Hi everyone,

Release: http://sec.gov/Archives/edgar/data/1451505/00011046591201270...
Slides: http://phx.corporate-ir.net/External.File?t=1&item=VHlwZ...
Transcript: http://seekingalpha.com/article/395141-transocean-s-ceo-disc...

After the third quarter disappointed in several different ways, the fourth quarter was much better on several fronts.

1. $1 billion was set aside as a contingency loss related to lawsuits arising from the Macondo well incident. This is the first time (I believe) that the company has actually assigned a loss level and it represents some certainty coming out of the various court battles. Note, though, that US GAAP allows the company to use the lower end of any range of potential losses, which they said they did. So this amount could be increased in the future, depending on how the cases proceed.

2. Rig utilization, dayrates, and revenue efficiency all improved sequentially and YoY, after having declined for the most part (both sequentially and YoY) in Q3. This is a big relief.

3. The company actually took several rigs out of stacked and management is talking positively about taking more out going through the year as opportunities arise.

4. Despite more rigs coming online over the next couple of years, management believes that demand is increasing, so dayrates and utilization should be increasing, as well.

5. Several court rulings went in the company's favor. Here's CEO Newman in the conference call: "First, the court ruled that BP was not an additional insured party with respect to environmental damages under our excess liability policy. Second, the court ruled that BP generally owes us contractual indemnity for compensatory damages associated with the spill. The third one, which we received last week, rules that we will not be liable for OPA damages for the sub-serface release of hydrocarbons and that we are not liable for Clean Water Act fines and penalties."

That last one is huge, as those penalties could have been staggeringly large.

6. Regarding the relatively minor bottom-surface leak at a well being drilled off the coast of Brazil reported in November, Chevron has accepted responsibility for the incident, which pretty much releases Transocean from any liability, though it's probably going to have to point that out to the Brazilian courts.

7. Expected fleet downtime is supposed to peak during this current quarter and then decline sharply as we move through 2012 (see the slides).

All of that is good news.

The big loss came from the annual check of goodwill impairment and it hurt the company to the tune of $5.2 billion. Management wasn't exactly clear on why, saying that it was "as of October 1," the day they actually assess goodwill, and that the company's prospects and market cap vs. book value weren't too good then.

Here's how the CFO described it: "Under US GAAP, we test for goodwill impairment annually on October 1. After failing the first step of the test in the fourth quarter, we had to do a detailed analysis to estimate the value of our goodwill. This required us to determine an estimate of the market valuation of our contract drilling business and consequently an estimate of implied value of goodwill. The estimated impairment was determined by comparing the estimated implied value to the existing book value of goodwill. It is important to note that the estimated goodwill impairment is based solely on conditions on October 1 and includes the same market factors that also impacted our share price in the fourth quarter. Our estimate is subject to adjustment and will be finalized in the first quarter of 2012."

Later, in a response to a question, he said, "Unfortunately, the goodwill impairment under US GAAP is very mechanical and we elected, probably 12 years ago when the new rules came into effect, to evaluate our goodwill on October 1, and so on October 1 is when we have to evaluate all the various market conditions and all of the uncertainties, including the Macondo Well uncertainties, the operational uncertainties that we were experiencing in the fourth quarter. So, all of those went into our valuation of the contract drilling business and, really, all the same factors that impacted our stock price and our market capitalization in the fourth quarter end up reflected in our valuation of the contract drilling business. 

"So, when we compare that we go through an allocation process and come up with the implied value of goodwill that is really a point in time. I always view it as, if you look back at our market cap at the time and you compare it to our net book value, you would see our market cap is way below our net book value. Now, it is a much more complicated process than that simple calculation, but essentially it is the same. It has nothing to do with our view of the future of our fleet. It is really a very mechanical valuation exercise."

I get that and that it's a balance sheet issue, which is a snapshot in time, but was the carrying cost of goodwill really that far below the value of expected cash flows (I believe US GAAP uses undiscounted cash flows for this measurement)?

It's a non-cash charge and hopefully one-time, but it still hurts as that's money spent in the past that isn't recoverable. Also, under US GAAP, I don't believe it's reversible, so it's gone.


As the year progresses, I'll be looking for indications that more rigs are going to work and that dayrates are rising. That and putting Macondo behind will do good things for this company and, hopefully, our shares.

Cheers,
Jim