<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
OR
[ ] 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 1-7746
TRANSOCEAN OFFSHORE INC.
(Exact name of registrant as specified in its charter)
DELAWARE 72-0464968
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
4 GREENWAY PLAZA
HOUSTON, TEXAS 77046
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 871-7500
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 [ ]
As of July 31, 1997, 50,834,293 shares of common stock, par value $.01 per
share, of Transocean Offshore Inc. were outstanding.
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TRANSOCEAN OFFSHORE INC.
INDEX TO FORM 10-Q
QUARTER ENDED JUNE 30, 1997
Page
----
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Operations
Three and Six Months Ended June 30, 1997 and 1996............. 2
Condensed Consolidated Balance Sheets
June 30, 1997 and December 31, 1996........................... 3
Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30, 1997 and 1996....................... 4
Notes to Condensed Consolidated Financial Statements............ 5
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................. 8
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings............................................ 17
ITEM 6. Exhibits and Reports on Form 8-K............................. 17
1
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The condensed consolidated financial statements of Transocean Offshore Inc. and
consolidated subsidiaries (the "Company") included herein have been prepared,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and notes normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. These financial statements should be read in conjunction with the
audited consolidated financial statements and the notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1996.
TRANSOCEAN OFFSHORE INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
(In thousands, except per share data)
Operating Revenues $ 208,093 $ 108,881 $ 427,709 $ 190,101
---------- ---------- ---------- ----------
Costs and Expenses
Operating and maintenance 132,885 69,050 277,731 126,802
Depreciation and amortization 25,837 6,300 50,245 12,358
General and administrative 7,265 3,297 13,044 6,756
---------- ---------- ---------- ----------
165,987 78,647 341,020 145,916
---------- ---------- ---------- ----------
Operating Income 42,106 30,234 86,689 44,185
---------- ---------- ---------- ----------
Other Income (Expense), Net
Equity in earnings of joint
ventures 2,420 1,423 4,885 2,603
Interest income 147 1,189 850 3,694
Interest expense, net of
amounts capitalized (6,029) (91) (10,831) (533)
Other, net 1,587 6,488 (613) 7,457
---------- ---------- ---------- ----------
(1,875) 9,009 (5,709) 13,221
---------- ---------- ---------- ----------
Income Before Income Taxes 40,231 39,243 80,980 57,406
Income Taxes 12,315 13,766 25,355 20,104
---------- ---------- ---------- ----------
Net Income $ 27,916 $ 25,477 $ 55,625 $ 37,302
========== ========== ========== ==========
Earnings Per Share of
Common Stock $ 0.55 $ 0.89 $ 1.09 $ 1.31
Weighted Average Shares
Outstanding 50,707 28,474 50,955 28,455
---------- ---------- ---------- ----------
Dividends Paid Per Share $ 0.06 $ 0.06 $ 0.12 $ 0.12
========== ========== ========== ==========
See accompanying notes.
2
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TRANSOCEAN OFFSHORE INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
1997 1996
----------- -----------
(In thousands, except share data)
ASSETS
Cash and Cash Equivalents $ 41,156 $ 24,154
Accounts Receivable 144,576 168,573
Deferred Income Taxes 17,317 17,207
Materials and Supplies 25,897 26,556
Prepayments 8,283 8,913
Other Current Assets 18,925 6,843
----------- -----------
Total Current Assets 256,154 252,246
----------- -----------
Investments in and Advances to Joint Ventures 41,183 35,608
Property and Equipment 1,914,990 1,751,863
Less Accumulated Depreciation 417,365 381,514
----------- -----------
Property and Equipment, net 1,497,625 1,370,349
----------- -----------
Goodwill, net 685,992 763,173
Other Assets 40,535 21,838
----------- -----------
Total Assets $ 2,521,489 $ 2,443,214
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts Payable $ 53,126 $ 67,032
Accrued Income Taxes 49,532 57,666
Current Portion of Long-Term Debt 2,494 28,013
Other Current Liabilities 61,971 78,767
----------- -----------
Total Current Liabilities 167,123 231,478
----------- -----------
Long-Term Debt 516,559 392,322
Deferred Income Taxes 153,247 151,980
Other Long-Term Liabilities 53,082 39,725
----------- -----------
Total Long-Term Liabilities 722,888 584,027
----------- -----------
Preferred Stock, $0.10 par value; 50,000,000
shares authorized, none issued and outstanding - -
Common Stock, $0.01 par value; 150,000,000
shares authorized, 51,708,472 shares issued,
including shares in treasury, and 50,815,472
shares outstanding at June 30, 1997, and
51,522,985 shares issued and outstanding at
December 31, 1996 517 515
Additional Paid-in Capital 1,505,290 1,501,159
Retained Earnings 175,581 126,035
Less Common Stock in Treasury, at cost;
893,000 shares at June 30, 1997 (49,910) -
----------- -----------
Total Stockholders' Equity 1,631,478 1,627,709
----------- -----------
Total Liabilities and Stockholders' Equity $ 2,521,489 $ 2,443,214
=========== ===========
See accompanying notes.
3
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TRANSOCEAN OFFSHORE INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
----------------------
1997 1996
---------- ----------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 55,625 $ 37,302
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation and amortization 50,245 12,358
Deferred income taxes 1,651 93
Equity in earnings of joint ventures (4,885) (2,603)
Gain on disposal of assets (332) (7,768)
Deferred income 20,000 -
Deferred expenses (10,506) (1,696)
Other, net (12,595) 1,436
Changes in operating assets and liabilities,
net of effects from divestiture
Accounts receivable (12,173) (8,021)
Accounts payable 1,651 (4,040)
Income taxes receivable/payable, net (8,086) 7,092
Other current assets (13,789) (3,154)
Other current liabilities (11,097) (2,705)
---------- ----------
Net cash provided by operating activities 55,709 28,294
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (192,158) (80,122)
Divestiture of non-core drilling services activities
and assets 105,584 -
Cash balances of activities divested (6,109) -
Proceeds from disposal of assets 572 3,517
Joint ventures and other investments (527) 3,563
Other (878) (4,150)
---------- ----------
Net cash used in investing activities (93,516) (77,192)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds of public debt offering, net 299,202 -
Net repayments on revolving credit facility (143,138) -
Proceeds from project financing facility 137,870 -
Repayments on term loan facility (193,250) -
Financing costs (5,208) -
Treasury shares purchased (49,910) -
Sale of note receivable 11,000 -
Exercise of stock options 3,792 644
Dividends paid (6,079) (3,414)
Other, net 530 (873)
---------- ----------
Net cash provided by (used in) financing activities 54,809 (3,643)
---------- ----------
Net Increase (Decrease) in Cash and Cash Equivalents 17,002 (52,541)
---------- ----------
Cash and Cash Equivalents at Beginning of Period 24,154 112,972
---------- ----------
Cash and Cash Equivalents at End of Period $ 41,156 $ 60,431
========== ==========
See accompanying notes.
4
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TRANSOCEAN OFFSHORE INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- GENERAL
BASIS OF CONSOLIDATION -- The accompanying condensed consolidated financial
statements of Transocean Offshore Inc. and its consolidated subsidiaries (the
"Company") have been prepared without audit in accordance with generally
accepted accounting principles 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. Accordingly, pursuant to such rules and regulations, these
financial statements do not include all disclosures required by generally
accepted accounting principles for complete financial statements. Operating
results for the three and six month periods ended June 30, 1997 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1997. In connection with the preparation of these financial
statements, management was required to make estimates and assumptions that
affect the reported amount of assets, liabilities, revenues, expenses and
disclosure of contingent liabilities. Actual results could differ from such
estimates. The accompanying condensed consolidated financial statements and
notes thereto should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1996.
SUPPLEMENTARY CASH FLOW INFORMATION -- Cash payments for interest and income
taxes, net were $13.1 million and $31.8 million, respectively, for the six
months ended June 30, 1997 and $1.1 million and $12.9 million, respectively, for
the six months ended June 30, 1996.
GOODWILL -- Goodwill is amortized on a straight-line basis over 40 years (the
period when benefits are expected to be derived). Accumulated amortization as
of June 30, 1997 totaled $16.2 million (see Note 2).
CAPITALIZED INTEREST -- Interest costs for the construction and upgrade of
qualifying assets are capitalized. The Company capitalized interest costs on
construction work in progress of $4.8 million and $7.7 million for the three and
six months ended June 30, 1997 and $0.5 million and $0.6 million in the
corresponding periods of 1996.
RECLASSIFICATIONS -- Certain reclassifications have been made to prior period
amounts to conform with the current period's presentation. Combining
adjustments were made to classify various statement of operations and balance
sheet items consistently upon combination with Transocean ASA (see Note 2).
INTERIM FINANCIAL INFORMATION -- The financial statements reflect all
adjustments which are, in the opinion of management, necessary for a fair
statement of the results for the interim periods. Such adjustments are
considered to be of a normal recurring nature unless otherwise identified.
NOTE 2 -- BUSINESS COMBINATION
The Company acquired over 99 percent of the outstanding capital shares of
Transocean ASA, a Norwegian company, pursuant to an exchange offer for Company
common stock and cash completed in September 1996 and subsequent purchases of
Transocean ASA shares in November and December 1996 (the "Combination"). All
remaining outstanding shares were purchased in July 1997. The total purchase
price was approximately $1.5 billion. The Combination was deemed effective for
accounting purposes as of September 1, 1996. The purchase price allocation is
based on preliminary estimates and may be revised at a later date.
In May 1997, the Company divested certain activities and associated non-core
assets within its drilling services line of business originally acquired in the
Combination by spinning off a new corporate entity, Procon Offshore ASA, which
was sold to investors in Norway. The divestiture had no material effect on the
financial results of the Company. The net proceeds from the sale were
approximately $106 million, goodwill was reduced by approximately $68 million
and no gain or loss was recognized on the sale.
5
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TRANSOCEAN OFFSHORE INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying Condensed Consolidated Statement of Operations for the three
and six months ended June 30, 1997 includes the operating results of Transocean
ASA. Unaudited pro forma consolidated operating results of the Company and
Transocean ASA for the six months ended June 30, 1996, assuming the acquisition
had been made as of January 1, 1996, are summarized as follows:
Six Months Ended
June 30, 1996
----------------
(In millions, except per share data)
Operating revenues $ 372.9
Income from continuing operations 6.1
Income from discontinued operations 33.7
---------
Net income $ 39.8
=========
Earnings per share:
Income from continuing operations $ 0.12
Income from discontinued operations 0.66
---------
Net income $ 0.78
=========
Pro forma net income from discontinued operations for the six months ended
June 30, 1996 includes a $51 million pre-tax gain on the sale of a Transocean
ASA discontinued business segment, which was disposed of in June 1996 prior to
the Combination.
NOTE 3 -- CONSTRUCTION IN PROGRESS
The Company made significant capital additions during the first half of 1997 in
connection with its previously announced fleet additions and upgrades. During
the first six months of 1997 the Company spent $38.9 million on the conversion
of a multi-service vessel to a semisubmersible drilling rig, to be named
"Transocean Marianas", $54.8 million on the construction of a new deepwater
drillship, to be named "Discoverer Enterprise" and $33.1 million on the upgrade
of the semisubmersible drilling rig, Transocean Amirante. In addition the
Company spent $22.9 million and $17.2 million on capital upgrades to the
drillship Discoverer Seven Seas and the semisubmersible Transocean Leader
(previously named the Transocean No. 8), respectively.
NOTE 4 -- DEBT
Debt is comprised of the following:
June 30, December 31,
1997 1996
----------- -----------
(In thousands)
Debentures, net $ 199,202 $ -
Notes 100,000 -
Revolving Credit Facility 50,623 193,761
Term Loan Facility - 193,250
Project Financing Agreement 137,870 -
Notes Payable 30,000 30,000
Other 1,358 3,324
----------- -----------
Total Debt 519,053 420,335
Less Current Maturities 2,494 28,013
----------- -----------
Total Long-Term Debt $ 516,559 $ 392,322
=========== ===========
6
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TRANSOCEAN OFFSHORE INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
PUBLIC DEBT OFFERING -- In April 1997, the Company completed the public offering
and sale of $300 million aggregate principal amount of senior, unsecured debt
securities. The securities sold consisted of $100 million aggregate principal
amount of 7.45% Notes due April 15, 2027 (the "Notes") and $200 million
aggregate principal amount of 8.00% Debentures due April 15, 2027 (the
"Debentures"). Holders of Notes may elect to have all or any portion of the
Notes repaid on April 15, 2007 at 100% of the principal amount. The Notes, at
any time after April 15, 2007, and the Debentures, at any time, may be redeemed
at the option of the Company at 100% of the principal amount plus a make-whole
premium, if any, equal to the excess of the present value of future payments due
under the Notes and Debentures, using a discount rate equal to the then-
prevailing yield of U.S. treasury notes plus 20 basis points over the principal
amount of the security being redeemed. Interest is payable on April 15 and
October 15 of each year, commencing October 15, 1997. The indenture and
supplemental indenture relating to the Notes and the Debentures place
limitations on the Company's ability to (i) incur indebtedness secured by
certain liens, (ii) engage in certain sale/leaseback transactions and (iii)
engage in certain merger, consolidation or reorganization transactions. The net
proceeds were used to repay amounts outstanding under the Company's term loan
and revolving credit facilities.
TERM LOAN AND REVOLVING CREDIT FACILITIES -- In connection with the Combination,
the Company entered into a secured credit agreement, dated as of July 30, 1996
with a group of banks led by ABN AMRO Bank N.V. (the "Credit Agreement"). The
Credit Agreement initially provided for borrowing by the Company under (i) a
six-year term loan facility in the amount of $200 million (the "Term Loan
Facility") and (ii) a six-year revolving credit facility in the amount of $400
million (the "Revolving Credit Facility"). In connection with the public
offering of the Notes and Debentures, the Credit Agreement was amended to, among
other things, release all security, convert $140 million of the term loans into
revolving loans, and renegotiate the applicable margins over LIBOR and the
applicable commitment fees. Following the amendment, the Credit Agreement
provides for a $540 million Revolving Credit Facility, with no Term Loan
Facility. Loans under the Credit Agreement bear interest, at the option of the
Company, at a base rate or LIBOR plus a specified margin that varies depending
on the Company's funded debt to total capital ratio or its public senior
unsecured debt rating.
PROJECT FINANCING AGREEMENT -- In connection with the construction of the
Discoverer Enterprise and upgrade of the Transocean Amirante, Transocean
Enterprise Inc., a wholly owned subsidiary of the Company, entered into a bank
financing agreement, dated as of December 27, 1996 with a group of banks led by
ABN AMRO Bank N.V. (the "Project Financing Agreement"). Approximately $340.5
million is available for drawdowns during the construction period. Amounts
outstanding bear interest at LIBOR plus a specified margin.
NOTE 5 -- CAPITAL STOCK
In February 1997, pursuant to previously granted authority, the Company
repurchased 893,000 shares of its common stock for a total of $49.9 million at
an average price of $55.89 per share. Borrowings from the Revolving Credit
Facility were used to fund the repurchases. On May 8, 1997, the Company's Board
of Directors authorized the repurchase of up to $200 million of the Company's
common stock from time to time on the open market or in privately negotiated
transactions. The Board of Directors regularly reviews the possibility of
repurchasing common stock in light of prevailing stock prices and the financial
position of the Company.
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following information should be read in connection with the information
contained in the Company's consolidated financial statements and the notes
thereto included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1996.
OVERVIEW
Transocean Offshore Inc. is a leading international provider of deepwater and
harsh environment contract drilling services for oil and gas wells. The Company
currently owns, has ownership interests in or operates 30 mobile offshore
drilling rigs. Transocean's fleet consists of seven fourth-generation
semisubmersibles, fourteen second- and third-generation semisubmersibles, three
drillships and six jackup rigs. In addition, the Company has under construction
a new technologically advanced, ultra-deepwater drillship, to be called the
"Discoverer Enterprise". The Company contracts these drilling rigs, related
equipment and work crews at a contractually determined price per day (dayrate)
to drill offshore wells. The Company also provides other drilling services on a
dayrate, cost plus, footage or lump sum basis, including the drilling of wells
to a specified depth for a fixed price.
During 1996, the Company acquired over 99 percent of the outstanding capital
shares of Transocean ASA, a Norwegian company, pursuant to an exchange offer for
Company common stock and cash completed in September 1996 and subsequent
purchases of Transocean ASA shares in November and December 1996 (the
"Combination"). All remaining outstanding shares were purchased in July 1997.
The total purchase price was approximately $1.5 billion. The Combination was
deemed effective for accounting purposes as of September 1, 1996. In May 1997,
the Company divested certain activities and non-core assets within its drilling
services line of business originally acquired in the Combination. The
divestiture had no material effect on the financial results of the Company.
8
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OPERATING RESULTS
Comparative data relating to the Company's operating revenues and operating
income by segment and geographic area follows. In the table and related
discussion below, the "Mobile Units" segment consists of the results of
operations for drilling rigs contracted to customers on a dayrate basis. The
"Drilling Services" segment includes results of all other drilling services
provided by the Company, including turnkey operations. The operating results of
Transocean ASA are included from September 1, 1996.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C>
OPERATING REVENUES (a)
Mobile Units
U.S. Gulf of Mexico $ 46,872 $ 38,617 $ 85,978 $ 64,312
North Sea and Europe 83,121 23,272 167,713 46,735
Other Western Hemisphere 2,769 6,168 9,704 12,309
Other Eastern Hemisphere 20,234 5,667 38,021 11,468
---------- ---------- ---------- ----------
152,996 73,724 301,416 134,824
---------- ---------- ---------- ----------
Drilling Services
U.S. Gulf of Mexico 15,834 11,295 37,261 18,057
North Sea and Europe 39,058 2,513 87,483 6,384
Other Western Hemisphere - 12,536 1,100 14,403
Other Eastern Hemisphere 205 8,813 449 16,433
---------- ---------- ---------- ----------
55,097 35,157 126,293 55,277
---------- ---------- ---------- ----------
Total Revenues $ 208,093 $ 108,881 $ 427,709 $ 190,101
========== ========== ========== ==========
OPERATING INCOME (LOSS) (b)
Mobile Units
U.S. Gulf of Mexico $ 25,400 $ 21,211 $ 49,009 $ 28,624
North Sea and Europe 12,677 5,405 25,542 10,943
Other Western Hemisphere 756 846 3,484 2,040
Other Eastern Hemisphere 8,581 2,221 18,264 4,258
Other (2,143) (1,945) (5,556) (3,473)
---------- ---------- ---------- ----------
45,271 27,738 90,743 42,392
---------- ---------- ---------- ----------
Drilling Services
U.S. Gulf of Mexico 448 1,586 786 2,487
North Sea and Europe 4,167 754 9,695 1,725
Other Western Hemisphere (89) 2,726 (742) 3,020
Other Eastern Hemisphere 15 997 138 2,081
Other (296) (258) (570) (599)
---------- ---------- ---------- ----------
4,245 5,805 9,307 8,714
---------- ---------- ---------- ----------
Corporate Expenses (7,410) (3,309) (13,361) (6,921)
---------- ---------- ---------- ----------
Operating Income $ 42,106 $ 30,234 $ 86,689 $ 44,185
========== ========== ========== ==========
</TABLE>
(a) Intersegment eliminations are not material.
(b) Amounts shown are after applicable depreciation and amortization.
9
<PAGE>
Quarter ended June 30, 1997, compared to Quarter ended June 30, 1996
Revenues increased to $208.1 million for the quarter ended June 30, 1997 up from
$108.9 million for the prior year quarter, an increase of $99.2 million or 91
percent. Operating income increased by $11.9 million or 39 percent, up from
$30.2 million in the second quarter of 1996 to $42.1 million in the current year
quarter. Net income for the second quarter of 1997 was $27.9 million, up from
$25.5 million for the second quarter of 1996, an increase of $2.4 million or 9
percent. The increases in 1997 resulted primarily from increased dayrates and
the inclusion of the Transocean ASA results following the Combination, partially
offset by higher interest costs. The second quarter of 1996 also included a
$4.3 million after-tax gain on the disposal of a jackup rig. The weighted-
average number of shares was 50.7 million and 28.5 million for the quarters
ended June 30, 1997 and 1996, respectively. The increase was primarily due to
the shares issued in the Combination.
Revenues and operating income from Mobile Units increased significantly in the
second quarter of 1997 compared to the prior year quarter. In the U.S. Gulf of
Mexico, the increases resulted primarily from higher dayrates earned during the
current quarter. In the North Sea and Europe, the increases in revenues and
operating income resulted primarily from the inclusion of the Transocean ASA
results following the Combination. The decrease in Other Western Hemisphere is
due to a drillship moving to the U.S. Gulf of Mexico in early 1997 for an
upgrade and future operations, partially offset by operations added through the
Combination. The increases in Other Eastern Hemisphere resulted primarily from
the results of rigs added through the Combination, higher dayrates earned during
the current year quarter and full utilization of one jackup rig which was
stacked during the 1996 quarter.
Revenues from Drilling Services increased during the second quarter of 1997
compared to the same period in 1996 while operating income decreased during the
same period. In the U.S. Gulf of Mexico, the increase in revenues resulted
primarily from higher revenues earned on turnkey wells completed during the
current quarter over the same number of wells completed in the prior year
quarter. Operating income in the U.S. Gulf of Mexico decreased slightly in the
second quarter of 1997 over the prior year quarter primarily due to losses from
turnkey operations. In the North Sea and Europe, the increases in revenues and
operating income resulted primarily from the inclusion of the Transocean ASA
results following the Combination, as well as a higher level of services
provided during the second quarter of 1997 over the prior year quarter. The
decreases in Other Eastern Hemisphere resulted primarily from services provided
in Qatar and Senegal during the second quarter of 1996 that were not performed
in the current year quarter. The Other Western Hemisphere earned no revenues as
the first well of a three-well turnkey drilling package in Mexico was in
progress during the second quarter of 1997, while turnkey services were
completed in Mexico in the prior year quarter.
Corporate expenses increased $4.1 million, from $3.3 million in the second
quarter of 1996 to $7.4 million in the current year quarter primarily due to
increased costs to integrate and manage a larger organization. The corporate
organization expanded to accommodate the overall growth of the Company as a
result of the Combination and the increased activity in the industry, including
major new construction programs, increased recruiting and training activity and
upgrade and expansion of communication and data processing systems.
Depreciation and amortization expense increased in the 1997 period over 1996
primarily due to additional depreciation relating to the Transocean ASA property
and equipment and $4.8 million of amortization of goodwill relating to the
Combination.
Other income (expense) decreased from income of $9.0 million in the second
quarter of 1996 to expense of $1.9 million in the current year quarter. The
second quarter of 1996 included a $6.6 million pre-tax ($4.3 million or $0.15
per share after-tax) gain on the disposal of the jackup rig Offshore Bahram.
Additionally, interest income decreased in the second quarter of 1997 as a
result of lower average cash balances and higher net interest expense due
primarily to debt incurred relating to the Combination. Partially offsetting
these decreases was higher equity in earnings of joint ventures, resulting
primarily from higher dayrates earned on two rigs owned by a corporation in
which the Company has a 25 percent interest.
10
<PAGE>
Six Months ended June 30, 1997, compared to Six Months ended June 30, 1996
Revenues increased to $427.7 million for the six months ended June 30, 1997 up
from $190.1 million for the prior year period, an increase of $237.6 million or
125 percent. Operating income increased by $42.5 million or 96 percent, up from
$44.2 million in the first six months of 1996 to $86.7 million in the current
year period. Net income for the first six months of 1997 was $55.6 million, up
from $37.3 million for the same period of 1996, an increase of $18.3 million or
49 percent. The increases in 1997 resulted primarily from increased dayrates
and the inclusion of the Transocean ASA results following the Combination
partially offset by a decrease in other income (expense). The weighted-average
number of shares was 51.0 million and 28.5 million for the six months ended
June 30, 1997 and 1996, respectively. The increase was primarily due to the
shares issued in the Combination.
Revenues and operating income from Mobile Units increased significantly in the
first six months of 1997 compared to the prior year period. In the U.S. Gulf of
Mexico, the increases resulted primarily from higher dayrates earned. In the
North Sea and Europe, the increases in revenues and operating income resulted
primarily from the inclusion of the Transocean ASA results following the
Combination. The decrease in Other Western Hemisphere is due to a drillship
moving to the U.S. Gulf of Mexico in early 1997 for an upgrade and future
operations, partially offset by operations added through the Combination. The
increases in Other Eastern Hemisphere resulted primarily from the results of
rigs added through the Combination, higher dayrates earned during the current
period and full utilization of one jackup rig which was stacked during the 1996
period.
Revenues and operating income from Drilling Services increased during the first
six months of 1997 compared to the same period in 1996. In the U.S. Gulf of
Mexico, the increase in revenues resulted primarily from a higher number of
turnkey wells completed during the current period compared to the prior year.
Operating income in the U.S. Gulf of Mexico decreased in the first six months of
1997 over the prior year period primarily due to losses from turnkey operations.
In the North Sea and Europe, the increases in revenues and operating income
resulted primarily from the inclusion of the Transocean ASA results following
the Combination, as well as a higher level of services provided during the
second quarter of 1997 over the prior year quarter. The decreases in Other
Eastern Hemisphere resulted primarily from services provided in Qatar and
Senegal during 1996 that were not performed in the current year period. The
Other Western Hemisphere saw decreases as the first well of a three-well turnkey
drilling package in Mexico was in progress during the second quarter of 1997,
while turnkey services were completed in Mexico in the prior year.
Corporate expenses increased $6.5 million, from $6.9 million in the first six
months of 1996 to $13.4 million in the current year period primarily due to
increased costs to integrate and manage a larger organization. The corporate
organization expanded to accommodate the overall growth of the Company as a
result of the Combination and the increased activity in the industry, including
major new construction programs, increased recruiting and training activity and
upgrade and expansion of communication and data processing systems.
Depreciation and amortization expense increased in the 1997 period over 1996
primarily due to additional depreciation relating to the Transocean ASA property
and equipment and $9.6 million of amortization of goodwill relating to the
Combination.
Other income (expense) decreased from income of $13.2 million in the first six
months of 1996 to expense of $5.7 million in the current year period. The
decrease resulted from several factors. During 1997, the Company recognized
lower interest income due to lower average cash balances and higher net interest
expense due primarily to debt incurred relating to the Combination. Other
expense in 1997 included $1.9 million in losses on the mark-to-market adjustment
on open foreign exchange derivative instruments while 1996 included a $6.6
million pre-tax gain on the disposal of a jack-up rig. Higher equity in
earnings of joint ventures resulted primarily from higher dayrates earned on two
rigs owned by a corporation in which the Company has a 25 percent interest.
Income tax expense increased by $5.3 million due primarily to higher pre-tax
earnings in the first half of 1997 over the same period in 1996.
11
<PAGE>
MARKET OUTLOOK
The increased demand and higher dayrates for rigs in the deepwater and harsh-
environment markets that began in 1995 continued into the second quarter of
1997. The improvements in these markets are due in part to technological
advances that improved the economics of offshore exploration and development, as
well as the greater availability of attractive concessions in markets throughout
the world. Operators are showing more interest in deepwater areas worldwide,
including the U.S. Gulf of Mexico, and in some of the North Sea's more demanding
locations, particularly the harsh-environment areas west of Shetlands and
northern areas offshore Norway. As a result of the improved market conditions,
rigs are being contracted under longer term agreements at higher dayrates, with
customers often paying for upgrades to the rigs to operate in more challenging
conditions. In response to the demands of its customers, the Company is also
providing a variety of drilling services, including well planning, engineering
and management through integrated service teams.
Historically, the contract drilling market has been highly competitive and
cyclical; thus, the Company cannot predict the extent to which the current
market conditions will continue. In addition, as a result of improved market
conditions, a number of drilling contractors are upgrading existing rigs or
constructing new rigs that will be capable of competing with the Company's
deepwater and harsh-environment rigs. Although most of these rigs are being
built pursuant to long-term contract commitments, there can be no assurance
that, upon the expiration of such contracts and the contracts for the Company's
rigs, then-current market conditions will be favorable and that current high
utilization rates will continue.
LIQUIDITY AND CAPITAL RESOURCES
SOURCES AND USES OF CASH
Cash flows provided by operations for the six months ended June 30, 1997
increased to $55.7 million, up from $28.3 million for the six months ended June
30, 1996, an increase of $27.4 million. The increase in cash provided by
operations was primarily due to the increase in net income.
Cash flows used in investing activities increased by $16.3 million from $77.2
million in the first six months of 1996 to $93.5 million in the current year
period. The increase in cash used in investing activities resulted primarily
from the increase in capital expenditures relating to the Company's rig
construction and upgrades, partially offset by proceeds from the divestiture of
certain non-core drilling services activities and assets.
Cash flows provided by financing activities increased $58.4 million from $3.6
million used in the first six months of 1996 to $54.8 million provided in the
current year period. The increase resulted primarily from the public debt
offering and borrowings under the project financing agreement both of which are
discussed below, partially offset by repayments on revolving credit facilities
and from cash used to reacquire 893,000 shares of the Company's common stock.
CAPITAL EXPENDITURES
The Company's investments in its existing fleet and fleet additions announced
during 1996 continue to require significant capital expenditures. The Company
spent approximately $192 million in the first six months of 1997 on capital
expenditures. The Discoverer Enterprise project is expected to require capital
expenditures of approximately $115 million during the remainder of 1997 and $85
million during 1998. The Company expects to spend approximately $10 million
during the remainder of 1997 on the upgrade to the Transocean Amirante. The
upgrades of the Discoverer Seven Seas and the Transocean Leader are expected to
require capital expenditures of approximately $20 million and $45 million,
respectively, during the remainder of 1997. Expenditures for upgrades and
improvements to other rigs in the Company's operating fleet during the remainder
of 1997 are expected to be approximately $45 million.
The conversion of the Company's semisubmersible rig, to be named the "Transocean
Marianas", was expected to require additional capital expenditures of
approximately $95 million; however, the rig was damaged by a fire that broke out
on board the rig on July 18, 1997. The cause of the fire, which damaged the
rig's electrical system but resulted in no
12
<PAGE>
major structural damage to the rig and no injury to personnel, remains under
investigation. The Transocean Marianas conversion project was expected to have
been completed during the fourth quarter of 1997 followed by the commencement of
a five-year contract with Shell Offshore Inc. As a result of the fire, it is
expected that completion of the project will be delayed until the second half of
1998. The actual length of the delay and the amount of remaining capital
expenditures in 1997 and 1998 will not be known until a full assessment of
damage to the rig is completed. The Company believes that the costs to repair
the damage caused by the fire are fully insured.
The Company expects total capital expenditures to be approximately $315 million
for the remainder of 1997 (assuming $80 million for the Transocean Marianas).
As with any major construction project that takes place over an extended period
of time, actual costs and the timing of such expenditures may vary from initial
estimates based on finalization of the design and actual terms of awarded
contracts. The Company intends to fund the cash requirements relating to these
capital commitments through available cash balances, borrowings under the Credit
Agreement (defined below) and, in the case of the Discoverer Enterprise and
Transocean Amirante, financing under the Project Financing Agreement (defined
below).
DEBT
CREDIT AGREEMENT AND PROJECT FINANCING AGREEMENT -- In connection with the
Combination, the Company entered into a secured credit agreement dated as of
July 30, 1996 with a group of banks led by ABN AMRO Bank N.V. (the "Credit
Agreement"). Prior to the amendment discussed below, the Credit Agreement
provided for borrowing by the Company under a six-year term loan facility in the
amount of $200 million (the "Term Loan Facility") and a six-year revolving
credit facility in the amount of $400 million (the "Revolving Credit Facility").
Loans under the Credit Agreement bear interest, at the option of the Company, at
a base rate or LIBOR plus a margin (0.25 percent at June 30, 1997) that varies
depending on the Company's funded debt to total capital ratio or its public
senior unsecured debt rating. The Credit Agreement requires compliance with
various restrictive covenants and effectively limits the Company's ability to
pay dividends based on a specified net worth requirement and an interest
coverage ratio. Quarterly principal payments began on the Term Loan Facility on
December 31, 1996. The Credit Agreement has a maturity date of July 2002.
In connection with the public offering of the debt securities discussed below,
the Credit Agreement was amended to, among other things, release all security,
convert $140 million of the term loans into revolving loans, and renegotiate the
applicable margins over LIBOR and the applicable commitment fees. Following the
amendment, the Credit Agreement provides for a $540 million Revolving Credit
Facility, with no Term Loan Facility.
In connection with the construction of the Discoverer Enterprise and upgrade of
the Transocean Amirante, the Company entered into a bank financing agreement
with a group of banks led by ABN AMRO N.V. ("Project Financing Agreement").
Approximately $340 million is available for drawdowns during the construction
period and is available in two tranches. The first tranche of $66 million is to
be repaid by December 31, 1998 or when construction on both vessels is
completed. It bears an interest rate of LIBOR plus a margin (0.35 percent at
June 30, 1997). The second tranche of $274.5 million bears an interest rate of
LIBOR plus 0.85 percent during the construction period and is convertible to
term financing upon completion of construction and acceptance of the two vessels
(no later than December 31, 1998) by Amoco Exploration and Production Company
("Amoco"), which is contracting the rigs for a period of five years following
completion. The term financing would mature over a period of five years. The
term financing would also be divided into two tranches, the relative amounts of
which would depend on various factors. One tranche of the term financing would
be sized based upon and repaid from the net cash flows generated from the Amoco
contracts (the "Amoco Cash Flows"). The Company has the option to accept bank
financing for the Amoco Cash Flows at LIBOR plus 0.65 percent or to enter into
an uncommitted lease securitization program at commercial paper rates plus
approximately 0.28 percent. The second tranche of the term facility would be
repaid from Company cash flows to the extent the Amoco Cash Flows do not cover
scheduled repayments. The Company has the option to accept bank financing for
the Company cash flows at LIBOR plus 1.125 percent for a period of three years
and LIBOR plus 1.25 percent thereafter or to enter into a lease securitization
at commercial paper rates plus approximately 0.58 percent (as long as the
Company's credit rating is BBB- or Baa3 or better).
13
<PAGE>
PUBLIC DEBT OFFERING -- In April 1997, the Company completed the public offering
and sale of $300 million aggregate principal amount of senior, unsecured debt
securities. The securities sold consisted of $100 million aggregate principal
amount of 7.45% Notes due April 15, 2027 (the "Notes") and $200 million
aggregate principal amount of 8.00% Debentures due April 15, 2027 (the
"Debentures"). Holders of Notes may elect to have all or any portion of the
Notes repaid on April 15, 2007 at 100% of the principal amount. The Notes, at
any time after April 15, 2007, and the Debentures, at any time, may be redeemed
at the option of the Company at 100% of the principal amount plus a make-whole
premium, if any, equal to the excess of the present value of future payments due
under the Notes and Debentures using a discount rate equal to the then-
prevailing yield of U.S. treasury notes plus 20 basis points over the principal
amount of the security being redeemed. Interest is payable on April 15 and
October 15 of each year, commencing October 15, 1997. The indenture and
supplemental indenture relating to the Notes and the Debentures place
limitations on the Company's ability to (i) incur indebtedness secured by
certain liens, (ii) engage in certain sale/leaseback transactions and (iii)
engage in certain merger, consolidation or reorganization transactions. The net
proceeds were used to repay amounts outstanding under the Credit Agreement.
The Company has letters of credit outstanding at June 30, 1997 totaling $5.8
million, which guarantee various insurance and contract bidding activities.
SHELF REGISTRATION
In April 1997, the Company filed with the Securities and Exchange Commission
(the "SEC") a $750 million shelf registration statement on Form S-3 for the
proposed offering from time to time of debt securities, preferred stock, common
stock and warrants to purchase preferred stock or debt securities. The
registration statement was declared effective by the SEC on April 11, 1997. The
Company sold the Notes and Debentures under this registration statement.
AUTHORIZED STOCK REPURCHASE
In February 1997, the Company repurchased 893,000 shares of its common stock at
an average price of $55.89 per share for a total of $49.9 million pursuant to
authority previously granted by the Board of Directors. Borrowings from the
Revolving Credit Facility were used to fund the repurchase. In May 1997, the
Company's Board of Directors authorized the repurchase of up to $200 million
shares of its common stock from time to time on the open market or in privately
negotiated transactions. The Board of Directors regularly reviews the
possibility of repurchasing common stock in light of prevailing stock prices and
the financial position of the Company.
DERIVATIVE INSTRUMENTS
The Company enters into a variety of derivative financial instruments in
connection with the management of its exposure to fluctuations in foreign
exchange rates and interest rates. The Company does not enter into derivative
transactions for speculative purposes; however, for accounting purposes certain
transactions may not meet the criteria for hedge accounting.
Gains and losses on foreign exchange derivative instruments, which qualify as
accounting hedges, are deferred and recognized when the underlying foreign
exchange exposure is realized. Gains and losses on foreign exchange derivative
instruments, which do not qualify as hedges for accounting purposes, are
recognized currently based on the change in market value of the derivative
instruments. At June 30, 1997, the net market value of open foreign exchange
derivative instruments, not qualifying as accounting hedges, all of which expire
during 1997, was approximately $(0.4) million. The Company recognized a net pre-
tax loss of $1.9 million on such instruments for the six months ended
June 30, 1997. The notional amount of such open contracts was not material at
June 30, 1997.
The Company uses interest rate swap agreements to effectively convert a portion
of its floating rate debt to a fixed rate basis, reducing the impact of
interest rate changes on future income. Interest rate swaps are designated as a
hedge of underlying future payments. The interest rate differential to be
received or paid on the swaps is recognized over the lives of the swaps as an
adjustment to interest expense. At June 30, 1997, the net unrealized gain on
open interest rate swaps was $0.4 million, which has been deferred because the
Company intends to maintain these contracts through their
14
<PAGE>
maturities. During the second quarter of 1997 the Company closed out certain
interest rate options and swaps when they ceased to be an effective hedge,
recognizing a loss of approximately $0.4 million.
ACQUISITIONS
The Company regularly reviews possible acquisitions of businesses and drilling
units, and may from time to time in the future make significant capital
commitments for such purposes. Any such acquisition could involve the payment
by the Company of a substantial amount of cash and the issuance of a substantial
number of shares of common stock. The Company would expect to fund the cash
portion of any such acquisition through cash balances on hand, the incurrence of
additional debt, sales of assets or common stock, or a combination thereof.
In anticipation of future opportunities to provide new deepwater rigs, the
Company has recently obtained an option which will allow it to acquire a large
tanker that the Company believes is uniquely suited for conversion to an ultra-
deepwater drilling rig.
SOURCES OF LIQUIDITY
The Company believes that its cash and cash equivalents, cash generated from
operations, borrowings available under its Credit Agreement, Project Financing
Agreement and access to other financing sources will be adequate to meet its
anticipated short-term and long-term liquidity requirements, including scheduled
debt repayments.
ASSET DIVESTITURE
In May 1997, the Company divested certain non-core activities and associated
assets within its drilling services line of business originally acquired in the
Combination by spinning off a new corporate entity, Procon Offshore ASA, which
was sold to investors in Norway. The net proceeds from the sale were
approximately $106 million, goodwill was reduced by approximately $68 million
and no gain or loss was recognized on the sale.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB") issued the
Statement of Financial Accounting Standard ("SFAS") No. 128, Earnings per Share.
This statement establishes standards for computing and presenting earnings per
share ("EPS") and simplifies the standards for computing EPS previously outlined
in the Accounting Principles Board Opinion No. 15. The Company plans to adopt
this standard in the fourth quarter of 1997. Its adoption is not expected to
have a material effect on the Company's financial statements.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income.
This statement establishes standards for reporting and display of comprehensive
income and its components in a full set of general-purpose financial statements.
The Company plans to adopt this standard in the first quarter of 1998. Its
adoption is not expected to have a material effect on the Company's financial
statements.
Also in June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information. This statement establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. The Company plans to adopt this standard in the
fourth quarter of 1998. Its adoption is not expected to have a material effect
on the Company's financial statements.
15
<PAGE>
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. Statements to the effect that the Company or management "anticipates,"
"believes," "estimates," "expects," "predicts," or "projects" a particular
result or course of events, or that such result or course of events "should"
occur, and similar expressions, are also intended to identify forward-looking
statements.
Such statements are subject to numerous risks, uncertainties and assumptions,
including but not limited to, uncertainties relating to industry and market
conditions, prices of crude oil and natural gas, foreign exchange and currency
fluctuations, political instability in foreign jurisdictions, ability of the
Company to integrate newly acquired operations and other factors discussed in
this quarterly report and in the Company's other filings with the SEC. Should
one or more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
indicated.
16
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company and Global Marine Inc. ("Global Marine") are parties to an
agreement pursuant to which the Company participates in the cash flow from three
jackup drilling rigs owned and operated by Global Marine and Global Marine
participates in the cash flow from the one of the Company's jackup drilling
rigs, the Transocean Nordic. Global Marine has initiated arbitration
proceedings against the Company in Norway with respect to various disputed
matters under the agreement, including the distribution of revenues from the
rigs and whether the Company's acquisition of Transocean ASA may have given rise
to a right of first refusal on the part of Global Marine to purchase the
Transocean Nordic. The Company believes that Global Marine's claims are without
merit and that the outcome of the arbitration process will have no material
adverse effect on the Company's operations or financial position.
The Company is party to a contract with Kvaerner Installasjon as ("Kvaerner")
in Norway pursuant to which Kvaerner is performing modification and
refurbishment work on one of the Company's fourth-generation semisubmersible
drilling rigs, the Transocean Leader. Disputes have arisen with respect to the
work performed and the amount owed with respect to such work. The amount in
dispute is approximately $26 million. The Company will post a letter of credit
for approximately $30 million pending the resolution of the dispute by agreement
between the parties or by final judgment under the Norwegian judicial process.
The parties are continuing to discuss the matter, and the Company is unable to
predict at this time the ultimate outcome of such discussions or any resulting
judicial process; however, the Company believes Kvaerner's claims are without
merit and that the outcome of the dispute will have no material adverse effect
on the Company's operations or financial position.
ITEM 6. EXHIBITS AND REPORTS
(a) Exhibits
The following exhibits are filed in connection with this Report:
NUMBER DESCRIPTION
- ------ -----------
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K on April 2, 1997
reporting under Item 7. thereof certain pro forma financial
information for the year ended December 31, 1996 relating to the
Company's acquisition of Transocean ASA.
The Company filed a Current Report on Form 8-K on April 29, 1997
reporting under Item 5. thereof the completion of the Company's
public offering of $300,000,000 aggregate principal amount of debt
securities and including as exhibits certain documents relating
thereto.
17
<PAGE>
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 13, 1997.
TRANSOCEAN OFFSHORE INC.
By: /s/ Robert L. Long
__________________________________
Robert L. Long
Senior Vice President
(Principal Financial Officer)
By: /s/ Barbara S. Koucouthakis
__________________________________
Barbara S. Koucouthakis
Vice President and Controller
(Principal Accounting Officer)
18
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