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Transocean 10-K 2010 Documents found in this filing:UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
_________________________
FORM 10-K
(Mark
one)
þ ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the fiscal year ended December 31, 2009
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 000-53533
_________________________
TRANSOCEAN LTD.
(Exact name
of registrant as specified in its charter)
Registrant’s
telephone number, including area code: +41 (22) 930-9000
Securities
registered pursuant to Section 12(b) of the Act:
Securities
registered pursuant to Section 12(g) of the Act: None
_________________________
Indicate by
check mark whether the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes þ No ¨
Indicate by check mark if the registrant
is not required to file reports pursuant to Section 13 or Section 15(d) of the
Exchange Act. Yes ¨ No þ
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 þ No ¨
Indicate by
check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post
such files). Yes þ No ¨
Indicate by
check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. þ
Indicate by
check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller company. See definitions
of “large accelerated filer,” “accelerated filer” and “smaller reporting
company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer þ Accelerated
filer ¨ Non-accelerated
filer (do not check if a smaller reporting company) ¨ Smaller
reporting company ¨
Indicate by
check mark whether the registrant is a shell company (as defined by Rule 12b-2
of the Exchange Act). Yes ¨ No þ
As of
June 30, 2009, 320,953,074 shares were outstanding and the aggregate market
value of shares held by non-affiliates was approximately $23.8 billion
(based on the reported closing market price of the shares of
Transocean Ltd. on such date of $74.29 and assuming that all directors and
executive officers of the Company are “affiliates,” although the Company does
not acknowledge that any such person is actually an “affiliate” within the
meaning of the federal securities laws). As of February 19,
2010, 321,628,110 shares were outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of
the registrant’s definitive Proxy Statement to be filed with the Securities and
Exchange Commission within 120 days of December 31, 2009, for its 2010
annual general meeting of shareholders, are incorporated by reference into
Part III of this Form 10-K. INDEX
TO ANNUAL REPORT ON FORM 10-K
FOR
THE YEAR ENDED DECEMBER 31, 2009
Forward-Looking
Information
The
statements included in this annual report regarding future financial performance
and results of operations and other statements that are not historical facts are
forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. Forward-looking statements in this annual report include, but
are not limited to, statements about the following subjects:
Forward-looking
statements in this annual report are identifiable by use of the following words
and other similar expressions:
Such
statements are subject to numerous risks, uncertainties and assumptions,
including, but not limited to:
The
foregoing risks and uncertainties are beyond our ability to control, and in many
cases, we cannot predict the risks and uncertainties that could cause our actual
results to differ materially from those indicated by the forward-looking
statements. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results
may vary materially from those indicated.
All
subsequent written and oral forward-looking statements attributable to us or to
persons acting on our behalf are expressly qualified in their entirety by
reference to these risks and uncertainties. You should not place
undue reliance on forward-looking statements. Each forward-looking
statement speaks only as of the date of the particular statement, and we
undertake no obligation to publicly update or revise any forward-looking
statements, except as required by law.
PART
I
Overview
Transocean Ltd.
(together with its subsidiaries and predecessors, unless the context requires
otherwise, “Transocean,” the “Company,” “we,” “us” or “our”) is a leading
international provider of offshore contract drilling services for oil and gas
wells. As of February 2, 2010, we owned, had partial ownership
interests in or operated 138 mobile offshore drilling units. As
of this date, our fleet consisted of 44 High-Specification Floaters
(Ultra-Deepwater, Deepwater and Harsh Environment semisubmersibles and
drillships), 26 Midwater Floaters, 10 High-Specification Jackups,
55 Standard Jackups and three Other Rigs. In addition, we had
five Ultra-Deepwater Floaters under construction.
We believe
our mobile offshore drilling fleet is one of the most modern and versatile
fleets in the world. Our primary business is to contract our drilling
rigs, related equipment and work crews predominantly on a dayrate basis to drill
oil and gas wells. We specialize in technically demanding segments of
the offshore drilling business with a particular focus on deepwater and harsh
environment drilling services. We also provide oil and gas drilling
management services on either a dayrate basis or a completed-project,
fixed-price (or “turnkey”) basis, as well as drilling engineering and drilling
project management services, and we participate in oil and gas exploration and
production activities.
Transocean Ltd.
is a Swiss corporation with principal executive offices located at Blandonnet
International Business Center, Chemin de Blandonnet 2, Building F, 7th
Floor, 1214 Vernier, Switzerland. Our telephone number at that
address is +41 22 930-9000. Our shares are listed on the
New York Stock Exchange (“NYSE”) under the symbol “RIG.” On
February 16, 2010, we announced our intention to list our shares on the SIX
in the second quarter of 2010, subject to the approval of the
SIX. Our shares will continue to be listed on the
NYSE. For information about the revenues, operating income, assets
and other information related to our business, our segments and the geographic
areas in which we operate, see “Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations” and Notes to Consolidated
Financial Statements—Note 23—Segments, Geographical Analysis and Major
Customers.
Background
In
November 2007, we completed our merger transaction (the “Merger”) with
GlobalSantaFe Corporation (“GlobalSantaFe”). Immediately prior to the
effective time of the Merger, each of Transocean Inc.’s outstanding
ordinary shares was reclassified by way of a scheme of arrangement under Cayman
Islands law into (1) 0.6996 Transocean Inc. ordinary shares and
(2) $33.03 in cash (the “Reclassification” and together with the Merger,
the “GSF Transactions”). At the effective time of the Merger, each
outstanding ordinary share of GlobalSantaFe (the “GlobalSantaFe Ordinary
Shares”) was exchanged for (1) 0.4757 Transocean Inc. ordinary shares
(after giving effect to the Reclassification) and (2) $22.46 in
cash. Transocean Inc. issued approximately 107,752,000 of its
ordinary shares in connection with the Merger and distributed $14.9 billion
in cash in connection with the GSF Transactions. Transocean Inc.
funded the payment of the cash consideration for the GSF Transactions with
$15.0 billion of borrowings under a $15.0 billion, one-year senior
unsecured bridge loan facility (the “Bridge Loan Facility”) and has since
refinanced or repaid those borrowings and terminated the Bridge Loan
Facility. We included the financial results of GlobalSantaFe in our
consolidated financial statements beginning November 27, 2007, the date the
GlobalSantaFe Ordinary Shares were exchanged for Transocean Inc. ordinary
shares.
In
December 2008, Transocean Ltd. completed a transaction pursuant to an
Agreement and Plan of Merger among Transocean Ltd., Transocean Inc.,
which was our former parent holding company, and Transocean Cayman Ltd., a
company organized under the laws of the Cayman Islands that was a wholly owned
subsidiary of Transocean Ltd., pursuant to which Transocean Inc.
merged by way of schemes of arrangement under Cayman Islands law with Transocean
Cayman Ltd., with Transocean Inc. as the surviving company and, as a
result, a wholly owned subsidiary of Transocean Ltd. (the “Redomestication
Transaction”). In the Redomestication Transaction,
Transocean Ltd. issued one of its shares in exchange for each ordinary
share of Transocean Inc. In addition, Transocean Ltd.
issued 16 million of its shares to Transocean Inc. for future use to
satisfy Transocean Ltd.’s obligations to deliver shares in connection with
awards granted under our incentive plans or other rights to acquire shares of
Transocean Ltd. The Redomestication Transaction effectively
changed the place of incorporation of our parent holding company from the Cayman
Islands to Switzerland. As a result of the Redomestication
Transaction, Transocean Inc. became a direct, wholly owned subsidiary of
Transocean Ltd. In connection with the Redomestication
Transaction, we relocated our principal executive offices to Vernier,
Switzerland. We refer to the Redomestication Transaction and the
relocation of our principal executive offices together as the
“Redomestication.”
Drilling
Fleet
We
principally operate three types of drilling rigs:
Also
included in our fleet are barge drilling rigs and a coring
drillship.
Most of our
drilling equipment is suitable for both exploration and development drilling,
and we normally engage in both types of drilling activity. Likewise,
most of our drilling rigs are mobile and can be moved to new locations in
response to customer demand. All of our mobile offshore drilling
units are designed for operations away from port for extended periods of time
and most have living quarters for the crews, a helicopter landing deck and
storage space for pipe and drilling supplies.
We
categorize our fleet as follows: (1) “High-Specification Floaters,”
consisting of our “Ultra-Deepwater Floaters,” “Deepwater Floaters” and “Harsh
Environment Floaters,” (2) “Midwater Floaters,”
(3) “High-Specification Jackups,” (4) “Standard Jackups” and
(5) “Other Rigs.” As of February 2, 2010, our fleet of
138 rigs, excluding rigs under construction, included:
As of
February 2, 2010, our fleet was located in the Far East (25 units),
U.K. North Sea (16 units), Middle East (16 units), U.S. Gulf of Mexico
(15 units), West African countries other than Nigeria and Angola
(14 units), India (12 units), Brazil (10 units), Nigeria
(seven units), Angola (six units), Norway (five units), the
Mediterranean (four units), Trinidad (two units), Australia
(two units), Canada (two units), the Netherlands (one unit) and
the Caspian Sea (one unit).
High-Specification
Floaters are specialized offshore drilling units that we categorize into three
sub-classifications based on their capabilities. Ultra-Deepwater
Floaters have high-pressure mud pumps and a water depth capability of
7,500 feet or greater. Deepwater Floaters are generally those
other semisubmersible rigs and drillships that have a water depth capacity
between 7,500 and 4,500 feet. Harsh Environment Floaters
have a water depth capacity between 5,000 and 1,500 feet, are capable
of drilling in harsh environments and have greater displacement, resulting in
larger variable load capacity, more useable deck space and better motion
characteristics. Midwater Floaters are generally comprised of those
non-high-specification semisubmersibles with a water depth capacity of less than
4,500 feet. High-Specification Jackups consist of our harsh
environment and high-performance jackups, and Standard Jackups consist of our
remaining jackup fleet. Other Rigs consist of rigs that are of a
different type or use than those mentioned above.
Drillships
are generally self-propelled, shaped like conventional ships and are the most
mobile of the major rig types. All of our high-specification
drillships are dynamically positioned, which allows them to maintain position
without anchors through the use of their onboard propulsion and station-keeping
systems. Drillships typically have greater load capacity than early
generation semisubmersible rigs. This enables them to carry more
supplies on board, which often makes them better suited for drilling in remote
locations where resupply is more difficult. However, drillships are
typically limited to calmer water conditions than those in which
semisubmersibles can operate. Our five existing Enhanced
Enterprise-class and Enterprise-class drillships are, and four of our five
additional newbuild drillships contracted for or under construction will be,
equipped with our patented dual-activity technology. Dual-activity
technology includes structures, equipment and techniques for using two drilling
stations within a single derrick to perform drilling
tasks. Dual-activity technology allows our rigs to perform
simultaneous drilling tasks in a parallel rather than sequential
manner. Dual-activity technology reduces critical path activity and
improves efficiency in both exploration and development drilling.
Semisubmersibles
are floating vessels that can be submerged by means of a water ballast system
such that the lower hulls are below the water surface during drilling
operations. These rigs are capable of maintaining their position over
the well through the use of an anchoring system or a computer controlled dynamic
positioning thruster system. Some semisubmersible rigs are
self-propelled and move between locations under their own power when afloat on
pontoons although most are relocated with the assistance of
tugs. Typically, semisubmersibles are better suited than drillships
for operations in rougher water conditions. Our three Express-class
semisubmersibles are designed for mild environments and are equipped with the
unique tri-act derrick, which was designed to reduce overall well construction
costs. The tri-act derrick allows offline tubular and riser handling
operations to occur at two sides of the derrick while the center portion of the
derrick is being used for normal drilling operations through the rotary
table. Our three Development Driller-class semisubmersibles are
equipped with our patented dual-activity technology.
Jackup rigs
are mobile self-elevating drilling platforms equipped with legs that can be
lowered to the ocean floor until a foundation is established to support the
drilling platform. Once a foundation is established, the drilling
platform is then jacked further up the legs so that the platform is above the
highest expected waves. These rigs are generally suited for water
depths of 400 feet or less.
We classify
certain of our jackup rigs as High-Specification Jackups. These rigs
have greater operational capabilities than Standard Jackups and are able to
operate in harsh environments, have higher capacity derricks, drawworks, mud
systems and storage, and are typically capable of drilling to deeper
depths. Typically, these jackups also have deeper water depth
capacity than Standard Jackups.
Depending on
market conditions, we may idle or stack non-contracted rigs. An idle rig is between
contracts, readily available for operations, and operating costs are typically
at or near normal levels. A stacked rig is manned by a
reduced crew or unmanned and typically has reduced operating costs and is
(a) preparing for an extended period of inactivity, (b) expected to
continue to be inactive for an extended period, or (c) completing a period
of extended inactivity. Some idle rigs and all stacked rigs require
additional costs to return to service. The actual cost, which could
fluctuate over time, depends upon various factors, including the availability
and cost of shipyard facilities, cost of equipment and materials and the extent
of repairs and maintenance that may ultimately be required. Under
certain circumstances, the cost could be significant. We consider
these factors, together with market conditions, length of contract and dayrate
and other contract terms, when deciding whether to return a stacked rig to
service. We may consider marketing stacked rigs as accommodation
units or for other alternative uses, from time to time, until drilling activity
increases and we obtain drilling contracts for these units.
As of
February 2, 2010, we owned all of the drilling rigs in our fleet noted in
the tables below, except for the following: (1) those specifically
described as being owned wholly or in part by unaffiliated parties,
(2) GSF Explorer, which is
subject to a capital lease through July 2026 (3) GSF Jack Ryan,
which is subject to a fully defeased capital lease through November 2020
and (4) Petrobras 10000, which
is subject to a capital lease through August 2029.
In the
tables presented below, the location of each rig indicates the current drilling
location for operating rigs or the next operating location for rigs in shipyards
with a follow-on contract, unless otherwise noted. In addition to the
rigs presented below, we also own or operate three Other Rigs, including two
drilling barges and a coring drillship.
Rigs
Under Construction (5)
The
following table provides certain information regarding our Ultra-Deepwater
Floaters under construction as of February 2, 2010:
______________________________
High-Specification
Floaters (44)
The
following table provides certain information regarding our High-Specification
Floaters as of February 2, 2010:
______________________________
(e) Owned
through our 50 percent interest in Transocean Pacific
Drilling Inc.
Midwater
Floaters (26)
The
following table provides certain information regarding our Midwater Floaters as
of February 2, 2010:
______________________________
High-Specification
Jackups (10)
The
following table provides certain information regarding our High-Specification
Jackups as of February 2, 2010:
______________________________
Standard
Jackups (55)
The
following table provides certain information regarding our Standard Jackups as
of February 2, 2010:
______________________________
Markets
Our
operations are geographically dispersed in oil and gas exploration and
development areas throughout the world. Although the cost of moving a
rig and the availability of rig-moving vessels may cause the balance between
supply and demand to vary between regions, significant variations do not tend to
exist long-term because of rig mobility. Consequently, we operate in
a single, global offshore drilling market. Because our drilling rigs
are mobile assets and are able to be moved according to prevailing market
conditions, we cannot predict the percentage of our revenues that will be
derived from particular geographic or political areas in future
periods.
In recent
years, there has been increased emphasis by oil companies on exploring for
hydrocarbons in deeper waters. This deepwater focus is due, in part,
to technological developments that have made such exploration more feasible and
cost-effective. Therefore, water-depth capability is a key component
in determining rig suitability for a particular drilling
project. Another distinguishing feature in some drilling market
sectors is a rig’s ability to operate in harsh environments, including extreme
marine and climatic conditions and temperatures.
The
deepwater and midwater market sectors are serviced by our semisubmersibles and
drillships. Although the term “deepwater” as used in the drilling
industry to denote a particular sector of the market can vary and continues to
evolve with technological improvements, we generally view the deepwater market
sector as that which begins in water depths of approximately 4,500 feet and
extends to the maximum water depths in which rigs are capable of drilling, which
is currently approximately 12,000 feet. We view the midwater
market sector as that which covers water depths of about 300 feet to
approximately 4,500 feet.
The global
jackup market sector begins at the outer limit of the transition zone and
extends to water depths of about 400 feet. This sector has been
developed to a significantly greater degree than the deepwater market sector
because the shallower water depths have made it much more affordable and
accessible than the deeper water market sectors.
The
“transition zone” market sector is characterized by marshes, rivers, lakes, and
shallow bay and coastal water areas. We operate in this sector using
our two barge drilling rigs located in Southeast Asia.
Contract
Backlog
Our contract
backlog at December 31, 2009 was approximately $31 billion,
representing a 23 percent and 3 percent decrease compared to our
contract backlog of $40 billion and $32 billion at December 31,
2008 and 2007, respectively. See “Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operations—Outlook—Drilling
Market” and “Item 7. Management’s Discussion and Analysis of Financial Condition
and Results of Operations—Performance and Other Key Indicators.”
Operating
Revenues and Long-Lived Assets by Country
Operating
revenues and long-lived assets by country are as follows
(in millions):
______________________________
Contract
Drilling Services
Our
contracts to provide offshore drilling services are individually negotiated and
vary in their terms and provisions. We obtain most of our contracts
through competitive bidding against other contractors. Drilling
contracts generally provide for payment on a dayrate basis, with higher rates
while the drilling unit is operating and lower rates for periods of mobilization
or when drilling operations are interrupted or restricted by equipment
breakdowns, adverse environmental conditions or other conditions beyond our
control.
A dayrate
drilling contract generally extends over a period of time covering either the
drilling of a single well or group of wells or covering a stated
term. Certain of our contracts with customers may be cancelable at
the option of the customer upon payment of an early termination
payment. Such payments may not, however, fully compensate us for the
loss of the contract. Contracts also customarily provide for either
automatic termination or termination at the option of the customer typically
without the payment of any termination fee, under various circumstances such as
non-performance, in the event of downtime or impaired performance caused by
equipment or operational issues, or sustained periods of downtime due to force
majeure events. Many of these events are beyond our
control. The contract term in some instances may be extended by the
customer exercising options for the drilling of additional wells or for an
additional term. Our contracts also typically include a provision
that allows the customer to extend the contract to finish drilling a
well-in-progress. During periods of depressed market conditions, our
customers may seek to renegotiate firm drilling contracts to reduce their
obligations or may seek to repudiate their contracts. Suspension of
drilling contracts will result in the reduction in or loss of dayrate for the
period of the suspension. If our customers cancel some of our
contracts and we are unable to secure new contracts on a timely basis and on
substantially similar terms, or if contracts are suspended for an extended
period of time or if a number of our contracts are renegotiated, it could
adversely affect our consolidated statement of financial position, results of
operations or cash flows. See “Item 1A. Risk Factors—Our drilling
contracts may be terminated due to a number of events.”
Drilling
Management Services
We provide
drilling management services primarily on a turnkey basis through Applied
Drilling Technology Inc., our wholly owned subsidiary, which primarily
operates in the U.S. Gulf of Mexico, and through ADT International, a division
of one of our U.K. subsidiaries, which primarily operates in the North Sea
(together, “ADTI”). As part of our turnkey drilling services, we
provide planning, engineering and management services beyond the scope of our
traditional contract drilling business and, thereby, assume greater
risk. Under turnkey arrangements, we typically assume responsibility
for the design and execution of a well and deliver a logged or cased hole to an
agreed depth for a guaranteed price for which payment is contingent upon
successful completion of the well program.
In addition
to turnkey drilling services, we participate in project management operations
that include providing certain planning, management and engineering services,
purchasing equipment and providing personnel and other logistical services to
customers. Our project management services differ from turnkey
drilling services in that the customer assumes control of the drilling
operations and thereby retains the risks associated with the
project.
These
drilling management services revenues represented less than three percent
of our consolidated revenues for the year ended December 31,
2009. In the course of providing drilling management services, ADTI
may use a drilling rig in our fleet or contract for a rig owned by another
contract driller.
Integrated
Services
From time to
time, we provide well and logistics services in addition to our normal drilling
services through third party contractors and our employees. We refer
to these other services as integrated services, which are generally subject to
individual contractual agreements executed to meet specific customer needs and
may be provided on either a dayrate, cost plus or fixed-price basis, depending
on the daily activity. As of February 2, 2010, we were only
performing such services in India. These integrated services revenues
represented less than two percent of our consolidated revenues for the year
ended December 31, 2009.
Oil
and Gas Properties
We conduct
oil and gas exploration, development and production activities through our oil
and gas subsidiaries. We acquire interests in oil and gas properties
principally in order to facilitate the awarding of turnkey contracts for our
drilling management services operations. Our oil and gas activities
are conducted through Challenger Minerals Inc. and Challenger Minerals
(North Sea) Limited (together, “CMI”), which holds property interests primarily
in the U.S. offshore Louisiana and Texas and in the U.K. sector of the North
Sea. The oil and gas properties revenues represented less than
one percent of our consolidated revenues for the year ended
December 31, 2009.
Joint
Venture, Agency and Sponsorship Relationships and Other Investments
In some
areas of the world, local customs and practice or governmental requirements
necessitate the formation of joint ventures with local participation, which we
may or may not control. We are an active participant in several joint
venture drilling companies, principally in Angola, India, Indonesia, Malaysia
and Nigeria. Local laws or customs in some areas of the world also
effectively mandate establishment of a relationship with a local agent or
sponsor. When appropriate in these areas, we enter into agency or
sponsorship agreements.
We hold a
50 percent interest in Transocean Pacific Drilling Inc. (“TPDI”), a
British Virgin Islands joint venture company formed by us and Pacific Drilling
Limited (“Pacific Drilling”), a Liberian company, to own two ultra-deepwater
drillships named Dhirubhai Deepwater KG1
and Dhirubhai Deepwater KG2,
the latter of which is currently under construction and expected to be completed
in the first quarter of 2010. Under a management services agreement
with TPDI, we currently provide construction management services for the Dhirubhai Deepwater KG2 and
operating management services for the Dhirubhai Deepwater KG1, and
we have agreed to provide operating management services for the Dhirubhai Deepwater KG2
after the drillship commences operations. Beginning on
October 18, 2010, Pacific Drilling will have the right to exchange its
interest in the joint venture for our shares or cash at a purchase price based
on an appraisal of the fair value of the drillships, subject to various
adjustments.
We hold a
65 percent interest in Angola Deepwater Drilling Company Limited (“ADDCL”),
a Cayman Islands joint venture company formed to construct, own and operate an
ultra-deepwater drillship to be named Discoverer Luanda. Angco
Cayman Limited, a Cayman Islands company, holds the remaining 35 percent
interest in ADDCL. Under a management services agreement with ADDCL,
we provide construction management services and have agreed to provide operating
management services once the drillship begins operations, which is currently
expected to be in the third quarter of 2010. Beginning on the fifth
anniversary of the first well commencement date, Angco Cayman Limited will have
the right to exchange its interest in the joint venture for cash at a purchase
price based on an appraisal of the fair value of the drillship, subject to
various adjustments.
We hold a
50 percent interest in Overseas Drilling Limited (“ODL”), an unconsolidated
Cayman Islands joint venture company, which owns the drillship Joides
Resolution. The drillship is contracted to perform drilling
and coring operations in deep waters worldwide for the purpose of scientific
research. We manage and operate the vessel on behalf of
ODL.
See “Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations—Related Party Transactions.”
Significant
Customers
We engage in
offshore drilling services for most of the leading international oil companies
(or their affiliates), as well as for many government-controlled and independent
oil companies. Our most significant customer in 2009 was BP,
accounting for 12 percent of our 2009 operating revenues. The
loss of this significant customer could, at least in the short term, have a
material adverse effect on our results of operations. No other
customer accounted for 10 percent or more of our 2009 operating
revenues.
Employees
We require
highly skilled personnel to operate our drilling units. We conduct
extensive personnel recruiting, training and safety programs. At
December 31, 2009, we had approximately 19,300 employees, and we had
engaged approximately 2,200 persons through contract labor
providers. Some of our employees working in Angola, the U.K. and
Norway, are represented by, and some of our contracted labor work under,
collective bargaining agreements. Many of these represented
individuals are working under agreements that are subject to ongoing salary
negotiation in 2010. These negotiations could result in higher
personnel expenses, other increased costs or increased operation restrictions as
the outcome of such negotiations apply to all offshore employees not just the
union members.
Additionally,
the unions in the U.K. sought an interpretation of the application of the
Working Time Regulations to the offshore sector. The Employment
Tribunal issued its decision in favor of the unions and held, in part, that
offshore workers are entitled to 28 days of annual leave. Such
decision has been overturned on appeal by the Employment Appeal Tribunal, but
the unions have appealed this decision to the Court of Session for a hearing in
June 2010. The application of the Working Time Regulations to
the offshore sector could result in higher labor costs and could undermine our
ability to obtain a sufficient number of skilled workers in the
U.K.
Legislation
has been introduced in the U.S. Congress that could encourage additional
unionization efforts in the U.S., as well as increase the chances that such
efforts succeed. Additional unionization efforts, if successful, new
collective bargaining agreements or work stoppages could materially increase our
labor costs and operating restrictions.
Technological
Innovation
We are the
world’s largest offshore drilling contactor and leading provider of drilling
management services worldwide. Our fleet is considered one of the
most modern and versatile in the world due to its emphasis on technically
demanding sectors of the offshore drilling business. Since launching
the offshore industry’s first jackup drilling rig in 1954, we have achieved a
long history of technological innovations, including the first dynamically
positioned drillship, the first rig to drill year-round in the North Sea, the
first semisubmersible rig for Sub-Arctic, year-round operations, and the latest
generations of ultra-deepwater drillships and semisubmersibles. Nine
of our existing fleet are, and four of our newbuilds will be, equipped with our
patented dual-activity technology, which allows our rigs to perform simultaneous
drilling tasks in a parallel rather than sequential manner and reduces critical
path activity while improving efficiency in both exploration and development
drilling. The effective use of and continued improvements in
technology are critical to the maintenance of our competitive position within
the drilling services industry. We expect to continue to develop
technology internally or to acquire technology through strategic
acquisitions.
Environmental
Regulation
For a
discussion of the effects of environmental regulation, see “Item 1A. Risk
Factors—Compliance with or breach of environmental laws can be costly and could
limit our operations.”
Our
operations are subject to a variety of global environmental
regulations. We monitor environmental regulation in each country of
operation and, while we see an increase in general environmental regulation, we
have made and will continue to make the required expenditures to comply with
current and future environmental requirements. We make expenditures to
further our commitment to environmental improvement and the setting of a global
environmental standard as part of our wider corporate responsibility
effort. We assess the environmental impacts of our business, specifically
in the areas of greenhouse gas emissions, climate change, discharges and waste
management. We report our global emissions data each year through the
Carbon Disclosure Project in addition to a description of our actions being
undertaken to manage under future emissions legislation under development in a
number of countries in North America and Europe. Our actions are
designed to reduce risk in our future operations and promote sound environmental
management. While we continue to assess further projects designed to
reduce our overall emissions, to date, we have not expended material amounts in
order to comply with recent legislation, and we do not believe that our
compliance with such requirements will have a material adverse effect upon our
results of operations or competitive position or materially increase our capital
expenditures.
Available
Information
Our website
address is www.deepwater.com. Information
contained on or accessible from our website is not incorporated by reference
into this annual report on Form 10-K and should not be considered a part of
this report or any other filing that we make with the SEC. We make
available on this website free of charge, our annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and
amendments to those reports as soon as reasonably practicable after we
electronically file those materials with, or furnish those materials to, the
SEC. You may also find information related to our corporate
governance, board committees and company code of business conduct and ethics on
our website. The SEC also maintains a website, www.sec.gov, that contains reports,
proxy statements and other information regarding SEC registrants, including
us.
We intend to
satisfy the requirement under Item 5.05 of Form 8-K to disclose any amendments
to our Code of Business Conduct and Ethics and any waiver from any provision of
our Code of Business Conduct and Ethics by posting such information in the
Corporate Governance section of our website at www.deepwater.com.
ITEM
1A. Risk
Factors
Risks
related to our business
The
worldwide financial and economic downturn could have a material adverse effect
on our revenue, profitability and financial position.
The worldwide financial and economic
downturn reduced the availability of liquidity and credit to fund the
continuation and expansion of industrial business operations
worldwide. The shortage of liquidity and credit combined with losses
in worldwide equity markets led to an extended worldwide economic
recession. A slowdown in economic activity caused by the recession
reduced worldwide demand for energy and resulted in an extended period of lower
oil and natural gas prices. Crude oil prices have declined from
record levels in July 2008 and natural gas prices have also experienced
sharp declines. Declines in commodity prices, along with difficult
conditions in the credit markets, have had a negative impact on our business,
and this impact could continue or worsen. Demand for our services depends on oil
and natural gas industry activity and expenditure levels that are directly
affected by trends in oil and, to a lesser extent, natural gas
prices. Demand for our services is particularly sensitive to the
level of exploration, development, and production activity of, and the
corresponding capital spending by, oil and natural gas companies, including
national oil companies. Any prolonged reduction in oil and natural
gas prices could depress the immediate levels of exploration, development, and
production activity. Perceptions of longer-term lower oil and natural
gas prices by oil and gas companies could similarly reduce or defer major
expenditures given the long-term nature of many large-scale development
projects. Lower levels of activity result in a corresponding decline
in the demand for our services, which could have a material adverse effect on
our revenue and profitability. Additionally, these factors may
adversely impact our statement of financial position if they are determined to
cause an impairment of our goodwill or intangible assets or of our long-lived
assets or our assets held for sale. The worldwide financial and
economic downturn may also adversely affect the ability of shipyards to meet
scheduled deliveries of our newbuild and other shipyard
projects.
The
worldwide financial and economic downturn may continue to negatively impact our
business and financial condition.
The
continued economic downturn and related instability in the global financial
system has had, and may continue to have, an impact on our business and our
financial condition. Our ability to access the capital 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. The economic downturn has impacted
lenders participating in our credit facilities and our customers, and an
extended or worsening economic downturn may cause them to fail to meet their
obligations to us.
Our
business depends on the level of activity in the offshore oil and gas industry,
which is significantly affected by volatile oil and gas prices and other
factors.
Our business
depends on the level of activity in oil and gas exploration, development and
production in offshore areas worldwide. Oil and gas prices and market
expectations of potential changes in these prices significantly affect this
level of activity. However, higher commodity prices do not
necessarily translate into increased drilling activity since customers’
expectations of future commodity prices typically drive demand for our
rigs. Also, increased competition for customers’ drilling budgets
could come from, among other areas, land-based energy markets in Africa, Russia,
Western Asian countries, the Middle East, the U.S. and elsewhere. The
availability of quality drilling prospects, exploration success, relative
production costs, the stage of reservoir development and political and
regulatory environments also affect customers’ drilling
campaigns. Worldwide military, political and economic events have
contributed to oil and gas price volatility and are likely to do so in the
future.
Oil and gas
prices are extremely volatile and are affected by numerous factors, including
the following:
Our
industry is highly competitive and cyclical, with intense price
competition.
The offshore
contract drilling industry is highly competitive with numerous industry
participants, none of which has a dominant market share. Drilling
contracts are traditionally awarded on a competitive bid
basis. Intense price competition is often the primary factor in
determining which qualified contractor is awarded a job, although rig
availability and the quality and technical capability of service and equipment
may also be considered.
Our industry
has historically been cyclical and is impacted by oil and gas price levels and
volatility. There have been periods of high demand, short rig supply
and high dayrates, followed by periods of low demand, excess rig supply and low
dayrates. Changes in commodity prices can have a dramatic effect on
rig demand, and periods of excess rig supply intensify the competition in the
industry and often result in rigs being idle for long periods of
time. Since the onset of the worldwide financial and economic
downturn, we have experienced weakness in our Midwater Floater,
High-Specification Jackups and Standard Jackup markets. We have idled
rigs, and may in the future, idle additional rigs or enter into lower dayrate
contracts in response to market conditions.
During prior
periods of high utilization and dayrates, industry participants have increased
the supply of rigs by ordering the construction of new units. This
has typically resulted in an oversupply of drilling units and has caused a
subsequent decline in utilization and dayrates, sometimes for extended periods
of time. There are numerous high-specification rigs and jackups under
contract for construction. The entry into service of these new units
will increase supply and could curtail a strengthening, or trigger a reduction,
in dayrates as rigs are absorbed into the active fleet. Any further
increase in construction of new drilling units would likely exacerbate the
negative impact on utilization and dayrates. Lower utilization and
dayrates could adversely affect our revenues and
profitability. Prolonged periods of low utilization and dayrates
could also result in the recognition of impairment charges on certain classes of
our drilling rigs or our goodwill balance if future cash flow estimates, based
upon information available to management at the time, indicate that the carrying
values of these rigs, goodwill or other intangible assets may not be
recoverable.
We rely heavily on a relatively
small number of customers and the loss of a significant customer and/or a
dispute that leads to the loss of a customer could have a material adverse
impact on our financial results.
We engage in
offshore drilling services for most of the leading international oil companies
(or their affiliates), as well as for many government-controlled and independent
oil companies. Our most significant customer in 2009 was BP,
accounting for 12 percent of our 2009 operating revenues. The
loss of this customer or another significant customer could, at least in the
short term, have a material adverse effect on our results of
operations.
Our
operating and maintenance costs will not necessarily fluctuate in proportion to
changes in operating revenues.
Our
operating and maintenance costs will not necessarily fluctuate in proportion to
changes in operating revenues. Costs for operating a rig are
generally fixed or only semi-variable regardless of the dayrate being
earned. In addition, should our rigs incur idle time between
contracts, we typically will not reduce the staff on those rigs because we will
use the crew to prepare the rig for its next contract. During times
of reduced activity, reductions in costs may not be immediate as portions of the
crew may be required to prepare rigs for stacking, after which time the crew
members are assigned to active rigs or dismissed. In addition, as our
rigs are mobilized from one geographic location to another, the labor and other
operating and maintenance costs can vary significantly. In general,
labor costs increase primarily due to higher salary levels and
inflation. Equipment maintenance expenses fluctuate depending upon
the type of activity the unit is performing and the age and condition of the
equipment. Contract preparation expenses vary based on the scope and
length of contract preparation required and the duration of the firm contractual
period over which such expenditures are amortized.
Our
shipyard projects and operations are subject to delays and cost
overruns.
As of
February 2, 2010, we had a total of five deepwater newbuild rig
projects. We also have a variety of other more limited shipyard
projects at any given time. These shipyard projects are subject to
the risks of delay or cost overruns inherent in any such construction project
resulting from numerous factors, including the following:
These
factors may contribute to cost variations and delays in the delivery of our
upgraded and newbuild units and other rigs undergoing shipyard
projects. Delays in the delivery of these units would result in delay
in contract commencement, resulting in a loss of revenue to us, and may also
cause customers to terminate or shorten the term of the drilling contract for
the rig pursuant to applicable late delivery clauses. In the event of
termination of one of these contracts, we may not be able to secure a
replacement contract on as favorable terms, if at all.
Our
operations also rely on a significant supply of capital and consumable spare
parts and equipment to maintain and repair our fleet. We also rely on
the supply of ancillary services, including supply boats and helicopters.
Shortages in materials, delays in the delivery of necessary spare parts,
equipment or other materials, or the unavailability of ancillary services could
negatively impact our future operations and result in increases in rig downtime,
and delays in the repair and maintenance of our fleet.
Our
drilling contracts may be terminated due to a number of events.
Certain of
our contracts with customers may be cancelable at the option of the customer
upon payment of an early termination payment. Such payments may not,
however, fully compensate us for the loss of the contract. Contracts
also customarily provide for either automatic termination or termination at the
option of the customer typically without the payment of any termination fee,
under various circumstances such as non-performance, as a result of downtime or
impaired performance caused by equipment or operational issues, or sustained
periods of downtime due to force majeure events. Many of these events
are beyond our control. During periods of depressed market conditions
such as the current economic downturn, we are subject to an increased risk of
our customers seeking to repudiate their contracts, including through claims of
non-performance. Our customers’ ability to perform their obligations
under their drilling contracts with us may also be negatively impacted by the
economic downturn. If our customers cancel some of our contracts, and
we are unable to secure new contracts on a timely basis and on substantially
similar terms, or if contracts are suspended for an extended period of time or
if a number of our contracts are renegotiated, it could adversely affect our
consolidated statement of financial position, results of operations or cash
flows.
Our
current backlog of contract drilling revenue may not be fully
realized.
Our contract
backlog as of February 2, 2010 was approximately
$30.4 billion. This amount represents the firm term of the
contract multiplied by the contractual operating rate, which may be higher than
other rates included in the contract such as waiting on weather rate, repair
rate or force majeure rate. Our contract backlog includes signed
drilling contracts and, in some cases, other definitive agreements awaiting
contract execution. We may not be able to realize the full amount of
our contract backlog due to events beyond our control. In addition,
some of our customers have experienced liquidity issues, and these liquidity
issues could increase if commodity prices decline to lower levels for an
extended period of time. Liquidity issues could lead our customers to
go into bankruptcy or could encourage our customers to seek to repudiate, cancel
or renegotiate these agreements for various reasons, as described under “Our
drilling contracts may be terminated due to a number of events”
above. Our inability to realize the full amount of our contract
backlog may have a material adverse effect on our consolidated statement of
financial position, results of operations or cash flows.
Our
non-U.S. operations involve additional risks not associated with our U.S.
operations.
We operate
in various regions throughout the world, which may expose us to political and
other uncertainties, including risks of:
We are
protected to some extent against loss of capital assets, but generally not loss
of revenue, from most of these risks through indemnity provisions in our
drilling contracts. Our assets are generally not insured against risk
of loss due to perils such as terrorist acts, civil unrest, expropriation,
nationalization and acts of war.
Many
governments favor or effectively require the awarding of drilling contracts to
local contractors or require foreign contractors to employ citizens of, or
purchase supplies from, a particular jurisdiction. These practices
may adversely affect our ability to compete.
Our non-U.S.
contract drilling operations are subject to various laws and regulations in
certain countries in which we operate, including laws and regulations relating
to the import and export, equipment and operation of drilling units, currency
conversions and repatriation, oil and gas exploration and development, and
taxation of offshore earnings and earnings of expatriate
personnel. We are also subject to the U.S. Treasury Department’s
Office of Foreign Assets Control (“OFAC”) and other U.S. laws and regulations
governing our international operations. In addition, various state
and municipal governments, universities and other investors have proposed or
adopted divestment and other initiatives regarding investments (including, with
respect to state governments, by state retirement systems) in companies that do
business with countries that have been designated as state sponsors of terrorism
by the U.S. State Department. We had a noncontrolling interest in a
Libyan joint venture that operates to a limited extent in Syria, which has been
designated as a state sponsor of terrorism by the U.S. State
Department. We sold our noncontrolling interest in this joint venture
in November 2009. Our internal compliance program has identified
and we have self-reported a potential OFAC compliance issue involving the
shipment of goods by a freight forwarder through Iran, a country that has been
designated as a state sponsor of terrorism by the U.S. State
Department. See “Item 2. Management’s Discussion and Analysis of
Financial Condition and Results of Operations—Outlook–Regulatory
Matters.” We also operate a rig in Myanmar, a country that is subject
to some U.S. trading sanctions. Failure to comply with applicable
laws and regulations, including those relating to sanctions and export
restrictions, may subject us to criminal sanctions or civil remedies, including
fines, denial of export privileges, injunctions or seizures of
assets. Investors could view any potential violations of OFAC
regulations negatively, which could adversely affect our reputation and the
market for our shares.
Governments
in some foreign countries have become increasingly active in regulating and
controlling the ownership of concessions and companies holding concessions, the
exploration for oil and gas and other aspects of the oil and gas industries in
their countries. In addition, government action, including
initiatives by OPEC, may continue to cause oil or gas price
volatility. In some areas of the world, this governmental activity
has adversely affected the amount of exploration and development work done by
major oil companies and may continue to do so.
A
substantial portion of our drilling contracts are partially payable in local
currency. Those amounts may exceed our local currency needs, leading
to the accumulation of excess local currency, which, in certain instances, may
be subject to either temporary blocking or other difficulties converting to U.S.
dollars. Excess amounts of local currency may be exposed to the risk
of currency exchange losses.
The shipment
of goods, services and technology across international borders subjects us to
extensive trade laws and regulations. Our import and export
activities are governed by unique customs laws and regulations in each of the
countries where we operate. Moreover, many countries, including the
U.S., control the import and export of certain goods, services and technology
and impose related import and export recordkeeping and reporting
obligations. Governments also may impose economic sanctions against
certain countries, persons and other entities that may restrict or prohibit
transactions involving such countries, persons and entities, and we are also
subject to the U.S. anti-boycott law.
The laws and
regulations concerning import and export activity, recordkeeping and reporting,
import and export control and economic sanctions are complex and constantly
changing. These laws and regulations may be enacted, amended,
enforced or interpreted in a manner materially impacting our
operations. The adverse impact of the global economic crisis may
increase some foreign government’s efforts to enact, enforce, amend or interpret
laws and regulations as a method to increase revenue. Shipments can
be delayed and denied import or export for a variety of reasons, some of which
are outside our control and some of which may result from failure to comply with
existing legal and regulatory regimes. Shipping delays or denials
could cause unscheduled operational downtime. Any failure to comply
with these applicable legal and regulatory obligations also could result in
criminal and civil penalties and sanctions, such as fines, imprisonment,
debarment from government contracts, seizure of shipments and loss of import and
export privileges.
An
inability to obtain visas and work permits for our employees on a timely basis
could hurt our operations and have an adverse effect on our
business.
Our ability
to operate worldwide depends on our ability to obtain the necessary visas and
work permits for our personnel to travel in and out of, and to work in, the
jurisdictions in which we operate. Governmental actions in some of
the jurisdictions in which we operate may make it difficult for us to move our
personnel in and out of these jurisdictions by delaying or withholding the
approval of these permits. As a result of a change in government
enforcement of the immigration policy in Angola, we have recently experienced
considerable difficulty in obtaining the necessary visas and work permits for
our employees to work in Angola, where we operate a number of
rigs. If we are not able to obtain visas and work permits for the
employees we need to operate our rigs on a timely basis, we might not be able to
perform our obligations under our drilling contracts, which could allow our
customers to cancel the contracts. If our customers cancel some of
our contracts, and we are unable to secure new contracts on a timely basis and
on substantially similar terms, it could adversely effect our consolidated
statement of financial position, results of operations or cash
flows.
Failure
to comply with the U.S. Foreign Corrupt Practices Act could result in fines,
criminal penalties, drilling contract terminations and an adverse effect on our
business.
As an
international company, we are subject to many laws and regulations, including
but not limited to the U.S. Foreign Corrupt Practices Act
(“FCPA”). We are currently involved in several investigations by the
U.S. Department of Justice and the SEC involving our operations and whether or
not we or any of our employees have violated the FCPA. We cannot
predict the ultimate outcome of any current or future investigations, the total
costs to be incurred in completing such investigations, the potential impact on
personnel, the effect of implementing any further measures that may be necessary
to ensure full compliance with applicable laws or to what extent, if at all, we
could be subject to fines, sanctions or other penalties which could be material
under certain circumstances.
Our current
investigations include a review of amounts paid to and by customs brokers in
connection with the obtaining of permits for the temporary importation of
vessels and the clearance of goods and materials. These permits and
clearances are necessary in order for us to operate our vessels in certain
jurisdictions. There is a risk that we may not be able to obtain
import permits or renew temporary importation permits in West African countries,
including Nigeria, in a manner that complies with the FCPA. As a
result, we may not have the means to renew temporary importation permits for
rigs located in the relevant jurisdictions as they expire or to send goods and
equipment into those jurisdictions, in which event we may be forced to terminate
the pending drilling contracts and relocate the rigs or leave the rigs in these
countries and risk permanent importation issues, either of which could have an
adverse effect on our financial results. In addition, termination of
drilling contracts could result in damage claims by
customers. Following the completion of existing investigations, we
will continue to be subject to the FCPA and these risks. See “Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations—Outlook–Regulatory Matters.”
Our
labor costs and the operating restrictions under which we operate could increase
as a result of collective bargaining negotiations and changes in labor laws and
regulations.
Some of our
employees working in Angola, the U.K. and Norway, are represented by, and some
of our contracted labor work under, collective bargaining
agreements. Many of these represented individuals are working under
agreements that are subject to ongoing salary negotiation in
2010. These negotiations could result in higher personnel expenses,
other increased costs or increased operation restrictions as the outcome of such
negotiations apply to all offshore employees not just the union
members. Additionally, the unions in the U.K. sought an
interpretation of the application of the Working Time Regulations to the
offshore sector. The Employment Tribunal issued its decision in favor
of the unions and held, in part, that offshore workers are entitled to
28 days of annual leave. Such decision has been overturned on
appeal by the Employment Appeal Tribunal, but the unions have appealed this
decision of the Court of Session for a hearing in June 2010. The
application of the Working Time Regulations to the offshore sector could result
in higher labor costs and could
undermine our ability to obtain a sufficient number of skilled workers in the
U.K. Legislation has been introduced in the U.S. Congress that could
encourage additional unionization efforts in the U.S., as well as increase the
chances that such efforts succeed. Additional unionization efforts,
if successful, new collective bargaining agreements or work stoppages could
materially increase our labor costs and operating restrictions.
Our
business involves numerous operating hazards.
Our
operations are subject to the usual hazards inherent in the drilling of oil and
gas wells, such as blowouts, reservoir damage, loss of production, loss of well
control, punch-throughs, craterings, fires and natural disasters such as
hurricanes and tropical storms. In particular, the South China Sea,
the Northwest Coast of Australia and the Gulf of Mexico area are subject to
typhoons, hurricanes or other extreme weather conditions on a relatively
frequent basis, and our drilling rigs in these regions may be exposed to damage
or total loss by these storms, some of which may not be covered by
insurance. The occurrence of these events could result in the
suspension of drilling operations, damage to or destruction of the equipment
involved and injury to or death of rig personnel. Some experts
believe global climate change could increase the frequency and severity of these
extreme weather conditions. We are also subject to personal injury
and other claims by rig personnel as a result of our drilling
operations. Operations also may be suspended because of machinery
breakdowns, abnormal drilling conditions, failure of subcontractors to perform
or supply goods or services, or personnel shortages. In addition,
offshore drilling operations are subject to perils peculiar to marine
operations, including capsizing, grounding, collision and loss or damage from
severe weather. Damage to the environment could also result from our
operations, particularly through oil spillage or extensive uncontrolled
fires. We may also be subject to property, environmental
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and other
damage claims by oil and gas companies. Our insurance policies and
contractual rights to indemnity may not adequately cover losses, and we do not
have insurance coverage or rights to indemnity for all
risks. Consistent with standard industry practice, our customers
generally assume, and indemnify us against, well control and subsurface risks
under dayrate contracts. These are risks associated with the loss of
control of a well, such as blowout or cratering, the cost to regain control of
or redrill the well and associated pollution. However, there can be
no assurance that these customers will be financially able to indemnify us
against all these risks.
We maintain
insurance coverage for property damage, occupational injury and illness, and
general and marine third-party liabilities. We generally have no
coverage for named storms in the U.S. Gulf of Mexico and war perils
worldwide. Also, pollution and environmental risks generally are not
totally insurable. We maintain large self-insured deductibles for
damage to our offshore drilling equipment and third-party
liabilities. We also self-insure coverage for expenses to ADTI and
CMI related to well control and redrill liability for well
blowouts.
If a
significant accident or other event occurs and is not fully covered by insurance
or an enforceable or recoverable indemnity from a customer, it could adversely
affect our consolidated statement of financial position, results of operations
or cash flows. The amount of our insurance may be less than the
related impact on enterprise value after a loss. Our insurance
coverage will not in all situations provide sufficient funds to protect us from
all liabilities that could result from our drilling operations. Our
coverage includes annual aggregate policy limits. As a result, we
retain the risk through self-insurance for any losses in excess of these
limits. We generally do not carry insurance for loss of revenue
unless contractually required, and certain other claims may also not be
reimbursed by insurance carriers. Any such lack of reimbursement may
cause us to incur substantial costs. In addition, we could decide to
retain substantially more risk through self-insurance in the
future. Moreover, no assurance can be made that we will be able to
maintain adequate insurance in the future at rates we consider reasonable or be
able to obtain insurance against certain risks. As of
February 19, 2010, all of the rigs that we owned or operated were covered
by existing insurance policies.
Regulation
of greenhouse gases and climate change could have a negative impact on our
business.
Some
scientific studies have suggested that emissions of certain gases, commonly
referred to as “greenhouse gases” (“GHGs”) and including carbon dioxide and
methane, may be contributing to warming of the Earth’s atmosphere and other
climatic changes. In response to such studies, the issue of climate
change and the effect of GHG emissions, in particular emissions from fossil
fuels, is attracting increasing attention worldwide.
On October
30, 2009, the U.S. Environmental Protection Agency (“EPA”) published a final
rule requiring the reporting of GHG emissions from specified large sources in
the U.S. beginning in 2011 for emissions occurring in 2010. In
addition, on December 15, 2009, the EPA published a final rule finding that
current and projected concentrations of six key GHGs in the atmosphere threaten
public health and welfare of current and future generations. The EPA
also found that the combined emissions of these GHGs from new motor vehicles and
new motor vehicle engines contribute to the GHG pollution that threatens public
health and welfare. This final rule, also known as EPA’s
“Endangerment Finding,” does not impose any requirements on industry or other
entities directly; however, after the rule’s January 14, 2010 effective date,
the EPA will be able to finalize motor vehicle GHG standards, the effect of
which could reduce demand for motor fuels refined from crude
oil. Finally, according to the EPA, the final motor vehicle GHG
standards will trigger construction and operating permit requirements for
stationary sources. As a result, the EPA has proposed to tailor these
programs such that only stationary sources, including refineries that emit over
25,000 tons of GHG emissions per year, will be subject to air permitting
requirements. In addition, on September 22, 2009, the EPA issued a
“Mandatory Reporting of Greenhouse Gases” final rule. This rule
establishes a new comprehensive scheme requiring operators of stationary sources
emitting more than established annual thresholds of carbon dioxide-equivalent
GHGs to inventory and report their GHG emissions annually on a
facility-by-facility basis. Further, proposed legislation has been
introduced in the U.S. Congress that would establish an economy-wide cap on
emissions of GHGs in the U.S. and would require most sources of GHG emissions to
obtain GHG emission “allowances” corresponding to their annual emissions of
GHGs. Moreover, in 2005, the Kyoto Protocol to the 1992 United
Nations Framework Convention on Climate Change, which establishes a binding set
of emission targets for greenhouse gases, became binding on all those countries
that had ratified it. International discussions are currently
underway to develop a treaty to replace the Kyoto Protocol after its expiration
in 2012.
Because our
business depends on the level of activity in the offshore oil and gas industry,
existing or future laws, regulations, treaties or international agreements
related to GHGs and climate change, including incentives to conserve energy or
use alternative energy sources, could have a negative impact on our business if
such laws, regulations, treaties or international agreements reduce the
worldwide demand for oil and gas. In addition, such laws,
regulations, treaties or international agreements could result in increased
compliance costs or additional operating restrictions, which may have a negative
impact on our business.
Failure
to retain key personnel could hurt our operations.
We require
highly skilled personnel to operate and provide technical services and support
for our business worldwide. Over the last few years, competition for
the labor required for drilling operations, including for turnkey drilling and
drilling management services businesses and construction projects, intensified
as the number of rigs activated, added to worldwide fleets or under construction
increased, leading to shortages of qualified personnel in the industry and
creating upward pressure on wages and higher
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turnover. We
may experience a reduction in the experience level of our personnel as a result
of any increased turnover, which could lead to higher downtime and more
operating incidents, which in turn could decrease revenues and increase
costs. In response to these
historical labor market conditions, we increased efforts in our recruitment,
training, development and retention programs as required to meet our anticipated
personnel needs. Although we expect current market conditions to slow
employee turnover, if increased competition for labor were to intensify in the
future we may experience further increases in costs or limits on
operations.
We
have a substantial amount of debt, and we may lose the ability to obtain future
financing and suffer competitive disadvantages.
Our overall
debt level was $12 billion and $14 billion at December 31, 2009
and December 31, 2008, respectively. This substantial level of
debt and other obligations could have significant adverse consequences on our
business and future prospects, including the following:
Our
overall debt level and/or market conditions could lead the credit rating
agencies to lower our corporate credit ratings below currently expected levels
and possibly below investment grade.
Our high
leverage level and/or market conditions could lead the credit rating agencies to
downgrade our credit ratings below currently expected levels and possibly to
non-investment grade levels. Such ratings levels could limit our
ability to refinance our existing debt, cause us to issue debt with unfavorable
terms and conditions and increase certain fees we pay under our credit
facilities. In addition, such ratings levels could negatively impact
current and prospective customers’ willingness to transact business with
us. Suppliers may lower or eliminate the level of credit provided
through payment terms when dealing with us thereby increasing the need for
higher levels of cash on hand, which would decrease our ability to repay debt
balances. Our credit ratings are currently BBB+ and Baa2 by Standard
& Poor’s and Moody’s, respectively.
We
are subject to litigation that, if not resolved in our favor and not
sufficiently insured against, could have a material adverse effect on
us.
We are
subject to a variety of litigation and may be sued in additional
cases. Certain of our subsidiaries are named as defendants in
numerous lawsuits alleging personal injury as a result of exposure to asbestos
or toxic fumes or resulting from other occupational diseases, such as silicosis,
and various other medical issues that can remain undiscovered for a considerable
amount of time. Some of these subsidiaries that have been put on
notice of potential liabilities have no assets. Our patent for
dual-activity technology has been challenged, and we have been accused of
infringing other patents. Other subsidiaries are subject to
litigation relating to environmental damage. We cannot predict the
outcome of the cases involving those subsidiaries or the potential costs to
resolve them. Insurance may not be applicable or sufficient in all
cases, insurers may not remain solvent, and policies may not be
located. Suits against non-asset-owning subsidiaries have and may in
the future give rise to alter ego or successor-in-interest claims against us and
our asset-owning subsidiaries to the extent a subsidiary is unable to pay a
claim or insurance is not available or sufficient to cover the
claims. To the extent that one or more pending or future litigation
matters is not resolved in our favor and is not covered by insurance, a material
adverse effect on our financial results and condition could result.
Public
health threats could have a material adverse effect on our operations and our
financial results.
Public
health threats, such as the H1N1 flu virus, Severe Acute Respiratory Syndrome,
and other highly communicable diseases, outbreaks of which have already occurred
in various parts of the world in which we operate, could adversely impact our
operations, the operations of our customers and the global economy, including
the worldwide demand for oil and natural gas and the level of demand for our
services. Any quarantine of personnel or inability to access our
offices or rigs could adversely affect our operations. Travel
restrictions or operational problems in any part of the world in which we
operate, or any reduction in the demand for drilling services caused by public
health threats in the future, may materially impact operations and adversely
affect our financial results.
Compliance
with or breach of environmental laws can be costly and could limit our
operations.
Our
operations are subject to regulations controlling the discharge of materials
into the environment, requiring removal and cleanup of materials that may harm
the environment or otherwise relating to the protection of the
environment. For example, as an operator of mobile offshore drilling
units in navigable U.S. waters and some offshore areas, we may be liable for
damages and costs incurred in connection with oil spills or waste disposals
related to those operations. Laws and regulations protecting the
environment
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have become
more stringent in recent years, and may in some cases impose strict liability,
rendering a person liable for environmental damage without regard to
negligence. These laws and regulations may expose us to liability for
the conduct of or conditions caused by others or for acts that were in
compliance with all applicable laws at the time they were
performed. The application of these requirements or the adoption of
new requirements could have a material adverse effect on our consolidated
statement of financial position, results of operations or cash
flows.
We have
generally been able to obtain some degree of contractual indemnification
pursuant to which our customers agree to protect and indemnify us against
liability for pollution, well and environmental damages; however, there is no
assurance that we can obtain such indemnities in all of our contracts or that,
in the event of extensive pollution and environmental damages, our customers
will have the financial capability to fulfill their contractual obligations to
us. Also, these indemnities may not be enforceable in all
instances.
Our
ability to operate our rigs in the U.S. Gulf of Mexico could be restricted by
governmental regulation.
Hurricanes
Ivan, Katrina and Rita in 2005 and Hurricanes Gustav and Ike in 2008 caused
damage to a number of rigs in the U.S. Gulf of Mexico. Rigs that were
moved off location by the storms damaged platforms, pipelines, wellheads and
other drilling rigs. In 2006, the Minerals Management Service of the
U.S. Department of the Interior (“MMS”) issued interim guidelines requiring that
semisubmersibles operating in the U.S. Gulf of Mexico assess their mooring
systems against stricter criteria. In 2007, additional guidelines
were issued which impose stricter criteria, requiring rigs to meet 25-year storm
conditions. Although all of our semisubmersibles currently operating
in the U.S. Gulf of Mexico meet the 2007 requirements, these guidelines may
negatively impact our ability to operate other semisubmersibles in the U.S. Gulf
of Mexico in the future. Moreover, the MMS may issue additional
regulations that could increase the cost of operations or reduce the area of
operations for our rigs in the future, thus reducing their
marketability. Implementation of additional MMS regulations may
subject us to increased costs or limit the operational capabilities of our rigs
and could materially and adversely affect our operations in the U.S. Gulf of
Mexico.
Acts
of terrorism and social unrest could affect the markets for drilling
services.
Acts of
terrorism and social unrest, brought about by world political events or
otherwise, have caused instability in the world’s financial and insurance
markets in the past and may occur in the future. Such acts could be
directed against companies such as ours. In addition, acts of
terrorism and social unrest could lead to increased volatility in prices for
crude oil and natural gas and could affect the markets for drilling
services. Insurance premiums could increase and coverages may be
unavailable in the future. U.S. government regulations may
effectively preclude us from actively engaging in business activities in certain
countries. These regulations could be amended to cover countries
where we currently operate or where we may wish to operate in the
future.
Other
risks
A
change in tax laws, treaties or regulations, or their interpretation, of any
country in which we operate could result in a higher tax rate on our worldwide
earnings, which could result in a significant negative impact on our earnings
and cash flows from operations.
We operate
worldwide through our various subsidiaries. Consequently, we are
subject to changes in applicable tax laws, treaties or regulations in the
jurisdictions in which we operate, which could include laws or policies directed
toward companies organized in jurisdictions with low tax rates. A
material change in the tax laws or policies, or their interpretation, of any
country in which we have significant operations, or in which we are incorporated
or resident, could result in a higher effective tax rate on our worldwide
earnings and such change could be significant to our financial
results.
Tax
legislative proposals intending to eliminate some perceived tax advantages of
companies that have legal domiciles outside the U.S. but have certain U.S.
connections have repeatedly been introduced in the U.S.
Congress. Recent examples include, but are not limited to,
legislative proposals that would broaden the circumstances in which a non-U.S.
company would be considered a U.S. resident and proposals that could override
certain tax treaties and limit treaty benefits on certain payments by U.S.
subsidiaries to non-U.S. affiliates. See “Item 7. Management’s Discussion
and Analysis of Financial Condition and Results of Operations—Outlook–Tax
Matters.”
U.S.
tax authorities could treat us as a "passive foreign investment company," which
could have adverse U.S. federal income tax consequences to U.S.
holders.
A foreign
corporation will be treated as a "passive foreign investment company," or PFIC,
for U.S. federal income tax purposes if either (1) at least 75 percent
of its gross income for any taxable year consists of certain types of "passive
income" or (2) at least 50 percent of the average value of the
corporation's assets produce or are held for the production of those types of
"passive income." For purposes of these tests, “passive income”
includes dividends, interest and gains from the sale or exchange of investment
property and certain rents and royalties, but does not include income derived
from the performance of services.
We believe
that we have not been and will not be a PFIC with respect to any taxable
year. Based upon our operations as described herein, our income from
offshore contract drilling services should be treated as services income for
purposes of determining whether we are a PFIC. Accordingly, we
believe that our income from our offshore contract drilling services should not
constitute "passive income," and the assets that we own and operate in
connection with the production of that income should not constitute passive
assets.
There is
significant legal authority supporting this position, including statutory
provisions, legislative history, case law and U.S. Internal Revenue Service
(“IRS”) pronouncements concerning the characterization, for other tax purposes,
of income derived from services where a substantial component of such income is
attributable to the value of the property or equipment used in connection with
providing such services. It should be noted, however, that a recent
case and an IRS pronouncement which relies on the recent case characterize
income from time chartering of vessels as rental income rather than services
income for other tax purposes. However, we believe that the terms of
the time charters in the recent case differ in material respects from the terms
of our drilling contracts with customers. No assurance can be given
that the IRS or a court will accept our position, and there is a risk that the
IRS or a court could determine that we are a PFIC.
If we were
to be treated as a PFIC for any taxable year, our U.S. shareholders would face
adverse U.S. tax consequences. Under the PFIC rules, unless a
shareholder makes certain elections available under the Internal Revenue Code of
1986, as amended (which elections could themselves have adverse consequences for
such shareholder), such shareholder would be liable to pay U.S. federal income
tax at the highest applicable income tax rates on ordinary income upon the
receipt of excess distributions (as defined for U.S. tax purposes) and upon any
gain from the disposition of our shares, plus interest on such amounts, as if
such excess distribution or gain had been recognized ratably over the
shareholder’s holding period of our shares. In addition, under
applicable statutory provisions, the preferential 15 percent tax rate on
“qualified dividend income,” which applies to dividends paid to non-corporate
shareholders prior to 2011, does not apply to dividends paid by a foreign
corporation if the foreign corporation is a PFIC for the taxable year in which
the dividend is paid or the preceding taxable year.
A
loss of a major tax dispute or a successful tax challenge to our operating
structure, intercompany pricing policies or the taxable presence of our key
subsidiaries in certain countries could result in a higher tax rate on our
worldwide earnings, which could result in a significant negative impact on our
earnings and cash flows from operations.
We are a
Swiss corporation that operates through our various subsidiaries in a number of
countries throughout the world. Consequently, we are subject to tax
laws, treaties and regulations in and between the countries in which we
operate. Our income taxes are based upon the applicable tax laws and
tax rates in effect in the countries in which we operate and earn income as well
as upon our operating structures in these countries.
Our income
tax returns are subject to review and examination. We do not
recognize the benefit of income tax positions we believe are more likely than
not to be disallowed upon challenge by a tax authority. If any tax
authority successfully challenges our operational structure, intercompany
pricing policies or the taxable presence of our key subsidiaries in certain
countries; or if the terms of certain income tax treaties are interpreted in a
manner that is adverse to our structure; or if we lose a material tax dispute in
any country, particularly in the U.S., Norway or Brazil, our effective tax rate
on our worldwide earnings could increase substantially and our earnings and cash
flows from operations could be materially adversely affected. For
example, there is considerable uncertainty as to the activities that constitute
being engaged in a trade or business within the U.S. (or maintaining a permanent
establishment under an applicable treaty), so we cannot be certain that the IRS
will not contend successfully that we or any of our key subsidiaries were or are
engaged in a trade or business in the U.S. (or, when applicable, maintained or
maintains a permanent establishment in the U.S.). If we or any of our
key subsidiaries were considered to have been engaged in a trade or business in
the U.S. (when applicable, through a permanent establishment), we could be
subject to U.S. corporate income and additional branch profits taxes on the
portion of our earnings effectively connected to such U.S. business during the
period in which this was considered to have occurred, in which case our
effective tax rate on worldwide earnings for that period could increase
substantially, and our earnings and cash flows from operations for that period
could be adversely affected. See “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations—Outlook–Tax Matters.”
We
may be limited in our use of net operating losses.
Our ability
to benefit from our deferred tax assets depends on us having sufficient future
earnings to utilize our net operating loss (“NOL”) carryforwards before they
expire. We have established a valuation allowance against the future
tax benefit for a number of our foreign NOL carryforwards, and we could be
required to record an additional valuation allowance against our foreign or U.S.
deferred tax assets if market conditions change materially and, as a result, our
future earnings are, or are projected to be, significantly less than we
currently estimate. Our NOL carryforwards are subject to review and
potential disallowance upon audit by the tax authorities of the jurisdictions
where the NOLs are incurred.
Our
status as a Swiss corporation may limit our flexibility with respect to certain
aspects of capital management and may cause us to be unable to make
distributions or repurchase shares without subjecting our shareholders to Swiss
withholding tax.
Swiss law
allows our shareholders to authorize share capital that can be issued by the
board of directors without additional shareholder approval, but this
authorization is limited to 50 percent of the existing registered share
capital and must be renewed by the shareholders every two
years. Additionally, subject to specified exceptions, Swiss law
grants preemptive rights to existing shareholders to subscribe for new issuances
of shares. Swiss law also does not provide as much flexibility in the
various terms that can attach to different classes of shares as the laws of some
other jurisdictions. In the event we need to raise common equity
capital at a time when the trading price of our shares is below the par value of
the shares (currently 15 Swiss francs, equivalent to U.S. $13.89
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based on a
foreign exchange rate of 1.08 Swiss francs to $1.00 on February 19,
2010), we will need to obtain approval of shareholders to decrease the par value
of our shares or issue another class of shares with a lower par
value. Any reduction in par value would decrease our par value
available for future repayment of share capital not subject to Swiss withholding
tax. Swiss law also reserves for approval by shareholders certain
corporate actions over which a board of directors would have authority in some
other jurisdictions. For example, dividends must be approved by
shareholders. These Swiss law requirements relating to our capital
management may limit our flexibility, and situations may arise where greater
flexibility would have provided substantial benefits to our
shareholders.
If we are
not successful in our efforts to make distributions, if any, through a reduction
of par value or, after January 1, 2011, make distributions, if any, out of
qualifying additional paid-in capital as shown on Transocean Ltd.’s
standalone Swiss statutory financial statements, then any dividends paid by us
will generally be subject to a Swiss federal withholding tax at a rate of
35 percent. Payment of a capital distribution in the form of a
par value reduction is not subject to Swiss withholding tax. On
February 16, 2010, we announced that our board of directors has decided to
recommend that shareholders at our May 2010 annual general meeting approve
a distribution in the form of a par value reduction denominated in Swiss francs
for an amount equivalent to approximately U.S. $1.0 billion, payable in
four installments. However, our shareholders may not approve the
proposal, or we may not be able to meet the other legal requirements for a
reduction in par value. The Swiss withholding tax rules could also be
changed in the future. In addition, over the long term, the amount of
par value available for us to use for par value reductions or the amount of
qualifying additional paid-in capital available for us to pay out as
distributions will be limited. If we are unable to make a
distribution through a reduction in par value or, after January 1, 2011,
make a distribution out of qualifying additional paid-in capital as shown on
Transocean Ltd.’s standalone Swiss statutory financial statements, we may
not be able to make distributions without subjecting our shareholders to Swiss
withholding taxes.
Under
present Swiss tax law, repurchases of shares for the purposes of capital
reduction are treated as a partial liquidation subject to a 35 percent
Swiss withholding tax on the difference between the repurchase price and the par
value. At our 2009 annual general meeting, our shareholders approved
the repurchase of up to 3.5 billion Swiss francs of our registered shares
for cancellation (the “Share Repurchase Program”). On
February 12, 2010, our board of directors authorized our management to
implement the Share Repurchase Program. In addition, we announced our
intention to list our shares on the SIX in the second quarter of
2010. Should we complete the listing of our shares on the SIX, we may
repurchase shares under the Share Repurchase Program via a second trading line
on the SIX from institutional investors who are generally able to receive a full
refund of the Swiss withholding tax. Alternatively, in relation to
the U.S. market, we may repurchase shares under the Share Repurchase Program
using an alternative procedure pursuant to which we can repurchase shares under
the Share Repurchase Program via a "virtual second trading line" from market
players (in particular, banks and institutional investors) who are generally
entitled to receive a full refund of the Swiss withholding tax. If we
complete the listing of our shares on the SIX, there may not be sufficient
liquidity in our shares on the SIX to repurchase the amount of shares that we
would like to repurchase using the second trading line on the SIX. In
addition, following the listing of our shares on the SIX our ability to use the
“virtual second trading line” will be limited to the share repurchase program
currently approved by our shareholders, and any use of the “virtual second
trading line” with respect to future shares programs will require the approval
of the competent Swiss tax and other authorities. We may not be able
to repurchase as many shares as we would like to repurchase for purposes of
capital reduction on either the “virtual second trading line” or, in the future,
a SIX second trading line without subjecting the selling shareholders to Swiss
withholding taxes.
We
are subject to anti-takeover provisions.
Our articles
of association and Swiss law contain provisions that could prevent or delay an
acquisition of the company by means of a tender offer, a proxy contest or
otherwise. These provisions may also adversely affect prevailing
market prices for our shares. These provisions, among other
things:
None.
The
description of our property included under “Item 1. Business” is incorporated by
reference herein.
We maintain
offices, land bases and other facilities worldwide, including our principal
executive offices in Vernier, Switzerland, our corporate offices in Zug,
Switzerland; Houston, Texas; Cayman Islands and Barbados and our regional
operational office in France. Our remaining offices and bases are
located in various countries in North America, South America, the Caribbean,
Europe, Africa, Russia, the Middle East, India, the Far East and
Australia. We lease most of these facilities.
Asbestos litigation>—In 2004,
several of our subsidiaries were named, along with numerous other unaffiliated
defendants, in 21 complaints filed on behalf of 769 plaintiffs in the
Circuit Courts of the State of Mississippi and which claimed injuries arising
out of exposure to asbestos allegedly contained in drilling mud during these
plaintiffs’ employment in drilling activities between 1965 and
1986. A Special Master, appointed to administer these cases
pre-trial, subsequently required that each individual plaintiff file a separate
lawsuit, and the original 21 multi-plaintiff complaints were then dismissed
by the Circuit Courts. The amended complaints resulted in one of our
subsidiaries being named as a direct defendant in seven cases. We
have or may have an indirect interest in an additional
17 cases. The complaints generally allege that the defendants
used or manufactured asbestos-containing products in connection with drilling
operations and have included allegations of negligence, products liability,
strict liability and claims allowed under the Jones Act and general maritime
law. The plaintiffs generally seek awards of unspecified compensatory
and punitive damages. In each of these cases, the complaints have
named other unaffiliated defendant companies, including companies that allegedly
manufactured the drilling-related products that contained
asbestos. None of the cases in which one of our subsidiaries is a
named defendant has been scheduled for trial in 2010, and the preliminary
information available on these claims is not sufficient to determine if there is
an identifiable period for alleged exposure to asbestos, whether any asbestos
exposure in fact occurred, the vessels potentially involved in the claims, or
the basis on which the plaintiffs would support claims that their injuries were
related to exposure to asbestos. However, the initial evidence
available would suggest that we would have significant defenses to liability and
damages. In 2009, two cases that were part of the original 2004
multi-plaintiff suits went to trial in Mississippi against unaffiliated
defendant companies which allegedly manufactured drilling-related products
containing asbestos. We were not a defendant in either of these
cases. One of the cases resulted in a substantial jury verdict in
favor of the plaintiff, and this verdict was subsequently vacated by the trial
judge on the basis that the plaintiff failed to meet its burden of
proof. While the court’s decision is consistent with our general
evaluation of the strength of these cases, it has not been reviewed on
appeal. The second case resulted in a verdict completely in favor of
the defendants. There have been no other trials involving any of the
parties to the original 21 complaints. We intend to defend these
lawsuits vigorously, although there can be no assurance as to the ultimate
outcome. We historically have maintained broad liability insurance,
although we are not certain whether insurance will cover the liabilities, if
any, arising out of these claims. Based on our evaluation of the
exposure to date, we do not expect the liability, if any, resulting from these
claims to have a material adverse effect on our consolidated statement of
financial position, results of operations or cash flows.
One of our
subsidiaries is involved in lawsuits arising out of the subsidiary’s involvement
in the design, construction and refurbishment of major industrial
complexes. The operating assets of the subsidiary were sold and its
operations discontinued in 1989, and the subsidiary has no remaining assets
other than the insurance policies involved in its litigation, fundings from
settlements with the primary insurers and funds received from the cancellation
of certain insurance policies. The subsidiary has been named as a
defendant, along with numerous other companies, in lawsuits alleging personal
injury as a result of exposure to asbestos. As of December 31,
2009, the subsidiary was a defendant in approximately
1,041 lawsuits. Some of these lawsuits include multiple
plaintiffs and we estimate that there are approximately 2,623 plaintiffs in
these lawsuits. For many of these lawsuits, we have not been provided
with sufficient information from the plaintiffs to determine whether all or some
of the plaintiffs have claims against the subsidiary, the basis of any such
claims, or the nature of their alleged injuries. The first of the
asbestos-related lawsuits was filed against this subsidiary in
1990. Through December 31, 2009, the amounts expended to
resolve claims (including both attorneys’ fees and expenses, and settlement
costs) have not been material, and all deductibles with respect to the primary
insurance have been satisfied. The subsidiary continues to be named
as a defendant in additional lawsuits and we cannot predict the number of
additional cases in which it may be named a defendant nor can we predict the
potential costs to resolve such additional cases or to resolve the pending
cases. However, the subsidiary has in excess of $1 billion in
insurance limits potentially available to the subsidiary. Although
not all of the policies may be fully available due to the insolvency of certain
insurers, we believe that the subsidiary will have sufficient insurance and
funds from the settlements of litigation with insurance carriers available to
respond to these claims. While we cannot predict or provide assurance
as to the final outcome of these matters, we do not believe that the current
value of the claims where we have been identified will have a material impact on
our consolidated statement of financial position, results of operations or cash
flows.
Sedco 710
litigation>—One of
our subsidiaries was involved in an action with respect to a customs matter
relating to the Sedco 710
semisubmersible drilling rig. Prior to our merger with
Sedco Forex, this drilling rig, which was working for Petrobras in Brazil
at the time, had been admitted into the country on a temporary basis under
authority granted to a Schlumberger entity. When the drilling
contract with Petrobras was transferred from Schlumberger to us in the merger,
the temporary import permit was not
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transferred. When
the temporary import permit granted to Schlumberger expired in 2000, renewal
filings were not immediately made and the Brazilian authorities threatened to
cancel the temporary import permit and to collect customs duties as if the rig
had been nationalized in Brazil. Together with Schlumberger, we
jointly filed an action for the purpose of avoiding cancellation of, and
extending, the temporary import permit and to avoid collection of any customs
duty. Other proceedings were also initiated to secure the transfer of
the temporary import permit to us. The court initially permitted the
transfer of the temporary import permit but did not rule on whether the
temporary admission could be extended without the payment of a financial penalty
in the form of Brazilian customs duties. In 2004, the Brazilian
authorities issued an assessment totaling approximately $167 million (based
on the initial assessment amount, accrued interest and current exchange rate)
against our subsidiary based on the expiration of the temporary import
permit. This amount continued to grow as a result of interest and
changes in the exchange rate. The first level Brazilian court also ruled in 2007
that the financial penalties were appropriate and this ruling was subsequently
upheld at the next level. We continued to contest this decision but ultimately
decided to participate in November 2009 in a Brazilian tax amnesty program and
paid $142 million to settle all tax claims by the Brazilian authorities in
this matter. In addition, we reached a settlement with Schlumberger
with respect to our allegation that Schlumberger should be responsible for the
assessment.
Rio de Janeiro tax
assessment>—In the third quarter of 2006, we received tax assessments of
approximately $164 million from the state tax authorities of Rio de Janeiro
in Brazil against one of our Brazilian subsidiaries for taxes on equipment
imported into the state in connection with our operations. The
assessments resulted from a preliminary finding by these authorities that our
subsidiary’s record keeping practices were deficient. We currently
believe that the substantial majority of these assessments are without
merit. We filed an initial response with the Rio de Janeiro tax
authorities on September 9, 2006 refuting these additional tax
assessments. In September 2007, we received confirmation from
the state tax authorities that they believe the additional tax assessments are
valid, and as a result, we filed an appeal on September 27, 2007 to the
state Taxpayer’s Council contesting these assessments. While we
cannot predict or provide assurance as to the final outcome of these
proceedings, we do not expect it to have a material adverse effect on our
consolidated statement of financial position, results of operations or cash
flows.
Patent Litigation>—Several of
our subsidiaries have been sued by Heerema Engineering Services (“Heerema”) in
the U.S. District Court for the Southern District of Texas for patent
infringement, claiming that we infringe their U.S. patent entitled Method and
Device for Drilling Oil and Gas. Heerema claims that our Enterprise class,
advanced Enterprise class, Express class and Development Driller class of
drilling rigs operating in the U.S. Gulf of Mexico infringe on this patent. They
seek unspecified damages and injunctive relief. The court has held a hearing on
construction of their patent but has not yet issued a decision. We deny
liability for patent infringement, believe that their patent is invalid and
intend to vigorously defend against the claim. We do not expect the liability,
if any, resulting from this claim to have a material adverse effect on our
consolidated statement of financial position, results of operations or cash
flows.
Other matters>—We are involved in
various tax matters as described in “Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operations—Outlook–Tax Matters”
and various regulatory matters as described in “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations—Outlook–Regulatory Matters.” We are also involved in
lawsuits relating to damage claims arising out of hurricanes Katrina and Rita,
all of which are insured and which are not material to us. In
addition, we are involved in a number of other lawsuits, including a dispute for
municipal tax payments in Brazil and a dispute involving customs procedures in
India, neither of which is material to us, and all of which have arisen in the
ordinary course of our business. We do not expect the liability, if
any, resulting from these other matters to have a material adverse effect on our
consolidated statement of financial position, results of operations or cash
flows. We cannot predict with certainty the outcome or effect of any
of the litigation matters specifically described above or of any such other
pending or threatened litigation. There can be no assurance that our
beliefs or expectations as to the outcome or effect of any lawsuit or other
litigation matter will prove correct and the eventual outcome of these matters
could materially differ from management’s current estimates.
Environmental
Matters
We have
certain potential liabilities under the Comprehensive Environmental Response,
Compensation and Liability Act (“CERCLA”) and similar state acts regulating
cleanup of various hazardous waste disposal sites, including those described
below. CERCLA is intended to expedite the remediation of hazardous
substances without regard to fault. Potentially responsible parties
(“PRPs”) for each site include present and former owners and operators of,
transporters to and generators of the substances at the
site. Liability is strict and can be joint and several.
We have been
named as a PRP in connection with a site located in Santa Fe Springs,
California, known as the Waste Disposal, Inc. site. We and other
PRPs have agreed with the U.S. EPA and the U.S. Department of Justice (“DOJ”) to
settle our potential liabilities for this site by agreeing to perform the
remaining remediation required by the EPA. The form of the agreement
is a consent decree, which has been entered by the court. The parties
to the settlement have entered into a participation agreement, which makes us
liable for approximately eight percent of the remediation and related
costs. The remediation is complete, and we believe our share of the
future operation and maintenance costs of the site is not
material. There are additional potential liabilities related to the
site, but these cannot be quantified, and we have no reason at this time to
believe that they will be material.
One of our
subsidiaries has been ordered by the California Regional Water Quality Control
Board (“CRWQCB”) to develop a testing plan for a site known as Campus 1000
Fremont in Alhambra, California. This site was formerly owned and
operated by certain of our subsidiaries. It is presently owned by an
unrelated party, which has received an order to test the property. We
have also been advised that one or more of our subsidiaries is likely to be
named by the EPA as a PRP for the San Gabriel Valley, Area 3, Superfund
site, which includes this property. Testing has been completed at the
property but no contaminants of concern were detected. In discussions
with CRWQCB staff we were advised of their intent to issue us a “no further
action” letter but it has not yet been received. Based on the test
results, we would contest any potential liability. We have no
knowledge at this time of the potential cost of any remediation, who else will
be named as PRPs, and whether in fact any of our subsidiaries is a responsible
party. The subsidiaries in question do not own any operating assets
and have limited ability to respond to any liabilities.
Resolutions
of other claims by the EPA, the involved state agency or PRPs are at various
stages of investigation. These investigations involve determinations
of:
Our ultimate
financial responsibility in connection with those sites may depend on many
factors, including:
It is
difficult to quantify with certainty the potential cost of these environmental
matters, particularly in respect of remediation
obligations. Nevertheless, based upon the information currently
available, we believe that our ultimate liability arising from all environmental
matters, including the liability for all other related pending legal
proceedings, asserted legal claims and known potential legal claims which are
likely to be asserted, is adequately accrued and should not have a material
effect on our financial position or ongoing results of
operations. Estimated costs of future expenditures for environmental
remediation obligations are not discounted to their present value.
Contamination litigation>—On
July 11, 2005, one of our subsidiaries was served with a lawsuit filed on
behalf of three landowners in Louisiana in the 12th Judicial District Court
for the Parish of Avoyelles, State of Louisiana. The lawsuit named
19 other defendants, all of which were alleged to have contaminated the
plaintiffs’ property with naturally occurring radioactive material, produced
water, drilling fluids, chlorides, hydrocarbons, heavy metals and other
contaminants as a result of oil and gas exploration
activities. Experts retained by the plaintiffs issued a report
suggesting significant contamination in the area operated by the subsidiary and
another codefendant, and claimed that over $300 million would be required
to properly remediate the contamination. The experts retained by the
defendants conducted their own investigation and concluded that the remediation
costs would amount to no more than $2.5 million.
The
plaintiffs and the codefendant threatened to add GlobalSantaFe as a defendant in
the lawsuit under the “single business enterprise” doctrine contained in
Louisiana law. The single business enterprise doctrine is similar to
corporate veil piercing doctrines. On August 16, 2006, our
subsidiary and its immediate parent company, each of which is an entity that no
longer conducts operations or holds assets, filed voluntary petitions for relief
under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court
for the District of Delaware. Later that day, the plaintiffs
dismissed our subsidiary from the lawsuit. Subsequently, the
codefendant filed various motions in the lawsuit and in the Delaware
bankruptcies attempting to assert alter ego and single business enterprise
claims against GlobalSantaFe and two other subsidiaries in the
lawsuit. The efforts to assert alter ego and single business
enterprise theory claims against GlobalSantaFe were rejected by the Court in
Avoyelles Parish, and the lawsuit against the other defendant went to trial on
February 19, 2007. This lawsuit was resolved at trial with a
settlement by the codefendant that included a $20 million payment and
certain cleanup activities to be conducted by the codefendant.
The
codefendant sought to dismiss the bankruptcies. In addition, the
codefendant filed proofs of claim against both our subsidiary and its parent
with regard to its claims arising out of the settlement of the
lawsuit. On February 15, 2008, the Bankruptcy Court denied the
codefendant’s request to dismiss the bankruptcy case but modified the automatic
stay to allow the codefendant to proceed on its claims against the debtors, our
subsidiary and its parent, and their insurance companies. The
codefendant subsequently filed suit against the debtors and certain of its
insurers in the Court of Avoyelles Parish to determine their liability for the
settlement.
The
codefendant filed a Notice of Appeal of the rulings of the Bankruptcy
Court. GlobalSantaFe and its two subsidiaries also filed Notices of
Appeal to the U.S. District Court for the District of Delaware. On
January 27, 2009, the codefendant’s appeal was granted by the District
Court and the bankruptcy case was remanded to the Bankruptcy Court with
instructions to have the case dismissed. On February 10, 2009,
the Bankruptcy Court entered an order dismissing the bankruptcy
case. The debtors, GlobalSantaFe and the two subsidiaries have filed
Notices of Appeal of the District Court’s ruling with the U.S. Court of Appeals
for the Third Circuit. On February 18, 2009, the District Court
stayed its ruling which instructed the Bankruptcy Court to dismiss the
case. The appeal was heard on September 14, 2009. On
December 22, 2009, the Court of Appeals affirmed the ruling of the District
Court. On January 5, 2010, we petitioned the Third Circuit for a
rehearing of that ruling. On January 27, 2010, the Third Circuit
declined the petitions for rehearing.
We believe
that these legal theories should not be applied against GlobalSantaFe or these
other two subsidiaries, and that in any event the manner in which the parent and
its subsidiaries conducted their businesses does not meet the requirements of
these theories for imposition of liability. Our subsidiary, its
parent and GlobalSantaFe intend to continue to vigorously defend against any
action taken in an attempt to impose liability against them under the theories
discussed above or otherwise and believe they have good and valid defenses
thereto. We do not believe that these claims will have a material
impact on our consolidated statement of financial position, results of
operations or cash flows.
ITEM
4. Submission
of Matters to Vote of Security Holders
The Company
did not submit any matter to a vote of its security holders during the fourth
quarter of 2009.
Executive
Officers of the Registrant
We have
included the following information, presented as of December 31, 2009, on
our executive officers in Part I of this report in reliance on General
Instruction (3) to Form 10-K. The officers of the Company
are elected annually by the board of directors. There is no family
relationship between any of the executive officers named below.
______________________________
Robert L.
Long is Chief Executive Officer and a member of the board of directors of the
Company. Mr. Long has served as Chief Executive Officer of the
Company and a member of the board of directors since
October 2002. Mr. Long served as President of the Company
from December 2001 to October 2006. Mr. Long served as
Chief Financial Officer of the Company from August 1996 until
December 2001. Mr. Long served as Senior Vice President of
the Company from May 1990 until the time of the Sedco Forex merger, at
which time he assumed the position of Executive Vice
President. Mr. Long also served as Treasurer of the Company from
September 1997 until March 2001. Mr. Long has been
employed by the Company since 1976 and was elected Vice President in
1987.
Steven L.
Newman is President of the Company. Mr. Newman has served as
President since May 2008. Mr. Newman also served as Chief
Operating Officer from May 2008 to November 2009. From
November 2007 until May 2008, Mr. Newman served as Executive Vice
President, Performance, leading the Company’s three business units and focusing
on customer service delivery and performance improvement across the company’s
worldwide fleet. He previously served in senior management roles,
including Executive Vice President and Chief Operating Officer from
October 2006 to November 2007, Senior Vice President of Human
Resources and Information Process Solutions from May 2006 to
October 2006, Senior Vice President of Human Resources, Information Process
Solutions and Treasury from March 2005 until May 2006, and Vice
President of Performance and Technology from August 2003 until
March 2005. He also has served as Regional Manager for the Asia
and Australia Region and in international field and operations management
positions, including Project Engineer, Rig Manager, Division Manager, Region
Marketing Manager and Region Operations Manager. Mr. Newman
joined the Company in 1994 in the Corporate Planning Department.
Arnaud A.Y.
Bobillier is Executive Vice President, Assets of the Company. Before
being named to his current position in March 2008, Mr. Bobillier
served as Senior Vice President of the Company's Europe and Africa Unit, which
covers offshore drilling operations in 15 countries, from January 2008 to
March 2008. Previously, Mr. Bobillier served as Vice
President of the Company’s Europe and Africa unit from May 2005 to
January 2008. He also served as Regional Manager for the Europe
and Africa Region from January 2004 to May 2005. From
September 2001 to January 2004, Mr. Bobillier served as Regional
Manager for the Company’s West Africa Region. He began his career
with a predecessor company in 1980 and has served in various management
positions in several countries, including the U.S., France, Saudi Arabia,
Indonesia, Congo, Brazil, South Africa and China.
Eric B.
Brown is Senior Vice President, General Counsel and Assistant Corporate
Secretary of the Company. Mr. Brown has served as General
Counsel of the Company since February 1995 and served as Corporate
Secretary of the Company from September 1995 until
October 2007. He held the position of Vice President from
February 1995 to February 2001, when he assumed the position of Senior
Vice President. Prior to assuming his duties with the Company,
Mr. Brown served as General Counsel of Coastal Gas Marketing
Company.
Cheryl D.
Richard is Senior Vice President, Human Resources and Information Technology of
the Company. Ms. Richard served as Senior Vice President, Human
Resources of GlobalSantaFe from June 2003 until the Merger in
November 2007, when she assumed her current
position. Ms. Richard was Vice President, Human Resources, with
Chevron Phillips Chemical Company from 2000 to June 2003, prior to which
she served in a variety of positions with Phillips Petroleum Company, now
ConocoPhillips, including operational, commercial and international
positions.
Ricardo H.
Rosa is Senior Vice President and Chief Financial Officer of the
Company. Before being named to his current position in
September 2009, Mr. Rosa served as Senior Vice President of the
Company's Europe and Africa Unit, which covers offshore drilling operations in
15 countries, from April 2008 to August 2009. Previously,
Mr. Rosa served as Senior Vice President of the Asia and Pacific Unit from
January 2008 to March 2008. He also served as served as the
Vice President of the Asia and Pacific Unit from May 2005 to
December 2007 and the Regional Manager for the Asia Region from
June 2003 to April 2005. Mr. Rosa also served as Vice
President and Controller from December 1999 to
May 2003. Beginning in September 1995, Mr. Rosa was
Controller of Sedco Forex Holdings Limited, one of our predecessor
companies. Having previously held various financial positions in
operating subsidiaries of Schlumberger Ltd., Mr. Rosa started his
career with six years in public accounting in the U.K. and Brazil with
PricewaterhouseCoopers.
Ihab Toma is
Senior Vice President, Marketing and Planning of the Company. Before
being named to his current position in August 2009, Mr. Toma served as
Vice President, Sales and Marketing for Europe, Africa and Caspian for
Schlumberger Oilfield Services from April 2006 to
August 2009. Previously, Mr. Toma led Schlumberger’s
information solutions business in various capacities, including Vice President,
Sales and Marketing from 2004 to April 2006, prior to which he served in a
variety of positions with Schlumberger Ltd., including President of Information
Solutions, Vice President of Information Management and Vice President of
Europe, Africa and CIS Operations. He started his career with
Schlumberger in 1986.
John H.
Briscoe is Vice President and Controller of the Company. Before being
named to his current position in October 2007, Mr. Briscoe served as
Vice President, Audit and Advisory Services from June 2007 to
October 2007 and Director of Investor Relations and Communications from
January 2007 to June 2007. From June 2005 to
January 2007, Mr. Briscoe served as Finance Director for the Company’s
North and South America Unit. Prior to joining the Company in
June 2005, Mr. Briscoe served as Vice President of Accounting for
Ferrellgas Inc. from July 2003 to June 2005, Vice President of
Administration from June 2002 to July 2003 and Division Controller
from June 1997 to June 2002. Prior to working for
Ferrellgas, Mr. Briscoe served as Controller for Latin America for Dresser
Industries Inc., which has subsequently been acquired by
Halliburton, Inc. Mr. Briscoe started his career with seven
years in public accounting beginning with the firm of KPMG and ending with Ernst
& Young as an Audit Manager.
PART
II
Market and share prices>—Our
shares are listed on the NYSE under the symbol “RIG.” On
February 16, 2010, we announced our intention to list our shares on the SIX
in the second quarter of 2010, subject to the approval of the
SIX. Following such a listing, our shares would continue to be listed
on the NYSE. The following table sets forth the high and low sales
prices of our shares for the periods indicated as reported on the NYSE Composite
Tape, including trading of the shares of Transocean Inc. through
December 18, 2008 and trading of the shares of Transocean Ltd. after
such date.
On
February 19, 2010, the last reported sales price of our shares on the NYSE
Composite Tape was $85.12 per share. On such date, there
were 7,323 holders of record of our shares
and 321,628,110 shares outstanding.
Shareholder matters>—We did not
declare or pay a cash dividend in either of the two most recent fiscal
years. On February 16, 2010, we announced that our board of
directors has decided to recommend that shareholders at our May 2010 annual
general meeting approve a distribution in the form of a par value reduction
denominated in Swiss francs for an amount equivalent to approximately
U.S. $1.0 billion, or approximately U.S. $3.11 per share based on the
then current number of issued shares. The Swiss franc equivalent will
be determined based on the exchange rate determined by us approximately two
business days prior to the date of the 2010 annual general
meeting. The distribution will, if approved, be paid in four
installments with expected payment dates in July 2010, October 2010,
January 2011 and April 2011. Distributions to shareholders
in the form of a reduction in par value of our shares are not subject to the
35 percent Swiss withholding tax. Shareholders will be paid in
U.S. dollars converted using an exchange rate determined by us approximately
two business days prior to the payment date, unless shareholders elect to
receive the payment in Swiss francs.
Any future
declaration and payment of any cash distributions will (1) depend on our
results of operations, financial condition, cash requirements and other relevant
factors, (2) be subject to shareholder approval, (3) be subject to
restrictions contained in our credit facilities and other debt covenants and
(4) be subject to restrictions imposed by Swiss law, including the
requirement that sufficient distributable profits from the previous year or
freely distributable reserves must exist.
In
December 2008, Transocean Ltd. completed the Redomestication
Transaction. In the Redomestication Transaction, Transocean Ltd.
issued one of its shares in exchange for each ordinary share of
Transocean Inc. In addition, Transocean Ltd. issued
16 million of its shares to Transocean Inc. for future use to satisfy
Transocean Ltd.’s obligations to deliver shares in connection with awards
granted under our incentive plans, warrants or other rights to acquire shares of
Transocean Ltd. The Redomestication Transaction effectively
changed the place of incorporation of our parent holding company from the Cayman
Islands to Switzerland. As a result of the Redomestication
Transaction, Transocean Inc. became a direct, wholly owned subsidiary of
Transocean Ltd. In connection with the Redomestication
Transaction, we relocated our principal executive offices to Vernier,
Switzerland.
Swiss Tax Consequences to
Shareholders of Transocean
The tax
consequences discussed below are not a complete analysis or listing of all the
possible tax consequences that may be relevant to shareholders of
Transocean. Shareholders should consult their own tax advisors in
respect of the tax consequences related to receipt, ownership, purchase or sale
or other disposition of our shares and the procedures for claiming a refund of
withholding tax.
Swiss Income Tax on
Dividends and Similar Distributions
A non-Swiss
holder will not be subject to Swiss income taxes on dividend income and similar
distributions in respect of our shares, unless the shares are attributable to a
permanent establishment or a fixed place of business maintained in Switzerland
by such non-Swiss holder. However, dividends and similar
distributions are subject to Swiss withholding tax. See “—Swiss
Withholding Tax—Distributions to Shareholders.”
Swiss Wealth
Tax
A non-Swiss
holder will not be subject to Swiss wealth taxes unless the holder’s shares are
attributable to a permanent establishment or a fixed place of business
maintained in Switzerland by such non-Swiss holder.
Swiss Capital Gains Tax upon
Disposal of Shares
A non-Swiss
holder will not be subject to Swiss income taxes for capital gains unless the
holder’s shares are attributable to a permanent establishment or a fixed place
of business maintained in Switzerland by such non-Swiss holder. In
such case, the non-Swiss holder is required to recognize capital gains or losses
on the sale of such shares, which will be subject to cantonal, communal and
federal income tax.
Swiss Withholding Tax—
Distributions to Shareholders
A Swiss
withholding tax of 35 percent is due on dividends and similar distributions
to our shareholders from us, regardless of the place of residency of the
shareholder (subject to the exceptions discussed under “—Exemption from Swiss
Withholding Tax—Distributions to Shareholders” below). We will be
required to withhold at such rate and remit on a net basis any payments made to
a holder of our shares and pay such withheld amounts to the Swiss federal tax
authorities. Please see “—Refund of Swiss Withholding Tax on
Dividends and Other Distributions.”
Exemption from Swiss
Withholding Tax—Distributions to Shareholders
Under
present Swiss tax law, distributions to shareholders in relation to a reduction
of par value are exempt from Swiss withholding tax. Beginning on
January 1, 2011, distributions to shareholders out of qualifying additional
paid-in capital for Swiss statutory purposes are as a matter of principle exempt
from the Swiss withholding tax. The particulars of this general
principle are, however, subject to regulations still to be promulgated by the
competent Swiss tax authorities. On December 31, 2009, the
aggregate amount of par value and qualifying additional paid-in capital of our
outstanding shares was 5.0 billion Swiss francs and 11.4 billion Swiss
francs, respectively (which is equivalent to approximately U.S.
$4.8 billion and U.S. $11.0 billion, respectively, at an exchange rate
as of the close of trading on December 31, 2009 of U.S. $1.00 to 1.04 Swiss
francs.) Consequently, we expect that a substantial amount of any
potential future distributions may be exempt from Swiss withholding
tax.
Repurchases of
Shares
Under
present Swiss tax law, repurchases of shares for the purposes of capital
reduction are treated as a partial liquidation subject to the 35 percent
Swiss withholding tax. However, for shares repurchased for capital
reduction, the portion of the repurchase price attributable to the par value of
the shares repurchased will not be subject to the Swiss withholding
tax. Beginning on January 1, 2011, subject to the adoption of
implementing regulations and amendments to Swiss corporate law, the portion of
the repurchase price attributable to the qualifying additional paid-in capital
for Swiss statutory reporting purposes of the shares repurchased will also not
be subject to the Swiss withholding tax. We would be required to
withhold at such rate the tax from the difference between the repurchase price
and the related amount of par value and, beginning on January 1, 2011,
subject to the adoption of implementing tax regulations the related amount of
qualifying additional paid-in capital. We would be required to remit
on a net basis the purchase price with the Swiss withholding tax deducted to a
holder of our shares and pay the withholding tax to the Swiss federal tax
authorities.
With respect
to the refund of Swiss withholding tax from the repurchase of shares, see
“—Refund of Swiss Withholding Tax on Dividends and Other Distributions”
below.
In most
instances, Swiss companies listed on the SIX carry out share repurchase programs
through a second trading line on the SIX. Swiss institutional
investors typically purchase shares from shareholders on the open market and
then sell the shares on the second trading line back to the
company. The Swiss institutional investors are generally able to
receive a full refund of the withholding tax. Due to, among other
things, the time delay between the sale to the company and the institutional
investors’ receipt of the refund, the price companies pay to repurchase their
shares has historically been slightly higher (but less than one percent)
than the price of such companies’ shares in ordinary trading on the SIX first
trading line. On February 16, 2010, we announced our intention
to list our shares on the SIX in the second quarter of 2010. Should
we complete the listing of our shares on the SIX, we may repurchase such shares
from institutional investors who are generally able to receive a full refund of
the Swiss withholding tax via a second trading line on the
SIX. Alternatively, in relation to the U.S. market, we may repurchase
such shares using an alternative procedure pursuant to which we repurchase such
shares via a "virtual second trading line" from market players (in particular,
banks and institutional investors) who are generally entitled to receive a full
refund of the Swiss withholding tax. If we complete the listing of
our shares on the SIX, there may not be sufficient liquidity in our shares on
the SIX to repurchase the amount of shares that we would like to repurchase
using the second trading line on the SIX. In addition, following the
listing of our shares on the SIX, our ability to use the “virtual second trading
line” will be limited to the share repurchase program currently approved by our
shareholders, and any use of the “virtual second trading line” with respect to
future share repurchase programs will require approval of the competent Swiss
tax and other authorities. We may not be able to repurchase as many
shares as we would like to repurchase for purposes of capital reduction on
either the “virtual second trading line” or, in the future, a SIX second
trading line without subjecting the selling shareholders to Swiss withholding
taxes.
The
repurchase of shares for purposes other than for cancellation, such as to retain
as treasury shares for use in connection with stock incentive plans, convertible
debt or other instruments within certain periods, will generally not be subject
to Swiss withholding tax.
At our 2009
annual general meeting our shareholders approved a release of qualifying
additional paid-in-capital (for Swiss statutory purposes) to other reserves (for
Swiss statutory purposes) that is necessary for the possible repurchase of
shares for cancellation.
Refund of Swiss Withholding
Tax on Dividends and Other Distributions
Swiss holders―A Swiss tax resident,
corporate or individual, can recover the withholding tax in full if such
resident is the beneficial owner of our shares at the time the dividend or other
distribution becomes due and provided that such resident reports the gross
distribution received on such resident’s income tax return, or in the case of an
entity, includes the taxable income in such resident’s income
statement.
Non-Swiss holders―If the shareholder
that receives a distribution from us is not a Swiss tax resident, does not hold
our shares in connection with a permanent establishment or a fixed place of
business maintained in Switzerland, and resides in a country that has concluded
a treaty for the avoidance of double taxation with Switzerland for which the
conditions for the application and protection of and by the treaty are met, then
the shareholder may be entitled to a full or partial refund of the withholding
tax described above. The procedures for claiming treaty refunds (and
the time frame required for obtaining a refund) may differ from country to
country.
Switzerland
has entered into bilateral treaties for the avoidance of double taxation with
respect to income taxes with numerous countries, including the U.S., whereby
under certain circumstances all or part of the withholding tax may be
refunded.
U.S. residents―The Swiss-U.S. tax
treaty provides that U.S. residents eligible for benefits under the treaty can
seek a refund of the Swiss withholding tax on dividends for the portion
exceeding 15 percent (leading to a refund of 20 percent) or a
100 percent refund in the case of qualified pension funds.
As a general
rule, the refund will be granted under the treaty if the U.S. resident can show
evidence of:
The claim
for refund must be filed with the Swiss federal tax authorities (Eigerstrasse
65, 3003 Berne, Switzerland), not later than December 31 of the third year
following the year in which the dividend payments became due. The
relevant Swiss tax form is Form 82C for companies, 82E for other entities
and 82I for individuals. These forms can be obtained from any Swiss
Consulate General in the U.S. or from the Swiss federal tax authorities at the
above address. Each form needs to be filled out in triplicate, with
each copy duly completed and signed before a notary public in the
U.S. Evidence that the withholding tax was withheld at the source
must also be included.
Stamp duties in relation to the
transfer of shares―The purchase or sale
of our shares may be subject to Swiss federal stamp taxes on the transfer of
securities irrespective of the place of residency of the purchaser or seller if
the transaction takes place through or with a Swiss bank or other Swiss
securities dealer, as those terms are defined in the Swiss Federal Stamp Tax Act
and no exemption applies in the specific case. If a purchase or sale
is not entered into through or with a Swiss bank or other Swiss securities
dealer, then no stamp tax will be due. The applicable stamp tax rate
is 0.075 percent for each of the two parties to a transaction and is
calculated based on the purchase price or sale proceeds. If the
transaction does not involve cash consideration, the transfer stamp duty is
computed on the basis of the market value of the consideration.
Issuer
Purchases of Equity Securities
______________________________
ITEM
6. Selected
Financial Data
The selected
financial data as of December 31, 2009 and 2008 and for each of the three
years in the period ended December 31, 2009 have been derived from the
audited consolidated financial statements included in “Item 8. Financial
Statements and Supplementary Data.” The following data should be read
in conjunction with “Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and the audited consolidated financial
statements and the notes thereto included under “Item 8. Financial Statements
and Supplementary Data.”
______________________________
ITEM
7. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
The
following information should be read in conjunction with the information
contained in “Item 1. Business,” “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.
Overview
Transocean Ltd.
(together with its subsidiaries and predecessors, unless the context requires
otherwise, “Transocean,” the “Company,” “we,” “us” or “our”) is a leading
international provider of offshore contract drilling services for oil and gas
wells. As of February 2, 2010, we owned, had partial ownership
interests in or operated 138 mobile offshore drilling units. As
of this date, our fleet consisted of 44 High-Specification Floaters
(Ultra-Deepwater, Deepwater and Harsh Environment semisubmersibles and
drillships), 26 Midwater Floaters, 10 High-Specification Jackups,
55 Standard Jackups and three Other Rigs. In addition, we
had five Ultra-Deepwater Floaters under construction.
We operate
in two reportable segments: (1) contract drilling services and
(2) other operations. Contract drilling services, our primary
business, involves contracting our mobile offshore drilling fleet, related
equipment and work crews primarily on a dayrate basis to drill oil and gas
wells. We believe our drilling fleet is one of the most modern and
versatile fleets in the world, consisting of floaters, jackups and other rigs
used in support of offshore drilling activities and offshore support services on
a worldwide basis. We specialize in technically demanding regions of
the offshore drilling business with a particular focus on deepwater and harsh
environment drilling services.
Our contract
drilling 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
build or upgrade rigs are determined by the activities and needs of our
customers.
The other
operations segment includes drilling management services and oil and gas
properties. Drilling management services are provided through Applied
Drilling Technology Inc., our wholly owned subsidiary, and through ADT
International, a division of one of our U.K. subsidiaries (together,
“ADTI”). ADTI provides oil and gas drilling management services on
either a dayrate basis or a completed-project, fixed-price (or “turnkey”) basis,
as well as drilling engineering and drilling project management
services. Our oil and gas properties consist of exploration,
development and production activities carried out through Challenger
Minerals Inc. and Challenger Minerals (North Sea) Limited (together,
“CMI”), our oil and gas subsidiaries.
In
December 2008, Transocean Ltd. completed a transaction pursuant to an
Agreement and Plan of Merger among Transocean Ltd., Transocean Inc.,
which was our former parent holding company, and Transocean Cayman Ltd., a
company organized under the laws of the Cayman Islands that was a wholly owned
subsidiary of Transocean Ltd., pursuant to which Transocean Inc.
merged by way of schemes of arrangement under Cayman Islands law with Transocean
Cayman Ltd., with Transocean Inc. as the surviving company (the
“Redomestication Transaction”). In the Redomestication Transaction,
Transocean Ltd. issued one of its shares in exchange for each ordinary
share of Transocean Inc. In addition, Transocean Ltd.
issued 16 million of its shares to Transocean Inc. for future use to
satisfy Transocean Ltd.’s obligations to deliver shares in connection with
awards granted under our incentive plans or other rights to acquire shares of
Transocean Ltd. The Redomestication Transaction effectively
changed the place of incorporation of our parent holding company from the Cayman
Islands to Switzerland. As a result of the Redomestication
Transaction, Transocean Inc. became a direct, wholly owned subsidiary of
Transocean Ltd. In connection with the Redomestication
Transaction, we relocated our principal executive offices to Vernier,
Switzerland.
Significant
Events
Distribution recommendation>—On
February 16, 2010, we announced that our board of directors has
decided to recommend that shareholders at our May 2010 annual general
meeting approve a distribution in the form of a par value reduction denominated
in Swiss francs for an amount equivalent to approximately U.S.
$1.0 billion, or approximately U.S. $3.11 per share based on the
current number of issued shares, payable in four installments. See
“—Liquidity and Capital Resources—Sources and Uses of Liquidity—Distribution
recommendation.”
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
3.5 billion Swiss francs, which is equivalent to approximately U.S.
$3.2 billion at an exchange rate as of the close of trading on
February 19, 2010 of U.S. $1.00 to 1.08 Swiss
francs. On February 12, 2010, our board of directors
authorized our management to implement the share repurchase program. See “—Liquidity and
Capital Resources—Sources and Uses of Liquidity—Share repurchase
program.”
Fleet expansion>—We have
recently completed construction of seven Ultra-Deepwater newbuilds and each
has departed the shipyard. As of February 2, 2010, five of these
units had been accepted by their respective customers and commenced their
respective contracts. See “—Outlook.”
Impairments>—During 2009,
we recorded impairment losses of $334 million, of which $279 million
was associated with GSF Arctic II and
GSF Arctic IV,
which were classified as held for sale until these rigs were sold in
January 2010. Additionally, we recorded impairment losses of
$49 million and $6 million related to customer relationships and trade
name, respectively, associated with our drilling management services reporting
unit. These impairments were due primarily to the global economic
downturn and depressed commodity prices.
Debt repayments>—In
March 2008, Transocean Inc. entered into a term credit facility under
the Term Credit Agreement dated March 13, 2008 (the “Term Loan”) and
borrowed $1.925 billion under the facility. In April 2008,
Transocean Inc. borrowed an additional $75 million, increasing the
borrowings under this facility to $2.0 billion, the maximum allowed under
the Term Loan. During the year ended December 31, 2009, we
repaid the outstanding borrowings and terminated the Term Loan. In
addition, we repurchased $901 million aggregate principal amount of the
1.625% Series A Convertible Senior Notes for an aggregate cash
purchase price of $865 million. See “—Liquidity and Capital
Resources—Sources and Uses of Liquidity.”
Exchange listing>—On
February 16, 2010, we announced our intention to list our shares on the SIX
in the second quarter of 2010, subject to the approval of the SIX. We
will continue to list our shares on the New York Stock Exchange.
Outlook
Drilling market>—We believe the
economic downturn and lower oil and gas prices, having fallen from the
historical highs experienced in 2008, have led to diminished demand for jackups,
midwater and moored deepwater units, resulting in lower utilization levels for
these classes of assets. Still, we expect market utilization to
stabilize over the next few quarters, although possibly at lower levels than
those of 2008, due to recent stability in | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||