs. For newbuild construction projects, we also capitalize the initial preparation, mobilization and commissioning costs incurred until the drilling unit is placed into service.
Capitalized costs increase the carrying amounts of, and depreciation expense for, the related assets, which also impact our results of operations.
Useful lives and salvage values-We depreciate our assets using the straight-line method over their estimated useful lives after allowing for salvage values.
We
estimate useful lives and salvage values by applying judgments and assumptions that reflect both historical experience and expectations regarding future operations, rig utilization and asset performance. Useful lives and salvage values of rigs are difficult to estimate due to a variety of factors, including (a) technological advances that impact the methods or cost of oil and gas exploration and development, (b) changes in market or economic conditions, and (c) changes in laws or regulations affecting the drilling industry. Applying different judgments and assumptions in establishing the useful lives and salvage values would likely result in materially different net carrying amounts and depreciation expense for our assets. We reevaluate the remaining useful lives and salvage values of our rigs when certain events occur that directly impact the useful lives and salvage values of the rigs, including changes in operating condition, functional capability and market and economic factors. When evaluating the remaining useful lives of rigs, we also consider major capital upgrades required to perform certain contracts and the long-term impact of those upgrades on future marketability. AtDecember 31, 2019 , a hypothetical one-year increase in the useful lives of all of our rigs would cause a decrease in our annual depreciation expense of approximately$49 million and a hypothetical one-year decrease would cause an increase in our annual depreciation expense of approximately$40 million . Long-lived asset impairment-We review our property and equipment for impairment when events or changes in circumstances indicate that the carrying amounts of our assets held and used may not be recoverable or when carrying amounts of assets held for sale exceed fair value less cost to sell. Potential impairment indicators include rapid declines in commodity prices and related market conditions, declines in dayrates or utilization, cancellations of contracts or credit concerns of multiple customers. During periods of oversupply, we may idle or stack rigs for extended periods of time or we may elect to sell certain rigs for scrap, which could be an indication that an asset group may be impaired since supply and demand are the key drivers of rig utilization and our ability to contract our rigs at economical rates. Our rigs are mobile units, equipped to operate in geographic regions throughout the world and, consequently, we may mobilize rigs from an oversupplied region to a more lucrative and undersupplied region when it is economical to do so. Many of our contracts generally allow our customers to relocate our rigs from one geographic region to another, subject to certain conditions, and our customers utilize this capability to meet their worldwide drilling requirements. Accordingly, our rigs are considered to be interchangeable within classes or asset groups, and we evaluate impairment by asset group. We consider our asset groups to be ultra-deepwater floaters, harsh environment floaters and midwater floaters. We assess recoverability of assets held and used by projecting undiscounted cash flows for the asset group being evaluated. When the carrying amount of the asset group is determined to be unrecoverable, we recognize an impairment loss, measured as the amount by which the carrying amount of the asset group exceeds its estimated fair value. To estimate the fair value of each asset group, we apply a variety of valuation methods, incorporating income, market and cost approaches. We may weigh the approaches, under certain circumstances, when relevant data is limited, when results are inconclusive or when results deviate significantly. Our estimate of fair value generally requires us to use significant unobservable inputs, representative of a Level 3 fair value measurement, including assumptions related to the long-term future performance of our asset groups, such as projected revenues and costs, dayrates, rig utilization and revenue efficiency. These projections involve uncertainties that rely on assumptions about demand for our services, future market conditions and technological developments. Because our business is cyclical in nature, the results of our impairment testing are expected to vary significantly depending on the timing of the assessment relative to the business cycle. Altering either the timing of or the assumptions used to estimate fair value and significant unanticipated changes to the assumptions could materially alter an outcome that could otherwise result in an impairment loss. Given the nature of these evaluations and their application to specific asset groups and specific time periods, it is not possible to reasonably quantify the impact of changes in
these assumptions.
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In the years ended December 31, 2019 , 2018 and 2017, we recognized a loss of
$578 million , $999 million and $1.4 billion , respectively, associated with the
impairment of assets that we determined were impaired at the time we classified
such assets as held for sale. In the year ended December 31, 2017 , we
recognized a loss of $94 million ($93 million , net of tax) associated with the
impairment of the midwater floater asset group. See Notes to Consolidated
Financial Statements-Note 7-Drilling Fleet.
Contingencies-We perform assessments of our contingencies on an ongoing basis to
evaluate the appropriateness of our liabilities and disclosures for such
contingencies. We establish liabilities for estimated loss contingencies when
we believe a loss is probable and the amount of the probable loss can be
reasonably estimated. We recognize corresponding assets for loss contingencies
that we believe are probable of being recovered through insurance. Once
established, we adjust the carrying amount of a contingent liability upon the
occurrence of a recognizable event when facts and circumstances change, altering
our previous assumptions with respect to the likelihood or amount of loss. We
recognize liabilities for legal costs as they are incurred, and we recognize a
corresponding asset for those legal costs only if we expect such legal costs to
be recovered through insurance. Our estimates involve a significant amount of
judgement. Actual results may differ from our estimates.
We have recognized a liability for estimated loss contingencies associated with
litigation and investigations resulting from the Macondo well incident that we
believe are probable and for which a reasonable estimate can be made. At
December 31, 2019 and 2018, the remaining liability for estimated loss
contingencies that we believe are probable and for which a reasonable estimate
can be made was $124 million and $158 million , respectively, recorded in other
current liabilities, the majority of which is related to our settlement with the
PSC. See Notes to Consolidated Financial Statements-Note 15-Commitments and
Contingencies.
Accounting Standards Updates
For a discussion of the new accounting standards updates that have had or are
expected to have an effect on our consolidated financial statements, see Notes
to Consolidated Financial Statements-Note 3-Accounting Standards Updates.
Other Matters
Regulatory matters
We occasionally receive inquiries from governmental regulatory agencies regarding our operations around the world, including inquiries with respect to various tax, environmental, regulatory and compliance matters. To the extent appropriate under the circumstances, we investigate such matters, respond to such inquiries and cooperate with the regulatory agencies. See Notes to Consolidated Financial Statements-Note 15-Commitments and Contingencies.
Tax matters
We conduct operations through our various subsidiaries in countries throughout
the world. Each country has its own tax regimes with varying nominal rates,
deductions and tax attributes. From time to time, we may identify changes to
previously evaluated tax positions that could result in adjustments to our
recorded assets and liabilities. Although we are unable to predict the outcome
of these changes, we do not expect the effect, if any, resulting from these
adjustments to have a material adverse effect on our consolidated financial
position, results of operations or cash flows. We file federal and local tax
returns in several jurisdictions throughout the world. 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 or results of operations, although
it may have a material adverse effect on our consolidated cash flows. See Notes
to Consolidated Financial Statements-Note 12-Income Taxes.
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