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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)

 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2019

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 001-38373

Graphic

Transocean Ltd.

(Exact name of registrant as specified in its charter)

Switzerland

98-0599916

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

Turmstrasse 30

Steinhausen, Switzerland

6312

(Address of principal executive offices)

(Zip Code)

+41 (41) 749-0500

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading symbol

Name of each exchange on which registered

Shares, CHF 0.10 par value

RIG

New York Stock Exchange

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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   Yes þ   No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer þ Accelerated Filer  Non-accelerated Filer  Smaller Reporting Company  Emerging Growth Company 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes    No þ

As of July 23, 2019, 611,803,445 shares were outstanding.

Table of Contents

TRANSOCEAN LTD. AND SUBSIDIARIES

INDEX TO QUARTERLY REPORT ON FORM 10-Q

QUARTER ENDED JUNE 30, 2019

Page

PART I.

FINANCIAL INFORMATION

1

2

3

4

5

6

18

30

30

31

31

31

31

Table of Contents

PART I.FINANCIAL INFORMATION

Item I.

Financial Statements

TRANSOCEAN LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In millions, except per share data)

(Unaudited)

Three months ended

Six months ended

June 30, 

June 30, 

2019

2018

2019

2018

Contract drilling revenues

$

758

$

790

$

1,512

$

1,454

Costs and expenses

Operating and maintenance

510

431

1,018

855

Depreciation and amortization

219

211

436

413

General and administrative

45

52

94

99

774

694

1,548

1,367

Loss on impairment

(1)

(1,014)

(1)

(1,014)

Gain (loss) on disposal of assets, net

(10)

1

(3)

6

Operating loss

(27)

(917)

(40)

(921)

Other income (expense), net

Interest income

12

13

22

25

Interest expense, net of amounts capitalized

(168)

(148)

(334)

(295)

Loss on retirement of debt

(9)

(2)

(27)

(2)

Other, net

23

31

(10)

(142)

(137)

(308)

(282)

Loss before income tax expense

(169)

(1,054)

(348)

(1,203)

Income tax expense

37

85

29

148

Net loss

(206)

(1,139)

(377)

(1,351)

Net income (loss) attributable to noncontrolling interest

2

(4)

2

(6)

Net loss attributable to controlling interest

$

(208)

$

(1,135)

$

(379)

$

(1,345)

Loss per share

Basic

$

(0.34)

$

(2.46)

$

(0.62)

$

(2.99)

Diluted

$

(0.34)

$

(2.46)

$

(0.62)

$

(2.99)

Weighted-average shares outstanding

Basic

612

462

612

450

Diluted

612

462

612

450

See accompanying notes.

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Table of Contents

TRANSOCEAN LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In millions)

(Unaudited)

Three months ended

Six months ended

June 30, 

June 30, 

2019

2018

2019

2018

Net loss

$

(206)

$

(1,139)

$

(377)

$

(1,351)

Net income (loss) attributable to noncontrolling interest

2

(4)

2

(6)

Net loss attributable to controlling interest

(208)

(1,135)

(379)

(1,345)

Components of net periodic benefit costs before reclassifications

1

7

(3)

Components of net periodic benefit costs reclassified to net loss

1

1

2

Other comprehensive income (loss) before income taxes

1

1

8

(1)

Income taxes related to other comprehensive income (loss)

Other comprehensive income (loss)

1

1

8

(1)

Other comprehensive income attributable to noncontrolling interest

Other comprehensive income (loss) attributable to controlling interest

1

1

8

(1)

Total comprehensive loss

(205)

(1,138)

(369)

(1,352)

Total comprehensive income (loss) attributable to noncontrolling interest

2

(4)

2

(6)

Total comprehensive loss attributable to controlling interest

$

(207)

$

(1,134)

$

(371)

$

(1,346)

See accompanying notes.

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Table of Contents

TRANSOCEAN LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions, except share data)

(Unaudited)

June 30, 

December 31, 

2019

2018

Assets

Cash and cash equivalents

 

$

2,243

$

2,160

Accounts receivable, net of allowance for doubtful accounts

of less than $1 at December 31, 2018

645

604

Materials and supplies, net of allowance for obsolescence

of $133 and $134 at June 30, 2019 and December 31, 2018, respectively

488

474

Restricted cash accounts and investments

610

551

Other current assets

222

159

Total current assets

4,208

3,948

Property and equipment

25,220

25,811

Less accumulated depreciation

(5,626)

(5,403)

Property and equipment, net

19,594

20,408

Contract intangible assets

703

795

Deferred income taxes, net

71

66

Other assets

1,048

448

Total assets

 

$

25,624

$

25,665

Liabilities and equity

Accounts payable

 

$

276

$

269

Accrued income taxes

29

70

Debt due within one year

349

373

Other current liabilities

807

746

Total current liabilities

1,461

1,458

Long-term debt

9,378

9,605

Deferred income taxes, net

208

64

Other long-term liabilities

1,820

1,424

Total long-term liabilities

11,406

11,093

Commitments and contingencies

Shares, CHF 0.10 par value, 639,674,422 authorized, 142,365,398 conditionally authorized, 617,970,525 issued

and 611,741,184 outstanding at June 30, 2019, and 638,285,574 authorized, 143,754,246 conditionally

authorized, 610,581,677 issued and 609,649,291 outstanding at December 31, 2018

59

59

Additional paid-in capital

13,405

13,394

Accumulated deficit

(421)

(67)

Accumulated other comprehensive loss

(295)

(279)

Total controlling interest shareholders’ equity

12,748

13,107

Noncontrolling interest

9

7

Total equity

12,757

13,114

Total liabilities and equity

 

$

25,624

$

25,665

See accompanying notes.

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TRANSOCEAN LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(In millions)

(Unaudited)

Three months ended

Six months ended

June 30, 

June 30, 

    

2019

2018

2019

2018

Shares

Balance, beginning of period

 

$

59

$

44

$

59

$

37

Issuance of shares in acquisition transactions

7

Balance, end of period

$

59

$

44

$

59

$

44

Additional paid-in capital

Balance, beginning of period

$

13,396

$

11,953

$

13,394

$

11,031

Share-based compensation

10

18

19

28

Issuance of shares in acquisition transactions

739

Equity component of convertible debt instruments

172

Acquisition of redeemable noncontrolling interest

53

53

Allocated capital for transactions with holders of noncontrolling interest

3

Other, net

(1)

(2)

(8)

(4)

Balance, end of period

$

13,405

$

12,022

$

13,405

$

12,022

Retained earnings (accumulated deficit)

Balance, beginning of period

$

(213)

$

1,719

$

(67)

$

1,929

Net loss attributable to controlling interest

(208)

(1,135)

(379)

(1,345)

Effect of adopting accounting standards updates

25

Balance, end of period

$

(421)

$

584

$

(421)

$

584

Accumulated other comprehensive loss

Balance, beginning of period

$

(296)

$

(292)

$

(279)

$

(290)

Other comprehensive income (loss) attributable to controlling interest

1

1

8

(1)

Effect of adopting accounting standards update

(24)

Balance, end of period

$

(295)

$

(291)

$

(295)

$

(291)

Total controlling interest shareholders’ equity

Balance, beginning of period

$

12,946

$

13,424

$

13,107

$

12,707

Total comprehensive loss attributable to controlling interest

(207)

(1,134)

(371)

(1,346)

Share-based compensation

10

18

19

28

Issuance of shares in acquisition transactions

746

Equity component of convertible debt instruments

172

Acquisition of redeemable noncontrolling interest

53

53

Allocated capital for transactions with holders of noncontrolling interest

3

Other, net

(1)

(2)

(7)

(4)

Balance, end of period

$

12,748

$

12,359

$

12,748

$

12,359

Noncontrolling interest

Balance, beginning of period

$

7

$

3

$

7

$

4

Total comprehensive income (loss) attributable to noncontrolling interest

2

2

(1)

Recognition of noncontrolling interest in business combination

33

Acquisition of noncontrolling interest

(30)

Allocated capital for transactions with holders of noncontrolling interest

(3)

Balance, end of period

$

9

$

3

$

9

$

3

Total equity

Balance, beginning of period

$

12,953

$

13,427

$

13,114

$

12,711

Total comprehensive loss

(205)

(1,134)

(369)

(1,347)

Share-based compensation

10

18

19

28

Issuance of shares in acquisition transactions

746

Equity component of convertible debt instruments

172

Recognition of noncontrolling interest in business combination

33

Acquisition of redeemable noncontrolling interest

53

53

Acquisition of noncontrolling interest

(30)

Other, net

(1)

(2)

(7)

(4)

Balance, end of period

$

12,757

$

12,362

$

12,757

$

12,362

See accompanying notes.

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TRANSOCEAN LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)

Six months ended

June 30, 

2019

2018

Cash flows from operating activities

Net loss

$

(377)

$

(1,351)

Adjustments to reconcile to net cash provided by operating activities:

Contract intangible asset amortization

92

49

Depreciation and amortization

436

413

Share-based compensation expense

19

28

Loss on impairment

1

1,014

(Gain) loss on disposal of assets, net

3

(6)

Loss on retirement of debt

27

2

Deferred income tax expense

109

46

Other, net

11

5

Changes in deferred revenues, net

4

(72)

Changes in deferred costs, net

(6)

7

Changes in other operating assets and liabilities, net

(217)

(29)

Net cash provided by operating activities

102

106

Cash flows from investing activities

Capital expenditures

(138)

(92)

Proceeds from disposal of assets, net

40

23

Investments in unconsolidated affiliates

(62)

(106)

Unrestricted and restricted cash acquired in business combination

131

Proceeds from maturities of unrestricted and restricted investments

123

500

Deposits to unrestricted investments

(50)

Other, net

3

Net cash provided by (used in) investing activities

(34)

406

Cash flows from financing activities

Proceeds from issuance of debt, net of discount and issue costs

1,056

Repayments of debt

(834)

(388)

Proceeds from investments restricted for financing activities

26

Payments to terminate derivative instruments

(92)

Other, net

(26)

(26)

Net cash provided by (used in) financing activities

196

(480)

Net increase in unrestricted and restricted cash and cash equivalents

264

32

Unrestricted and restricted cash and cash equivalents, beginning of period

2,589

2,975

Unrestricted and restricted cash and cash equivalents, end of period

$

2,853

$

3,007

See accompanying notes.

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TRANSOCEAN LTD. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1—Business

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.  We specialize in technically demanding sectors of the offshore drilling business with a particular focus on ultra-deepwater and harsh environment drilling services.  Our mobile offshore drilling fleet is considered one of the most versatile fleets in the world.  We contract our drilling rigs, related equipment and work crews predominantly on a dayrate basis to drill oil and gas wells.  As of June 30, 2019, we owned or had partial ownership interests in and operated 47 mobile offshore drilling units, including 31 ultra-deepwater floaters, 13 harsh environment floaters and three midwater floaters.  As of June 30, 2019, we were constructing (i) four additional ultra-deepwater drillships and (ii) one harsh environment semisubmersible, in which we hold a partial ownership interest.

Note 2—Significant Accounting Policies

Presentation—We prepared our accompanying unaudited condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States (“U.S.”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the U.S. Securities and Exchange Commission (the “SEC”).  Pursuant to such rules and regulations, these financial statements do not include all disclosures required by accounting principles generally accepted in the U.S. for complete financial statements.  The condensed consolidated financial statements reflect all adjustments, which are, in the opinion of management, necessary for a fair presentation of financial position, results of operations and cash flows for the interim periods.  Such adjustments are considered to be of a normal recurring nature unless otherwise noted.  Operating results for the three and six months ended June 30, 2019, are not necessarily indicative of the results that may be expected for the year ending December 31, 2019, or for any future period.  The accompanying condensed consolidated financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements and notes thereto as of December 31, 2018 and 2017, and for each of the three years in the period ended December 31, 2018, included in our annual report on Form 10-K filed on February 19, 2019.

Accounting estimates—To prepare financial statements in accordance with accounting principles generally accepted in the U.S., we must make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosures of contingent assets and liabilities.  On an ongoing basis, we evaluate our estimates and assumptions, including those related to our allowance for doubtful accounts, materials and supplies obsolescence, assets held for sale, property and equipment, intangibles, leases, income taxes, contingencies, share-based compensation and postemployment benefit plans.  We base our estimates and assumptions on historical experience and other factors that we believe are reasonable.  Actual results could differ from such estimates.

Fair value measurements—We estimate fair value at a price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal market for the asset or liability.  Our valuation techniques require inputs that we categorize using a three-level hierarchy, from highest to lowest level of observable inputs, as follows: (1) significant observable inputs, including unadjusted quoted prices for identical assets or liabilities in active markets (“Level 1”), (2) significant other observable inputs, including direct or indirect market data for similar assets or liabilities in active markets or identical assets or liabilities in less active markets (“Level 2”) and (3) significant unobservable inputs, including those that require considerable judgment for which there is little or no market data (“Level 3”).  When a valuation requires multiple input levels, we categorize the entire fair value measurement according to the lowest level of input that is significant to the measurement even though we may have also utilized significant inputs that are more readily observable.

Note 3—Accounting Standards Updates

Recently adopted accounting standards

Leases—Effective January 1, 2019, we adopted the accounting standards update that requires lessees to recognize a right-of-use asset and lease liability for virtually all leases and updates previous accounting standards for lessors to align certain requirements with the updates to the revenue recognition accounting standards.  We applied the transition method that required us to recognize right-of-use assets and lease liabilities as of the date of our adoption with no adjustment to prior periods.  We applied the package of practical expedients that permitted us to carry forward historical lease classifications.  For our drilling contracts, we recognize revenues based on the predominant component, which is the service component.  As of January 1, 2019, for the finance leases under which we are the lessee, we reclassified to other assets $528 million, representing the unamortized right-of-use asset previously recorded in property and equipment, and we reclassified an aggregate remaining lease liability of $511 million, including $32 million and $479 million recorded in other current liabilities and other long-term liabilities, respectively, previously recorded in debt due within one year and debt.  As of January 1, 2019, for operating leases under which we are the lessee, we recorded a non-cash adjustment to recognize an aggregate right-of-use asset of $95 million, recorded in other assets, and a corresponding aggregate remaining lease liability of $133 million, including $15 million and $118 million recorded in other current liabilities and other long-term liabilities, respectively.  We have accounted for lease and non-lease components of our operating leases as a single component.  We have not recognized right-of-use assets or lease liabilities for our short-term leases.  Our adoption did not have and is not expected in the future to have a material effect on our condensed consolidated statements of financial position, operations or cash flows.  See Note 8—Leases.

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TRANSOCEAN LTD. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS─continued

(Unaudited)

Other comprehensive income—Effective January 1, 2019, we adopted the accounting standards update that allows for a reclassification from accumulated other comprehensive loss to accumulated deficit for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017.  As of January 1, 2019, as a result of our adoption, we recorded an increase of $24 million to accumulated deficit with a corresponding decrease to accumulated other comprehensive loss.

Statements of equity—Effective January 1, 2019, we adopted the SEC’s final rule that requires a reconciliation of the changes in shareholders’ equity to be presented for the current and comparative quarter and year-to-date periods, together with subtotals for each interim period.  The final rule permits the disclosure requirements to be made either in a separate financial statement or in a note to the financial statements.  Our adoption did not have a material effect on our condensed consolidated statements of financial position, operations or cash flows or on the disclosures contained in our notes to condensed consolidated financial statements.

Recently issued accounting standards

Financial instruments – credit losses—Effective no later than January 1, 2020, we will adopt the accounting standards update that requires entities to estimate an expected lifetime credit loss on financial assets ranging from short-term trade accounts receivable to long-term financings.  The update, which permits early adoption, is effective for annual reporting periods beginning after December 15, 2019, including interim periods within those annual periods.  We continue to evaluate the requirements and do not expect our adoption to have a material effect on our condensed consolidated statements of financial position, operations or cash flows or on the disclosures contained in our notes to condensed consolidated financial statements.

Note 4—Business Combinations

Overview

In the year ended December 31, 2018, we completed the acquisitions of Songa Offshore SE, a European public company limited by shares, or societas Europaea, existing under the laws of Cyprus (“Songa”) and Ocean Rig UDW Inc., a Cayman Islands exempted company with limited liability (“Ocean Rig”).  In the six months ended June 30, 2018, in connection with the Songa acquisition, we incurred acquisition costs of $7 million, recorded in general and administrative costs and expenses.

Ocean Rig UDW Inc.

Consideration—To complete the Ocean Rig acquisition, we issued 147.7 million shares with a per share market value of $9.32, based on the market value of our shares on the acquisition date, and made an aggregate cash payment of $1.2 billion.  The aggregate fair value of the consideration transferred in the business combination was as follows (in millions):

    

Total

Consideration transferred

Aggregate fair value of shares issued as partial consideration for Ocean Rig shares

$

1,377

Aggregate cash paid as partial consideration for Ocean Rig shares

 

1,168

Total consideration transferred in business combination

$

2,545

Assets and liabilities—At June 30, 2019, we estimated the fair value of assets acquired and liabilities assumed, measured as of December 5, 2018, as follows (in millions):

    

Total

Assets acquired

Cash and cash equivalents

 

$

152

Accounts receivable

76

Property and equipment

2,205

Drilling contract intangible assets

275

Other assets

115

Liabilities assumed

Accounts payable and other current liabilities

71

Construction contract intangible liabilities

132

Other long-term liabilities

54

Net assets acquired

$

2,566

In the three and six months ended June 30, 2019, as a result of adjustments to assets acquired and liabilities assumed in the Ocean Rig acquisition, we recognized a gain of $9 million and $11 million, respectively, recorded in other, net, as an adjustment to the previously recognized gain on bargain purchase.  Including this adjustment, we have recognized a cumulative net gain of $21 million associated with the bargain purchase, primarily due to the decline in the market value of our shares between the announcement date and the closing date.  We estimated the fair value of the rigs and related equipment by applying a combination of income and market approaches, using projected discounted cash flows and estimates of the exchange price that would be received for the assets in the principal or most advantageous markets for the assets in an orderly transaction between participants as of the acquisition date.  We estimated the fair value

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TRANSOCEAN LTD. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS─continued

(Unaudited)

of the drilling contracts by comparing the contractual dayrates over the remaining firm contract term and option periods relative to the projected market dayrates as of the acquisition date.  We estimated the fair value of the construction contracts by comparing the contractual future payments and terms relative to the market payments and terms as of the acquisition date.  Our estimates of fair value for the drilling units and contract intangibles required us to use significant unobservable inputs, representative of a Level 3 fair value measurement, including assumptions related to the future performance of the assets, such as future commodity prices, projected demand for our services, rig availability, rig utilization, dayrates, remaining useful lives of the rigs and discount rates.

We have not completed our estimates of the fair values of assets acquired and liabilities assumed.  We continue to review the estimated fair values of property and equipment, intangible assets, and other assets and liabilities, and to evaluate the assumed tax positions and contingencies.  Our estimates of the fair value for such assets and liabilities require significant assumptions and judgment.  Until we complete our evaluation, we may be required to adjust our original estimates, and such adjustments could be material.

Note 5—Unconsolidated Affiliates

We hold investments in various partially owned, unconsolidated companies, including a 33.0 percent ownership interest in Orion Holdings (Cayman) Limited (“Orion”), a Cayman Islands company formed to construct and own the newbuild harsh environment floater Transocean Norge.  In the six months ended June 30, 2019 and 2018, we made a cash contribution of $59 million and $91 million, respectively, to Orion.  We have agreed to contribute $33 million to Orion in January 2020.  At June 30, 2019 and December 31, 2018, the aggregate carrying amount of our investment in Orion was $150 million and $91 million, respectively, recorded in other assets.

Note 6—Revenues

Overview—The duration of our performance obligation varies by contract.  As of June 30, 2019, the drilling contract with the longest expected remaining duration, excluding unexercised options, extends through February 2028.  In the six months ended June 30, 2019, we recognized revenues of $10 million for performance obligations satisfied in previous periods due to certain revenues recognized on a cash basis.  In the three and six months ended June 30, 2018, we recognized revenues of $55 million and $103 million, respectively, for performance obligations satisfied in previous periods, primarily related to revenues for a customer’s contract termination and certain revenues recognized on a cash basis.

To obtain contracts with our customers, we incur pre-operating costs to prepare a rig for contract and deliver or mobilize a rig to the drilling location.  We defer such pre-operating costs and recognize the costs on a straight-line basis, consistent with the general pace of activity, in operating and maintenance costs over the estimated firm period of drilling.  In the three and six months ended June 30, 2019, we recognized pre-operating costs of $3 million and $6 million, respectively.  In the three and six months ended June 30, 2018, we recognized pre-operating costs of $10 million and $22 million, respectively.  At June 30, 2019 and December 31, 2018, the unrecognized pre-operating costs to obtain contracts was $7 million and $2 million, respectively, recorded in other assets.

Disaggregation—In the three and six months ended June 30, 2019 and 2018, we recognized revenues as follows (in millions):

Three months ended June 30, 2019

Three months ended June 30, 2018

U.S.

Norway

Brazil

Other

Total

U.S.

Norway

Brazil

Other

Total