# Transocean Ltd. (RIG) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Transocean Ltd.'s 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1451505/000145150524000015/rig-20231231x10k.htm
Accession: 0001451505-24-000015
Filing date: 2024-02-21
Report date: 2023-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/RIG/
All MD&A years: /company/RIG/mda/
Previous year: /company/RIG/mda/fy2022/ (FY 2022)
Next year: /company/RIG/mda/fy2024/ (FY 2024)

Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations

Introduction

Transocean Ltd. (together with its subsidiaries and predecessors, unless the context requires otherwise, “Transocean,” “we,” “us” or “our”) is a leading international provider of offshore contract drilling services for oil and gas wells.  As of February 14, 2024, we owned or had partial ownership interests in and operated 37 mobile offshore drilling units, consisting of 28 ultra-deepwater floaters and nine harsh environment floaters.  Additionally, as of February 14, 2024, we were constructing one ultra-deepwater drillship.

We provide, as our primary business, contract drilling services in a single operating segment, which involves contracting our mobile offshore drilling rigs, related equipment and work crews to drill oil and gas wells.  We specialize in technically demanding regions of the global offshore drilling business with a particular focus on ultra-deepwater and harsh environment drilling services.  Our drilling fleet is one of the most versatile fleets in the world, consisting of drillships and semisubmersible floaters used in support of offshore drilling activities and offshore support services on a worldwide basis.

We perform contract drilling services by deploying our high-specification fleet in a single, global market that is 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.  The location of our rigs and the allocation of resources to operate, build or upgrade our rigs are determined by the activities and needs of our customers.

The information contained in this section should be read in conjunction with the information contained in “Part I. Item 1. Business,” “Part I. Item 1A. Risk Factors” and the audited consolidated financial statements and the notes thereto included under “Item 8. Financial Statements and Supplementary Data” elsewhere in this annual report on Form 10-K.  The following discussion of our results of operations and liquidity and capital resources includes comparisons for the years ended December 31, 2023 and 2022.  For a discussion, including comparisons, of our results of operations and liquidity and capital resources for the years ended December 31, 2022 and 2021, see “Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our annual report on Form 10-K for the year ended December 31, 2022, filed with the United States (“U.S.”) Securities and Exchange Commission on February 23, 2023.

Significant Events

Fleet expansion—In May 2023, we completed the construction of and placed into service the ultra-deepwater floater Deepwater Titan, the first drillship equipped with two 20,000 psi blowout preventers.  Additionally, in September 2023, we issued 11.9 million Transocean Ltd. shares with an aggregate value of $99 million to acquire the outstanding ownership interests of Liquila Ventures Ltd. (together with its subsidiaries, “Liquila”), a previously unconsolidated variable interest entity that is constructing the ultra-deepwater drillship Deepwater Aquila, and as a result, Liquila became our wholly owned subsidiary.  See “—Liquidity and Capital Resources—Sources and uses of liquidity.”

Secured debt issuance—In January 2023, we issued $525 million aggregate principal amount of 8.375% senior secured notes due February 2028 (the “8.375% Senior Secured Notes”), and we received $516 million aggregate cash proceeds, net of issue costs.  In January 2023, we issued $1.175 billion aggregate principal amount of 8.75% senior secured notes due February 2030 (the “8.75% Senior Secured Notes”), and we received $1.148 billion aggregate cash proceeds, net of issue costs.  In October 2023, we issued $325 million aggregate principal amount of 8.00% senior secured notes due September 2028 (the “8.00% Senior Secured Notes”), and we received $319 million aggregate cash proceeds, net of issue costs.  See “—Liquidity and Capital Resources—Sources and uses of liquidity.”

Early debt retirement—In January 2023, in connection with the issuance of the 8.75% Senior Secured Notes, we made an aggregate cash payment of $1.159 billion, including a make-whole premium, to redeem the remaining outstanding $311 million, $240 million, $250 million, and $336 million aggregate principal amount of the 5.875% senior secured notes due January 2024, the 7.75% senior secured notes due October 2024, the 6.25% senior secured notes due December 2024  and the 6.125% senior secured notes due August 2025, respectively.  In the year ended December 31, 2023, we made a cash payment of $243 million to redeem an equivalent aggregate principal amount of the outstanding 5.375% senior secured notes due May 2023.  See “—Liquidity and Capital Resources—Sources and uses of liquidity.”

Exchanged bonds—In the year ended December 31, 2023, holders of the outstanding $238 million aggregate principal amount of the 2.50% senior guaranteed exchangeable bonds due January 2027 (the “2.50% Senior Guaranteed Exchangeable Bonds”) exchanged such bonds under the terms of the governing indenture, and as part of the transactions, we delivered 38.6 million Transocean Ltd. shares.  In October 2023, our wholly owned subsidiary, Transocean Inc., entered into individually negotiated agreements with holders of $60 million and $41 million aggregate principal amount of the 4.00% senior guaranteed exchangeable bonds due December 2025 (the “4.00% Senior Guaranteed Exchangeable Bonds”) and the 4.625% senior guaranteed exchangeable bonds due September 2029 (the “4.625% Senior Guaranteed Exchangeable Bonds”), respectively and, as part of the transactions, we delivered 26.5 million Transocean Ltd. shares to such holders. See “—Liquidity and Capital Resources—Sources and uses of liquidity.”

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Asset disposal and investment in unconsolidated affiliate—In February 2023, we made a cash contribution of $10 million and a non-cash contribution of the ultra-deepwater floater Ocean Rig Olympia, and related assets, with an estimated fair value of $85 million, in exchange for an equity ownership interest in Global Sea Mineral Resources NV (together with its subsidiaries, “GSR”).  In the year ended December 31, 2023, we recognized a loss of $169 million, which had no tax effect, associated with the disposal of the rig and related assets.  See “—Operating Results,” “—Liquidity and Capital Resources—Sources and uses of liquidity”.

Impairment and disposal of assets held for sale—In the year ended December 31, 2023, we recognized an aggregate loss of $57 million, which had no tax effect, associated with the impairment of the harsh environment floaters Paul B. Loyd, Jr. and Transocean Leader and related assets, which we determined were impaired at the time that we classified the assets as held for sale.  On February 15, 2024, we completed the sale of Paul B. Loyd, Jr. and Transocean Leader and related assets.  See “—Operating Results” and “—Liquidity and Capital Resources—Sources and uses of liquidity.”

Outlook

Drilling market—Our industry outlook is positive based upon underlying economic factors, including numerous long-term forecasts that indicate hydrocarbons will continue to be a critical source of energy for the foreseeable future, despite significant relative growth in alternative energy technologies, which remain less economical versus hydrocarbons.  Economic forecasts indicate that countries that are not members of the Organization for Economic Co-operation and Development will continue to experience population growth and improvement in living standards, which will compound the increase in energy demand for the foreseeable future.  We believe that these factors will contribute to robust demand for oil and gas.

The existing supply of oil and gas is depleting and requires replenishment.  The replacement of reserves remains critically important given the significant underinvestment during the last several years and the challenges to new exploration and production investments imposed on many industry participants by investors and the governments of oil and gas producing nations.  Additionally, energy security will remain an important geopolitical factor across Europe, the U.S. and elsewhere with the growing understanding that hydrocarbons are not easily displaced by alternatives for much of the world’s energy needs.

With deepwater and harsh environment fields generating favorable economic returns and relatively lower carbon intensity than other hydrocarbon sources, we expect a significant portion of the required spending in fossil fuel development will continue to be allocated to deepwater and harsh environment projects.  Although the price for oil may continue to exhibit volatility in response to several factors outside of our control, including uncertainty about future output from the major oil and gas producing countries, interest rate changes, geopolitical events and global economic growth, we nevertheless expect prices to remain at levels that are robustly supportive of investment in deepwater and harsh environment exploration and development projects.

Significantly reduced offshore contracting activity during the previous downcycle has also resulted in a much smaller marketable global fleet of floating rigs available to meet the current upcycle in expected customer demands, specifically with respect to the highest specification drilling units preferred by many of our customers for their projects.  In recent quarters, marketable supply and demand for deepwater and harsh environment rigs has become more balanced.  Customers are now planning further into the future to ensure availability of rigs for their drilling programs and are signing contracts with longer lead times and durations, as well as higher dayrates.  Our customers continue to pursue offshore projects in deepwater and harsh environments where rates of return and production volumes are anticipated to be very attractive, which is reflected in the resumption of postponed projects, commencement of new drilling and exploration campaigns and extensions of current drilling campaigns.

Offshore drilling activity remains robust in every major ultra-deepwater geographic sector.  Several new exploration and development programs have commenced as our customers return their focus to reserve replacement.  Consequently, tendering activity improved meaningfully during 2023 and several multi-year tenders and direct negotiations for work in Brazil, West Africa, North America and Australia were awarded.  Many tenders remain active and are expected to be awarded in the first half of 2024.

South America, the Gulf of Mexico and, increasingly, Africa are key ultra-deepwater market sectors.  In the last two years, we observed sustained increases in dayrates for projects in the U.S. Gulf of Mexico and Brazil.  We continue to see these trends expand to other deepwater sectors.

In Norway, the largest market for harsh environment rigs, we anticipate demand will accelerate and extend through at least 2027, primarily due to previously enacted Norwegian tax incentive programs.  Several rigs have departed the region to work in other emerging harsh environment regions that require high-specification, high-efficiency semisubmersibles.  Contract durations, including subsequent extensions, on most of these units could make them unavailable to relocate for the foreseeable future.  We believe that these and other factors affecting supply and demand for drilling rigs are likely to have a favorable influence on dayrates and contracting terms as competition increases for high-specification, high-efficiency semisubmersibles.

As we project that this increased demand for both our asset groups will be sustained in the coming years, and as there are now fewer high-specification offshore drilling rigs capable of operating in these markets, we believe this demand may prompt the reactivation of cold-stacked rigs and the delivery of remaining stranded newbuild assets.

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As of February 14, 2024, our contract backlog was $9.01 billion compared to $9.40 billion as of October 18, 2023.  The risks of drilling project delays, contract renegotiations and contract terminations and cancellations remain low as oil prices have stayed at levels that are supportive of investment in deepwater and harsh environment projects.

Fleet status—We refer to the availability of our rigs in terms of the uncommitted fleet rate.  The uncommitted fleet rate is defined as the number of uncommitted days divided by the total number of rig calendar days in the measurement period, expressed as a percentage.  An uncommitted day is defined as a calendar day during which a rig is idle or stacked, is not contracted to a customer and is not committed to a shipyard.  The uncommitted fleet rates exclude the effect of priced options.  As of February 14, 2024, our uncommitted fleet rates for each of the five years in the period ending December 31, 2028 were as follows:

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","","2024","","2025","","2026","","2027","","2028"],["Uncommitted fleet rate","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Ultra-deepwater floaters","\u200b","47","%","\u200b","58","%","\u200b","69","%","\u200b","79","%","\u200b","92","%","\u200b"],["Harsh environment floaters","\u200b","23","%","\u200b","37","%","\u200b","69","%","\u200b","93","%","\u200b","100","%","\u200b"]]
[[/GREPCENT_TABLE]]

Performance and Other Key Indicators

Contract backlog—We believe our industry leading contract backlog sets us apart from the competition and provides indicators of our future revenue-earning opportunities.  Contract backlog is defined as the maximum contractual operating dayrate multiplied by the number of days remaining in the firm contract period, excluding revenues for mobilization, demobilization, contract preparation, other incentive provisions or reimbursement revenues, which are not expected to be significant to our contract drilling revenues.  The contract backlog represents the maximum contract drilling revenues that can be earned considering the contractual operating dayrate in effect during the firm contract period.  The contract backlog for our fleet was as follows:

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","February 14,","\u200b","October 18,","\u200b","February 9,"],["\u200b","","2024","","2023","","2023"],["\u200b","\u200b","(in millions)"],["Contract backlog","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Ultra-deepwater floaters","\u200b","$","6,951","","$","7,426","","$","7,378","\u200b"],["Harsh environment floaters","\u200b","\u200b","2,057","\u200b","\u200b","1,969","\u200b","\u200b","1,159","\u200b"],["Total contract backlog","","$","9,008","","$","9,395","","$","8,537","\u200b"]]
[[/GREPCENT_TABLE]]

Our contract backlog includes only firm commitments, including amounts associated with our contracted newbuild units under construction, which are represented by signed drilling contracts or, in some cases, by other definitive agreements awaiting contract execution.  It does not include conditional agreements and options to extend firm commitments.

The average contractual dayrate relative to our contract backlog is defined as the average maximum contractual operating dayrate to be earned per operating day in the measurement period.  An operating day is defined as a day for which a rig is contracted to earn a dayrate during the firm contract period after operations commence.  At February 14, 2024, the contract backlog and average contractual dayrates for our fleet were as follows:

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","\u200b","\u200b","\u200b","For the years ending December 31,","\u200b","\u200b","\u200b"],["\u200b","","Total","","2024","","2025","","2026","","2027","","2028","","Thereafter"],["\u200b","\u200b","(in millions, except average dayrates)"],["Contract backlog","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Ultra-deepwater floaters","","$","6,951","","$","1,984","","$","1,965","\u200b","$","1,486","\u200b","$","1,031","\u200b","$","381","\u200b","$","104","\u200b"],["Harsh environment floaters","\u200b","\u200b","2,057","\u200b","\u200b","762","\u200b","\u200b","791","\u200b","\u200b","415","\u200b","\u200b","89","\u200b","\u200b","\u2014","\u200b","\u200b","\u2014","\u200b"],["Total contract backlog","","$","9,008","","$","2,746","","$","2,756","\u200b","$","1,901","\u200b","$","1,120","\u200b","$","381","\u200b","$","104","\u200b"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Average contractual dayrates","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Ultra-deepwater floaters","","$","444,000","","$","428,000","","$","443,000","\u200b","$","453,000","\u200b","$","459,000","\u200b","$","464,000","\u200b","$","461,000","\u200b"],["Harsh environment floaters","\u200b","$","408,000","","$","366,000","","$","428,000","\u200b","$","456,000","\u200b","$","429,000","\u200b","$","\u2014","\u200b","$","\u2014","\u200b"],["Total fleet average","\u200b","$","435,000","","$","409,000","","$","438,000","\u200b","$","454,000","\u200b","$","457,000","\u200b","$","464,000","\u200b","$","461,000","\u200b"]]
[[/GREPCENT_TABLE]]

The actual amount of revenues earned and the actual periods in which revenues are earned will differ from the amounts and periods shown in the tables above due to various factors, including shipyard and maintenance projects, unplanned downtime and other factors that result in lower applicable dayrates than the full contractual operating dayrate.  Additional factors that could affect the amount and timing of actual revenues to be recognized include customer liquidity issues and contract terminations that may be available to our customers under certain circumstances.

The contractual operating dayrate may be higher than the actual dayrate we ultimately receive because an alternative contractual dayrate, such as a waiting-on-weather rate, repair rate, standby rate or force majeure rate, may apply under certain circumstances.  The contractual operating dayrate may also be higher than the actual dayrate we ultimately receive because of a number of factors, including rig downtime or suspension of operations.  In certain contracts, the actual dayrate may be reduced to zero if, for example, repairs extend beyond a stated period of time.  See “Part I. Item 1A. Risk Factors—Risks related to our business—Our current backlog of contract drilling revenues may not be fully realized.”

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Average daily revenue—We believe average daily revenue provides a comparative measurement unit for our revenue-earning performance.  Average daily revenue is defined as operating revenues, excluding revenues for contract terminations, reimbursements and contract intangible amortization, earned per operating day.  The average daily revenue for our fleet was as follows:

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","Years ended December 31,","\u200b"],["\u200b","","2023","","2022","","2021"],["Average daily revenue","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Ultra-deepwater floaters","\u200b","$","393,700","","$","329,100","\u200b","$","355,500","\u200b"],["Harsh environment floaters","\u200b","$","354,300","\u200b","$","380,000","\u200b","$","386,200","\u200b"],["Total fleet average daily revenue","\u200b","$","382,300","","$","345,500","\u200b","$","365,600","\u200b"]]
[[/GREPCENT_TABLE]]

Our average daily revenue fluctuates relative to market conditions and our revenue efficiency.  The average daily revenue may be affected by incentive performance bonuses or penalties or demobilization fee revenues.  Revenues for a newbuild unit are included in the calculation when the rig commences operations upon acceptance by the customer.  We remove a rig from the calculation upon disposal or classification as held for sale, unless we continue to operate the rig, in which case we remove the rig upon completion or novation of the contract.

Revenue efficiency—We believe revenue efficiency measures our ability to ultimately convert our contract backlog into revenues.  Revenue efficiency is defined as actual operating revenues, excluding revenues for contract terminations and reimbursements, for the measurement period divided by the maximum revenue calculated for the measurement period, expressed as a percentage.  Maximum revenue is defined as the greatest amount of contract drilling revenues the drilling unit could earn for the measurement period, excluding revenues for incentive provisions, reimbursements and contract terminations.  The revenue efficiency rates for our fleet were as follows:

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","Years ended December 31,","\u200b"],["\u200b","\u200b","2023","","2022","","2021"],["Revenue efficiency","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Ultra-deepwater floaters","\u200b","96.5","%","95.7","%","96.1","%"],["Harsh environment floaters","\u200b","97.8","%","97.6","%","98.8","%"],["Total fleet average revenue efficiency","\u200b","96.8","%","96.4","%","97.0","%"]]
[[/GREPCENT_TABLE]]

Our revenue efficiency rate varies due to revenues earned under alternative contractual dayrates, such as a waiting-on-weather rate, repair rate, standby rate, force majeure rate or zero rate, that may apply under certain circumstances.  Our revenue efficiency rate is also affected by incentive performance bonuses or penalties.  We include newbuilds in the calculation when the rigs commence operations upon acceptance by the customer.  We exclude rigs that are not operating under contract, such as those that are stacked.

Rig utilization—We present our rig utilization as an indicator of our ability to secure work for our fleet.  Rig utilization is defined as the total number of operating days divided by the total number of rig calendar days in the measurement period, expressed as a percentage.  The rig utilization rates for our fleet were as follows:

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","Years ended December 31,","\u200b"],["\u200b","\u200b","2023","","2022","","2021"],["Rig utilization","\u200b","\u200b","","\u200b","","\u200b"],["Ultra-deepwater floaters","\u200b","49.4","%","50.1","%","49.3","%"],["Harsh environment floaters","\u200b","59.1","%","64.9","%","64.4","%"],["Total fleet average rig utilization","\u200b","51.9","%","54.1","%","53.4","%"]]
[[/GREPCENT_TABLE]]

Our rig utilization rate declines as a result of idle and stacked rigs and during shipyard, contract preparation and mobilization periods.  We include newbuilds in the calculation when the rigs commence operations upon acceptance by the customer.  We remove a rig from the calculation upon disposal or classification as held for sale, unless we continue to operate the rig, in which case we remove the rig upon completion or novation of the contract.  Accordingly, our rig utilization can increase when we remove idle or stacked units from our fleet.

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Operating Results

Year ended December 31, 2023 compared to the year ended December 31, 2022

The following is an analysis of our operating results.  See “—Performance and Other Key Indicators” for definitions of operating days, average daily revenue, revenue efficiency and rig utilization.

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","Years ended December 31,","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","2023","\u200b","","2022","\u200b","","Change","","% Change","\u200b"],["\u200b","\u200b","(in millions, except day amounts and percentages)","\u200b"],["Operating days","\u200b","\u200b","7,045","\u200b","\u200b","","7,341","\u200b","\u200b","\u200b","(296)","\u200b","(4)","%"],["Average daily revenue","\u200b","$","382,300","\u200b","\u200b","$","345,500","\u200b","\u200b","$","36,800","\u200b","11","%"],["Revenue efficiency","\u200b","\u200b","96.8","%","\u200b","\u200b","96.4","%","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Rig utilization","\u200b","\u200b","51.9","%","\u200b","\u200b","54.1","%","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Contract drilling revenues","\u200b","$","2,832","\u200b","\u200b","$","2,575","\u200b","\u200b","$","257","\u200b","10","%"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Operating and maintenance expense","\u200b","\u200b","(1,986)","\u200b","\u200b","\u200b","(1,679)","\u200b","\u200b","\u200b","(307)","\u200b","(18)","%"],["Depreciation and amortization expense","\u200b","\u200b","(744)","\u200b","\u200b","\u200b","(735)","\u200b","\u200b","\u200b","(9)","\u200b","(1)","%"],["General and administrative expense","\u200b","\u200b","(187)","\u200b","\u200b","\u200b","(182)","\u200b","\u200b","\u200b","(5)","\u200b","(3)","%"],["Loss on impairment of assets","\u200b","\u200b","(57)","\u200b","\u200b","\u200b","\u2014","\u200b","\u200b","\u200b","(57)","\u200b","nm","\u200b"],["Loss on disposal of assets, net","\u200b","\u200b","(183)","\u200b","\u200b","\u200b","(10)","\u200b","\u200b","\u200b","(173)","\u200b","nm","\u200b"],["Operating loss","\u200b","\u200b","(325)","\u200b","\u200b","\u200b","(31)","\u200b","\u200b","\u200b","(294)","\u200b","nm","\u200b"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Other income (expense), net","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Interest income","\u200b","\u200b","52","\u200b","\u200b","\u200b","27","\u200b","\u200b","\u200b","25","\u200b","93","%"],["Interest expense, net of amounts capitalized","\u200b","\u200b","(646)","\u200b","\u200b","\u200b","(561)","\u200b","\u200b","\u200b","(85)","\u200b","(15)","%"],["Gain (loss) on retirement of debt","\u200b","\u200b","(31)","\u200b","\u200b","\u200b","8","\u200b","\u200b","\u200b","(39)","\u200b","nm","\u200b"],["Other, net","\u200b","\u200b","9","\u200b","\u200b","\u200b","(5)","\u200b","\u200b","\u200b","14","\u200b","nm","\u200b"],["Loss before income tax expense","\u200b","\u200b","(941)","\u200b","\u200b","\u200b","(562)","\u200b","\u200b","\u200b","(379)","\u200b","(67)","%"],["Income tax expense","\u200b","\u200b","(13)","\u200b","\u200b","\u200b","(59)","\u200b","\u200b","\u200b","46","\u200b","78","%"],["Net loss","\u200b","$","(954)","\u200b","\u200b","$","(621)","\u200b","\u200b","$","(333)","\u200b","(54)","%"]]
[[/GREPCENT_TABLE]]

“nm” means not meaningful.

Contract drilling revenues—Contract drilling revenues increased for the year ended December 31, 2023, compared to the year ended December 31, 2022, primarily due to the following: (a) approximately $210 million resulting from higher average daily revenues, (b) approximately $190 million resulting from the operations of our newbuild ultra-deepwater floaters Deepwater Atlas and Deepwater Titan placed into service in the two-year period ended December 31, 2023, (c) approximately $25 million resulting from slightly improved efficiency for the fleet, (d) approximately $25 million resulting from higher reimbursement revenues and (e) approximately $10 million resulting from increased early termination revenues.  These increases were partially offset by the following: (a) approximately $180 million resulting from reduced utilization, primarily for our harsh environment floaters that were under mobilization or contract preparation for their next contract and (b) approximately $25 million resulting from cold stacking Deepwater Nautilus.

Costs and expenses—Operating and maintenance costs and expenses increased for the year ended December 31, 2023, compared to the year ended December 31, 2022, primarily due to the following: (a) approximately $140 million resulting from reactivation and contract preparation, (b) approximately $85 million resulting from our two newbuild ultra-deepwater floaters placed into service, (c) approximately $55 million resulting from the effect of inflation on personnel and maintenance costs, (d) approximately $40 million resulting from various litigation, customs duties and indirect taxes and (e) approximately $25 million resulting from higher reimbursable costs.  These increases were partially offset by the following: (a) approximately $35 million resulting from cold stacking Deepwater Nautilus and (b) approximately $15 million resulting from the favorable effect of currency exchange rates on personnel costs.

Depreciation and amortization expense increased for the year ended December 31, 2023, compared to the year ended December 31, 2022, primarily due to (a) $48 million of increased depreciation associated with our newbuild ultra-deepwater floaters and other property and equipment placed into service since December 2022, partially offset by (b) $23 million of reduced depreciation resulting from the disposal of one rig and the classification of two rigs as held for sale and (c) approximately $12 million of reduced depreciation resulting from assets that had reached the end of their useful lives or had been retired.

General and administrative costs and expenses increased for the year ended December 31, 2023, compared to the year ended December 31, 2022, primarily due to the following: (a) approximately $16 million resulting from increased personnel costs, partially offset by (c) approximately $8 million resulting from reduced innovation costs and (d) approximately $4 million resulting from reduced legal and professional fees.

Loss on impairment or disposal of assets—In the year ended December 31, 2023, we recognized a loss associated with the impairment of two harsh environment floaters, which we determined were impaired at the time we classified them as held for sale.

In the year ended December 31, 2023, we recognized a loss of $169 million associated with our non-cash contribution of Ocean Rig Olympia and related assets in exchange for an equity ownership interest in GSR.  In the years ended December 31, 2023 and

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2022, we recognized an aggregate net loss of $14 million and $10 million, respectively, associated with the disposal of assets unrelated to rig sales.

Other income and expense—Interest expense, net of amounts capitalized, increased in the year ended December 31, 2023, compared to the year ended December 31, 2022, primarily due to the following: (a) $189 million resulting from debt issued in the two-year period ended December 31, 2023 and (b) $34 million resulting from reduced interest costs capitalized for our newbuild construction program, partially offset by (c) $113 million resulting from debt repaid as scheduled or early retired and (d) $30 million resulting from the fair value adjustment of the bifurcated compound exchange feature embedded in the indenture governing the 4.625% Senior Guaranteed Exchangeable Bonds.

In the year ended December 31, 2023, we recognized a net loss on retirement of debt, primarily associated with the early retirement of $1.38 billion aggregate principal amount of our debt securities.  In the year ended December 31, 2022, we recognized a net gain on the retirement of debt, primarily associated with the early retirement of $116 million aggregate principal amount of our debt securities in connection with exchange and purchase agreements.

Other income net, increased in the year ended December 31, 2023, compared to the year ended December 31, 2022, primarily due to the following: (a) an increased gain of $18 million resulting from net changes to currency exchange rates, (b) increased income of $17 million associated with our dual-activity patent and (c) increased income of $8 million related to the non-service components of net periodic benefit income, partially offset by (e) a loss of $27 million associated with a payment of cash or the issuance of additional shares to certain holders that elected to exercise their exchanges rights for the 4.00% Senior Guaranteed Exchangeable Bonds and the 4.625% Senior Guaranteed Exchangeable Bonds in the year ended December 31, 2023.

Income tax expense—In the years ended December 31, 2023 and 2022, our effective tax rate was (1.4) percent and (10.4) percent, respectively, based on loss before income tax expense.  In the years ended December 31, 2023 and 2022, the aggregate effect of discrete period tax items was a net tax benefit of $74 million and $19 million, respectively.  In the year ended December 31, 2023, such discrete items included settlements and expirations of various uncertain tax positions, changes to valuation allowances and changes to deferred taxes due to new rig operations.  In the year ended December 31, 2022, such discrete items included settlement and expiration of various uncertain tax positions, changes to valuation allowances, operational restructuring and gains due to exchange rate changes.  In the years ended December 31, 2023 and 2022, our effective tax rate, excluding discrete items, was (13.3) percent and (13.6) percent, respectively, based on loss before income tax expense.  In the year ended December 31, 2023 compared to the year ended December 31, 2022, our effective tax rate increased primarily due to changes in the relative blend of income from operations in certain jurisdictions.

Due to our operating activities and organizational structure, our income tax expense does not change proportionally with our income before income taxes.  Significant decreases in our income before income taxes typically lead to higher effective tax rates, while significant increases in income before income taxes can lead to lower effective tax rates, subject to the other factors impacting income tax expense noted above.  With respect to the effective tax rate calculation for the year ended December 31, 2023, a significant portion of our income tax expense was generated in countries in which income taxes are imposed or treated to be imposed on gross revenues, with the most significant of these countries being Angola and India.  Conversely, the countries in which we incurred the most significant income taxes during this period that were based on income before income tax include the U.S., Hungary, Brazil, Cyprus, Australia, Norway and Switzerland.  Our rig operating structures further complicate our tax calculations, especially in instances where we have more than one operating structure for the taxing jurisdiction and, thus, more than one method of calculating taxes depending on the operating structure utilized by the rig under the contract.

Liquidity and Capital Resources

Sources and uses of cash

In the year ended December 31, 2023, our primary sources of cash were net cash proceeds from issuance of debt and net cash provided by our operating activities.  Our primary uses of cash were debt repayments and capital expenditures.

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","Years ended December 31,","\u200b","\u200b","\u200b"],["\u200b","","2023","","2022","","Change"],["\u200b","\u200b","(in millions)"],["Cash flows from operating activities","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Net loss","\u200b","$","(954)","","$","(621)","","$","(333)","\u200b"],["Non-cash items, net","\u200b","\u200b","1,351","\u200b","\u200b","1,163","\u200b","\u200b","188","\u200b"],["Changes in operating assets and liabilities, net","\u200b","\u200b","(233)","\u200b","\u200b","(94)","\u200b","\u200b","(139)","\u200b"],["\u200b","\u200b","$","164","","$","448","","$","(284)","\u200b"]]
[[/GREPCENT_TABLE]]

Net cash provided by operating activities decreased primarily due to (a) increased disbursements made in connection with contract preparation and mobilization activities for rigs under new or upcoming contracts, (b) increased cash paid for interest and (c) increased cash paid to employees, partially offset by (d) reduced cash paid for income taxes.

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[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","Years ended December 31,","\u200b","\u200b","\u200b"],["\u200b","","2023","","2022","","Change"],["\u200b","\u200b","(in millions)"],["Cash flows from investing activities","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Capital expenditures","\u200b","$","(427)","","$","(717)","","$","290","\u200b"],["Investments in equity of unconsolidated affiliates","\u200b","\u200b","(10)","\u200b","\u200b","(42)","\u200b","\u200b","32","\u200b"],["Investment in loans to unconsolidated affiliates","\u200b","\u200b","(3)","\u200b","\u200b","(5)","\u200b","\u200b","2","\u200b"],["Proceeds from disposal of assets, net","\u200b","\u200b","10","\u200b","\u200b","7","\u200b","\u200b","3","\u200b"],["Cash acquired in acquisition of unconsolidated affiliate","\u200b","\u200b","7","\u200b","\u200b","\u2014","\u200b","\u200b","7","\u200b"],["\u200b","\u200b","$","(423)","","$","(757)","","$","334","\u200b"]]
[[/GREPCENT_TABLE]]

Net cash used in investing activities decreased primarily due to (a) reduced capital expenditures associated with our newbuild construction program and (b) reduced cash invested in the equity and debt of our unconsolidated affiliates, partially offset by (c) increased capital expenditures associated with maintenance, reactivation and contract preparation activities.

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","Years ended December 31,","\u200b","\u200b","\u200b"],["\u200b","","2023","","2022","","Change"],["\u200b","\u200b","(in millions)"],["Cash flows from financing activities","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Repayments of debt","\u200b","$","(1,717)","\u200b","$","(554)","\u200b","$","(1,163)","\u200b"],["Proceeds from issuance of debt, net of issue costs","\u200b","\u200b","1,983","\u200b","\u200b","175","\u200b","\u200b","1,808","\u200b"],["Proceeds from issuance of shares, net of issue costs","\u200b","\u200b","\u2014","\u200b","\u200b","263","\u200b","\u200b","(263)","\u200b"],["Proceeds from issuance of warrants, net of issue costs","\u200b","\u200b","\u2014","\u200b","\u200b","12","\u200b","\u200b","(12)","\u200b"],["Other, net","\u200b","\u200b","(3)","\u200b","\u200b","(8)","\u200b","\u200b","5","\u200b"],["\u200b","\u200b","$","263","","$","(112)","","$","375","\u200b"]]
[[/GREPCENT_TABLE]]

Net cash provided by financing activities increased primarily due to (a) net cash proceeds from the issuance of $1.175 billion aggregate principal amount of 8.75% Senior Secured Notes, $525 million aggregate principal amount of 8.375% Senior Secured Notes and $325 million aggregate principal amount of 8.00% Senior Secured Notes in the year ended December 31, 2023, and (b) decreased cash used to repay debt in scheduled installments, partially offset by (c) early repayments of $1.38 billion aggregate principal amount of certain of our debt securities in the year ended December 31, 2023 compared to early repayments of $77 million aggregate principal amount in the prior year.

Sources and uses of liquidity

Overview—We expect to use existing unrestricted cash balances, cash flows from operating activities, borrowings under our Secured Credit Facility or proceeds from the disposal of assets or the issuance of debt or shares to fulfill anticipated near-term obligations, which may include capital expenditures, working capital and other operational requirements, scheduled debt maturities or other payments.  At December 31, 2023, we had $762 million in unrestricted cash and cash equivalents and $233 million in restricted cash and cash equivalents.  We have generated positive cash flows from operating activities over recent years and, although we cannot provide assurances, we expect that such cash flows will continue to be positive over the next year.  For example, among other factors, if we incur costs for reactivation or contract preparation of multiple rigs or to otherwise assure the marketability of our fleet or general economic, financial, industry or business conditions deteriorate, our cash flows from operations may be reduced or negative.

Additionally, we have a bank credit agreement for a credit facility, secured by, among other things, a lien on nine of our ultra-deepwater floaters and two of our harsh environment floaters (as amended from time to time, the “Secured Credit Facility”).  Our Secured Credit Facility provides us with a borrowing capacity of $600 million through its scheduled maturity on June 22, 2025, and contains restrictive covenants, including a minimum guarantee coverage ratio of 3.0 to 1.0, a minimum collateral coverage ratio of 2.1 to 1.0 and a minimum liquidity requirement of $500 million, among others.  For more information about the restrictions in our Secured Credit Facility and maturity triggers thereof, as well as on our scheduled debt maturities in 2024 and beyond, see Notes to Consolidated Financial Statements—Note 9—Debt.

Although we currently anticipate relying on these sources of liquidity, including cash flows from operating activities and borrowings under our Secured Credit Facility, among others, we may in the future consider establishing additional financing arrangements with banks or other capital providers, including shipyard loans, and subject to market conditions and other factors, we may be required to provide collateral for any such future financing arrangements.  Additionally, we have from time to time relied on issuances of equity or equity-linked securities.  For more information about our issuances of equity securities, see Notes to Consolidated Financial Statements—Note 9—Debt and Notes to Consolidated Financial Statements—Note 14—Equity.

Debt and equity markets—From time to time, we seek to access the capital markets, including with respect to potential liability management transactions.  For example, during the three-year period ended December 31, 2023, we completed multiple debt and equity transactions, including the redemption, exchanges and retirement of existing debt, in connection with our ongoing efforts to prudently manage our capital structure and improve our liquidity position.  Subject to then-existing market conditions and our expected liquidity needs, among other factors, we may use existing unrestricted cash balances, our cash flows from operating activities, or proceeds from asset sales to pursue liability management transactions, including among others, purchasing or exchanging any of our debt or equity-linked securities in

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the open market, in privately negotiated transactions, or through tender or exchange offers, or by redeeming any of our outstanding debt securities pursuant to the terms of the applicable governing document, if applicable.  Any future purchases, exchanges or other transactions may be on the same terms or on terms that are more or less favorable to holders than the terms of any prior transaction.  We can provide no assurance as to which, if any, of these alternatives, or combinations thereof, we may choose to pursue in the future, if at all, or as to the timing with respect to any future transactions.  For more information about our previous debt repayment, redemption and retirement transactions during the three-year period ended December 31, 2023, see Notes to Consolidated Financial Statements—Note 9—Debt.

Our ability and willingness to access the debt and equity markets is a function of a variety of factors, including, among others, general economic, industry or market conditions, market perceptions of us and our industry and credit rating agencies’ views of our debt.  General economic or market conditions could have an adverse effect on our business and financial position and on the business and financial position of our customers, suppliers and lenders and could affect our ability to access the capital markets on acceptable terms or at all and our future need or ability to borrow under our Secured Credit Facility.  In addition to our potential sources of funding, the effects of such global events could impact our liquidity or need to alter our allocation or sources of capital, implement further cost reduction measures and change our financial strategy.  Additionally, the rating of our long-term debt is below investment grade, which is causing us to experience increased fees and interest rates under our Secured Credit Facility and indentures governing certain of our senior notes.  Future downgrades may further restrict our ability to access the debt market for sources of capital and may negatively impact the cost of such capital 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.

Drilling fleet—From time to time, we review possible acquisitions of businesses and drilling rigs, as well as noncontrolling ownership interests in other companies, and we may make significant future capital commitments for such purposes.  We may also consider investments related to major rig upgrades, new rig construction, or the acquisition of a rig under construction.  Any such acquisition or investment could involve the payment by us of a substantial amount of cash or the issuance of a substantial number of additional shares or other securities.  Our failure to subsequently secure drilling contracts in these instances, if not already secured, could have an adverse effect on our results of operations or cash flows.

In the years ended December 31, 2023 and 2022, we made capital expenditures of $427 million and $717 million, respectively, including $331 million and $669 million, respectively, for our newbuild construction projects.  The historical and projected capital expenditures and non-cash capital additions for our ongoing newbuild construction projects were as follows:

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","\u200b","\u200b","\u200b","Expected","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","Total costs","\u200b","costs for the","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","through","\u200b","year ending","\u200b","\u200b","\u200b"],["\u200b","\u200b","December 31,","\u200b","December 31,","\u200b","\u200b","\u200b"],["\u200b","","2023","","2024","\u200b","Total"],["\u200b","\u200b","(in millions)"],["Deepwater Aquila (a)","\u200b","$","301","\u200b","$","139","\u200b","$","440","\u200b"],["Deepwater Titan (b)","\u200b","\u200b","1,165","\u200b","\u200b","\u2014","\u200b","\u200b","1,165","\u200b"],["Deepwater Atlas (c)","\u200b","\u200b","1,000","\u200b","\u200b","\u2014","\u200b","\u200b","1,000","\u200b"],["Total","\u200b","$","2,466","","$","139","","$","2,605","\u200b"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(a)","In September 2023, we acquired Deepwater Aquila, an ultra-deepwater drillship under construction for Liquila, a previously unconsolidated variable interest entity, by acquiring the outstanding ownership interests in Liquila. The seventh generation, high-specification drillship is designed to be equipped with our patented dual activity, a 1,400 short-ton hookload, large deck space, high load capacities and will be dual-stack ready. The rig is expected to commence operations under its drilling contract in mid-2024."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(b)","In May 2023, we completed construction of the ultra-deepwater drillship Deepwater Titan, and it commenced operations under its drilling contract. Deepwater Titan is equipped with two 20,000 pounds per square inch blowout preventers and other equipment required by our customer."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(c)","In October 2022, we completed construction of the ultra-deepwater drillship Deepwater Atlas, and it commenced the first of two phases of operations using a 15,000 pounds per square inch blowout preventer. In October 2023, the rig completed installation of a 20,000 pounds per square inch blowout preventer and related equipment, and is expected to return to service in the first half of 2024."]]
[[/GREPCENT_TABLE]]

The ultimate amount of our capital expenditures is partly dependent upon financial market conditions, the actual level of operational and contracting activity, the costs associated with the current regulatory environment and customer requested capital improvements and equipment for which the customer agrees to reimburse us.  As with any major shipyard project that takes place over an extended period of time, the actual costs, the timing of expenditures and the project completion date may vary from estimates based on numerous factors, including actual contract terms, weather, exchange rates, shipyard labor conditions, availability of suppliers to recertify equipment and the market demand for components and resources required for drilling unit construction.  We intend to fund the cash requirements for our projected capital expenditures by using available cash balances, cash generated from operations and asset sales, borrowings under our Secured Credit Facility and financing arrangements with banks or other capital providers.  Economic conditions and other factors could impact the availability of these sources of funding.  See “—Sources and uses of liquidity.”

From time to time, we may also review the possible disposition of certain drilling assets.  During the year ended December 31, 2023, we made a non-cash contribution of an ultra-deepwater floater, together with related assets and a cash contribution of $10 million, as consideration for an equity ownership interest in an unconsolidated affiliate.  Additionally, on February 15, 2024, we completed the sale of two harsh environment floaters.  Considering market conditions, we have previously committed to plans to sell certain lower specification

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drilling units for scrap value, and we may identify additional lower-specification drilling units to be sold for scrap, recycling or alternative purposes.  See Notes to Consolidated Financial Statements—Note 7—Long-Lived Assets.

Contractual obligations—We provide additional information about our cash requirements for known contractual and other obligations on both a short-term and long-term basis in the notes to our consolidated financial statements as follows:

◾For additional information regarding our operating and finance lease obligations, see Notes to Consolidated Financial Statements—Note 8—Leases.

◾For additional information regarding our debt obligations and scheduled maturities, see Notes to Consolidated Financial Statements—Note 9—Debt.

◾For additional information regarding the obligations to our employees under our various postemployment benefit plans, see Notes to Consolidated Financial Statements—Note 10—Postemployment Benefit Plans.

◾For additional information regarding our tax obligations, see Notes to Consolidated Financial Statements—Note 11—Income Taxes.

◾For additional information regarding our obligations under long-term purchase agreements and service agreements and our material contingencies, see Notes to Consolidated Financial Statements—Note 13—Commitments and Contingencies.

Other commercial commitments—We have other commercial commitments, such as standby letters of credit and surety bonds that guarantee our performance as it relates to our drilling contracts, insurance, customs, tax and other obligations in various jurisdictions.  The cash obligations of these commitments, which are primarily geographically concentrated in Brazil, are not normally called because we typically comply with the underlying performance requirements.  Standby letters of credit are issued under various committed and uncommitted credit lines, some of which require cash collateral.  For additional information regarding our standby letters of credit and surety bond guarantees, see Notes to Consolidated Financial Statements—Note 13—Commitments and Contingencies.

Related Party Transactions

In April 2023, Perestroika AS (together with its subsidiaries, “Perestroika”), an entity affiliated with one of our directors that beneficially owns approximately 11 percent of our shares, exchanged $213 million aggregate principal amount of the 2.50% Senior Guaranteed Exchangeable Bonds under the terms of the governing indenture at the applicable exchange rate of 162.1626 Transocean Ltd. shares per $1,000 note.  As part of the transaction governing the exchange, we delivered 34.6 million Transocean Ltd. shares and additional immaterial cash consideration to such exchanging holder.  The director’s beneficial ownership of our shares resulting from these transactions did not change.  See Notes to Consolidated Financial Statements—Note 9—Debt.

In September 2023, we issued 11.9 million Transocean Ltd. shares with an aggregate value of $99 million, which included 2.0 million Transocean Ltd. shares with an aggregate value of $16.4 million issued to Perestroika, to acquire the outstanding ownership interests in Liquila, and as a result, Liquila became our wholly owned subsidiary.  See Notes to Consolidated Financial Statements—Note 4—Unconsolidated Affiliates.

We engage in certain related party transactions with our unconsolidated affiliates.  Our most significant transactions with our unconsolidated affiliates are under agreements with Orion Holdings (Cayman) Limited as follows: (a) we operate, stack and maintain Transocean Norge under a management services agreement, (b) we market Transocean Norge under a marketing services agreement and (c) during operations, we lease Transocean Norge under a bareboat charter agreement.  Additionally, we procure and provide services and equipment from and to other unconsolidated affiliates for technological innovation and subsea minerals exploration.  See Notes to Consolidated Financial Statements—Note 4—Unconsolidated Affiliates.

Critical Accounting Policies and Estimates

Overview

We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the U.S., which require us to make estimates that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures of contingent assets and liabilities.  These estimates require significant judgments and assumptions.  We evaluate our estimates on an ongoing basis using historical experience and various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying amounts of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates.

We consider the following to be our critical accounting policies and estimates since they are very important to the portrayal of our financial condition and results and require our most subjective and complex judgments.  We have discussed the development, selection and disclosure of such policies and estimates with the audit committee of our board of directors.  For information about our significant accounting policies and accounting standards updates, see Notes to Consolidated Financial Statements—Note 2—Significant Accounting Policies.

Income taxes

Overview—We provide for income taxes based on expected taxable income, statutory rates and tax laws in the jurisdictions in which we operate or have a taxable presence.  The relationship between our provision for or benefit from income taxes and our income or loss before income taxes can vary significantly from period to period considering, among other factors, (a) the overall level of income before income taxes, (b) changes in the blend of income that is taxed based on gross revenues rather than income before taxes, (c) rig movements

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between taxing jurisdictions and (d) our rig operating structures.  Consequently, our income tax expense does not change proportionally with our income or loss before income taxes.

Uncertain tax positions—We apply significant judgment to evaluate our tax positions based on the interpretation of tax laws in various jurisdictions and with the use of estimates and assumptions regarding significant future events, such as the amount, timing and character of income, deductions and tax credits.  Our tax liability in any given year could be affected by changes in tax laws, regulations, agreements, and treaties, currency exchange restrictions or our level or profitability of operations in each jurisdiction.  The tax laws relating to the offshore drilling industry in certain jurisdictions in which we operate are not well developed, requiring us to apply incremental judgment.  Although we employ the best information available at the time we prepare our annual tax provision, a number of years may elapse before the tax liabilities in the various jurisdictions are ultimately determined.

We are undergoing examinations of our tax returns in a number of taxing jurisdictions for various years.  We review our liabilities on an ongoing basis and, to the extent audits or other events cause us to adjust the liabilities accrued in prior periods, we recognize those adjustments in the period of the event.  Our tax liabilities are dependent on numerous factors that cannot be reasonably projected, including among others, the amount and nature of additional taxes potentially asserted by local tax authorities; the willingness of local tax authorities to negotiate a fair settlement through an administrative process; the impartiality of the local courts; and the potential for changes in the taxes paid to one country that either produce, or fail to produce, offsetting tax changes in other countries.  Consequently, we cannot reasonably estimate the future impact of changes to the assumptions and estimates related to our annual tax provision.

Unrecognized tax benefits—We establish liabilities for estimated tax exposures, and the provisions and benefits resulting from changes to those liabilities are included in our annual tax provision along with related interest and penalties.  Such tax exposures include potential challenges to intercompany pricing, disposition transactions, and withholding tax rates and their applicability.  These exposures may be affected by changes in applicable tax law or other factors, which could cause us to revise our prior estimates, and are generally resolved through the settlement of audits within these tax jurisdictions or by judicial means.  At December 31, 2023 and 2022, we had unrecognized tax benefits of $458 million and $471 million, respectively, including interest and penalties, against which we recorded net operating loss deferred tax assets of $411 million and $383 million, respectively, resulting in net unrecognized tax benefits of $47 million and $88 million, respectively, including interest and penalties, that upon reversal would favorably impact our effective tax rate.

Valuation allowance—We apply significant judgment to determine whether our deferred tax assets will be fully or partially realized.  Our evaluation requires us to consider all available positive and negative evidence, including projected future taxable income and the existence of cumulative losses in recent years.  We continually evaluate opportunities for the future utilization of our deferred tax assets.  When it is estimated to be more likely than not that all or some portion of certain deferred tax assets, such as foreign tax credit carryovers or net operating loss carryforwards, will not be realized, we establish a valuation allowance for the amount of the deferred tax assets that is considered to be unrealizable.  During the years ended December 31, 2023 and 2022, in connection with our evaluation of the projected realizability of our deferred tax assets, we determined that our consolidated cumulative loss incurred over the recent three-year period has limited our ability to consider other subjective evidence, such as projected contract activity rather than contract backlog.  See Notes to Consolidated Financial Statements—Note 11—Income Taxes.

Property and equipment

Overview—We apply significant judgment to account for our property and equipment, consisting primarily of offshore drilling rigs and related equipment, related to estimates and assumptions for cost capitalization, useful lives and salvage values.  At December 31, 2023 and 2022, the carrying amount of our property and equipment was $16.94 billion and $17.47 billion, respectively, representing 84 percent and 85 percent, respectively, of our total assets.

Capitalized costs—We capitalize costs incurred to enhance, improve and extend the useful lives of our property and equipment and expense costs incurred to repair and maintain the existing condition of our rigs.  For newbuild construction projects, we also capitalize the initial preparation, mobilization and commissioning costs incurred until the drilling unit is placed into service.  Cost capitalization affects our results of operations by reducing expenses in the period incurred and increasing depreciation expense over the useful life of the asset.

Useful lives and salvage values—We depreciate our assets using the straight-line method over their estimated useful lives after allowing for salvage values.  We estimate useful lives and salvage values by applying judgments and assumptions that reflect both historical experience and expectations regarding future operations, rig utilization and asset performance.  Useful lives and salvage values of rigs are difficult to estimate due to a variety of factors, including (a) technological advances that impact the methods or cost of oil and gas exploration and development, (b) changes in market or economic conditions and (c) changes in laws or regulations affecting the drilling industry.  Applying different judgments and assumptions in establishing the useful lives and salvage values would likely result in materially different net carrying amounts and depreciation expense for our assets.  We reevaluate the remaining useful lives and salvage values of our rigs when certain events occur that directly impact the useful lives and salvage values of the rigs, including changes in operating condition, functional capability and market and economic factors.  We may also consider major capital upgrades required to perform certain contracts and the long-term impact of those upgrades on future marketability.  At December 31, 2023, a hypothetical one-year increase in the useful lives of all of our rigs would cause a decrease in our annual depreciation expense of approximately $33 million and a hypothetical one-year decrease would cause an increase in our annual depreciation expense of approximately $13 million.

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Long-lived asset impairment—We review our property and equipment for impairment when events or changes in circumstances indicate that the carrying amounts of our assets held and used may not be recoverable.  Potential impairment indicators include rapid declines in commodity prices and related market conditions, declines in dayrates or utilization, cancellations of contracts or credit concerns of multiple customers.  During periods of oversupply, we may idle or stack rigs for extended periods of time or we may elect to sell certain rigs for scrap, which could be an indication that an asset group may be impaired since supply and demand are the key drivers of rig utilization and our ability to contract our rigs at economical rates.  Our rigs are mobile units, equipped to operate in geographic regions throughout the world and, consequently, we may mobilize rigs from an oversupplied region to a more lucrative and undersupplied region when it is economical to do so.  Many of our contracts generally allow our customers to relocate our rigs from one geographic region to another, subject to certain conditions, and our customers utilize this capability to meet their worldwide drilling requirements.  Accordingly, our rigs are considered to be interchangeable within classes or asset groups, and we evaluate impairment by asset group.  We consider our asset groups to be ultra-deepwater floaters and harsh environment floaters.

We assess recoverability of assets held and used by projecting undiscounted cash flows for the asset group being evaluated.  When the carrying amount of the asset group is determined to be unrecoverable, we recognize an impairment loss, measured as the amount by which the carrying amount of the asset group exceeds its estimated fair value.  To estimate the fair value of each asset group, we apply a variety of valuation methods, incorporating income, market and cost approaches.  We may weigh the approaches, under certain circumstances, when relevant data is limited, when results are inconclusive or when results deviate significantly.  Our estimate of fair value generally requires us to use significant unobservable inputs, representative of Level 3 fair value measurements, including assumptions related to the long-term future performance of our asset groups, such as projected revenues and costs, dayrates, rig utilization and revenue efficiency.  These projections involve uncertainties that rely on assumptions about demand for our services, future market conditions and technological developments.  Because our business is cyclical in nature, the results of our impairment testing are expected to vary significantly depending on the timing of the assessment relative to the business cycle.  Altering either the timing of or the assumptions used to estimate fair value and significant unanticipated changes to the assumptions could materially alter an outcome that could otherwise result in an impairment loss.  Given the nature of these evaluations and their application to specific asset groups and specific time periods, it is not possible to reasonably quantify the impact of changes in these assumptions.  See Notes to Consolidated Financial Statements—Note 7—Long-Lived Assets.

Other Matters

Regulatory matters

We occasionally receive inquiries from governmental regulatory agencies regarding our operations around the world, including inquiries with respect to various tax, environmental, regulatory and compliance matters.  To the extent appropriate under the circumstances, we investigate such matters, respond to such inquiries and cooperate with the regulatory agencies.  See Notes to Consolidated Financial Statements—Note 13—Commitments and Contingencies.

Tax matters

We conduct operations through our various subsidiaries in countries throughout the world.  Each country has its own tax regimes with varying statutory rates, deductions and tax attributes, which are subject to changes resulting from new legislation, interpretation or guidance.  From time to time, as a result of these changes, we may revise previously evaluated tax positions, which could cause us to adjust our recorded tax assets and liabilities.  Tax authorities in certain jurisdictions are examining our tax returns and, in some cases, have issued assessments.  We intend to defend our tax positions vigorously.  Although we can provide no assurance as to the outcome of the aforementioned changes, examinations or assessments, we do not expect the ultimate liability to have a material adverse effect on our consolidated statement of financial position or results of operations; however, it could have a material adverse effect on our consolidated statement of cash flows.  See Notes to Consolidated Financial Statements—Note 11—Income Taxes.

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