Transocean Ltd (RIG) 2001 Q2 法說會逐字稿

Good day everyone and welcome to the Transocean Sedco Forex second quarter 2001 earnings conference call. Today’s call is being recorded. For opening remarks and introductions, I would like to turn the call over to the Vice-President of Investor Relations and Communications, Mr. Jeff_____0015. Please go ahead sir.

Thank you Tracy. Good morning. We appreciate your participation in this morning’s conference call covering second quarter 2001 results. If you have not received the copy of the earnings release, you will find it on the company’s web site at www.deepwater.com (http://www.deepwater.com). Also issued earlier this morning was the company’s monthly fleet update report that covers the contract status as of July 31, 2001 about worldwide fleet. If you did not receive an e-mail of the report, you will also find that on the company’s web site in the investor relation’s section under financial reports. Before we begin this morning with formal comments, I’d like to introduce the members of the company’s senior management team that will participate in today’s conference call. First is J. Michael Talbert. Mike is President and Chief Executive Officer of the company. Jon C. Cole who is Executive Vice President of the US Shallow and Inland Water Division, Donald R. Ray, Executive Vice President of Technical Services and Ricardo H. Rosa Vice President and Controller. Mike Talbert will provide initial comments this morning followed by a Q&A segment. Before Mike begins, I must remind you that during the course of this conference call participants may make certain forward-looking statements regarding such matters as the prospects for and development of the drilling business, future earnings and other financial performance, capital expenditures, debt levels, rig utilization in markets, commodity prices, rig delivery dates, and other aspects of our new drill program, contract revenue and duration, contract backlog and prospects, projected dayrates, various aspects of the integration of R & B Falcon Corporation as well as other statements that are not historical facts which involves certain risks, assumptions and uncertainties. As you know, it is empirically difficult to make predictions in the technical industry since these risks, assumptions, and uncertainties include the prices and demand for crude oil and natural gas, rigs, new drill project, risks associated with international operations, risks relating to acquisitions, actions by regulatory bodies and other third parties, and other operating risks which are defined in the company’s most recent form 10Q, form 10K and other filings with the Securities and Exchange Commission. Should more and more of these risks or uncertainties materialize or should underlying assumptions prove incorrect, actual results may vary materially from those indicated. That covers the preliminary details, and thank you for your patience. I will now ask Mike Talbert to begin this morning’s call.

Thanks Jeff. My comments this morning before we get to the Q&A is going to cover several subjects. First I am going to give you a brief review of the financial performance for the second quarter. Then we will talk about rig markets as we see today around the world and where we think those markets are going. Then I’d like to review a little bit of our new drill performance particularly with respect to the Express rigs and put them in a context of our other new build rigs and finally I’ll give you an update on our previous earnings guidance for the year 2001 and 2002. At that point we’ll then go to Q&A. As we reported this morning, we had second quarter net income of about $86 million, which was $0.26 a share on revenues of about $750 million and that is before an extraordinary item of $17 billion or $0.5 per share loss related to the early retirement of some of the high costs R&D debt. On a ProForma basis assuming the merger of TSF and RBF that occurred last year, revenues would have been up about a 11% over the first quarter of this year and about 50% over the second quarter of 2000. When you look at our business by the two main segments we report, the international and US floater business represented about 80% of the revenue and 80% of the field operating profits in our total business. Also, if you were to split that between the Gulf of Mexico, and international, you find that about 60% of our revenues came from international operations. The results in the second quarter, the improvements are really driven by both dayrates and utilization. In the international and US floater business segment, dayrates were up for all asset categories led by about a 15% increase for international jackups, which increased from about 38,000 a day in the first quarter to a little over 44,000 a day in the second quarter. In total, the segment average day rates for this group was up about 7.5% from about 76,000 a day in the first quarter to 82,000 in Q2. Utilization was also up for all categories of asset in this group with a total segment up from about 74% in Q1 to 82% in Q2. The Gulf of Mexico, Shallow Water and Inland Barge group also had significant increases in dayrates in the second quarter compared to the first. Jackups were up over 12% to almost 40,000 a day and barges were up almost a little over 20% to a little over 23,000 per day in Q2. For the segment, the average dayrates was up almost 15%. Utilizations in this segment was pretty much flat versus the first quarter about 71% as we continue to choose to keep 8 jackups and 8 barges whole stacked. Looking at the markets today, it is just starting out with the Shallow Water, Gulf of Mexico and the barge business, clearly the markets for jackups in the Shallow Water and gulf have softened in the last six to eight weeks. We have gone from 25 rigs working to 17, and that could decline of few more rigs to maybe 15 in the next few weeks as rigs roll off contract. Dayrates have also declined from somewhere, as we said earlier, about 40,000 an average in Q2 to current rates of probably in the low 30s. The good news is we are starting to see increased level of bid request and at this time, we would expect this market to begin to improve about the fourth quarter of the year. My view of this market is that gas prices have not been the major driver of the downturn in activity. Gas prices have played a role. But the primary driver has been a confluence of several other events. It started with the migration of a lot of rigs to the Gulf of Mexico last year. It is estimated that some two-dozen rigs came over to the Gulf last year because of weak international jackups markets. That along with high gas prices over last winter here in the US put operators in a position where they wanted to spend their 2001 budget quickly to take advantage of $5 and $6 for MCS gas prices. So you might say the incremental supply that came to the US and high gas prices, operators spent their budgets early this year and drilled up there develop prospects. Some operators have told me that they believe as many as 75 or 80% of the independents have spent most of their budget for the year in the first half. Now, in that environment along comes the gas prices dropping and starting to approach $3 and also dayrates starting to drop for rigs and I think the reality is operators have been just taken a breather and that’s why I think we are starting to see getting increase again and why we start to feel that Q4 is going to show a definite turnaround in this business. In my view of what’s been going on here, I think is also supported by what’s been going on in our inland barge business. So that business has not seen the drop off in utilization. We’ve maintained our rig count at about 25 barges throughout the year. We’ve seen dayrates continue to improve slightly over the second quarter when they averaged over 23,000 a day, and while we are seeing some reduction in the backlog, it is not like the jackups that we would expect utilization and dayrates to remain fairly constant where they are today. The difference between these two markets is really not gas price because they are drilling very similar kind of prospects. I think the difference is that we control about two-thirds of the inland barge market including essentially all of the incremental supply. We chose not to try to supply the market peak but rather to maintain a steadier less volatile rig market. There is a clear lesson here I think for all drilling contractors and that is if we would simply quit trying to supply the market peaks, we would have a less cyclical business and a more profitable business. Turning now to the ultra-Deepwater markets on a worldwide basis and when I talk about ultra-Deepwater, I am really talking about more than 5000 feet of water. This is a market that’s on a worldwide basis has remained fairly steady. It is really not getting better and is not getting worse. I think the reality of this market is that the recent new drills have created enough supply that the incremental demand is being met to a large degree through a sublet market. Its operators of the long-term contracts simply don’t have enough current work to need their rigs 100% of the time. This situation has really developed in my view because of a delay in a lot of development programs. Those delays I don’t think are the result of anything going in the oil price markets, which I think oil prices are well above the price required for these projects to be economic, but has developed because of a number of reasons. Starting with the technical complexity of some of these developments, I think that operators are finding that the technology that works in 2000 ft. of water really has to be re-looked at to develop the else in 4000, 5000, or 6000 ft. As I also think there has been a shortage of experienced staff even among the largest oil companies to sort out the best way to develop these fields. Other areas, I think that additional wells drilled that have changed dramatically the size of the fields, in some cases smaller and in a number of cases creating fields much larger which have caused companies go back to the drawing board to reassess the development program, and finally, I think political and regulatory issues in some of the developing countries around the world that have a lot of Deepwater activity have also been a contributor to the slowdown. I really don’t expect to see this market improve much until development activity picks up and the sublet market drops off. We really first started to notice this to a significant degree last year. It’s become a bigger portion of the market this year. As we look ahead we think it is going to start to reduce in 2002. The altered deep-water market is another market where I will encourage my fellow drilling contractors not to try to supply the peak demands. We shouldn’t be building rigs without contracts. The other markets around the world primarily we are talking mid water semis and jackups in the international arena. Now we continue to see a gradual improvement in almost all of these markets. This is something that we’ve been saying for at least the last four or five quarters. These markets are continuing to improve but at a slower rate than we would have expected based on historical comparisons. As Jeff mentioned earlier that our monthly fleet update is out today, that lists eight new contracts since I think in the last 30 days that have been previously unannounced covering areas all around the world the Gulf of Mexico, Brazil, West Africa, the Med., and Asia and all of those contracts show continued dayrate improvement. In addition, currently we are working on 12 or 13 letters of intent that we hope will turn in to contracts. Again those letters of intent cover areas all around the world and essentially every case for a slightly higher dayrate than we have today. In addition, I’d say that the overall level of bid request we are seeing is holding fairly steady. So, the general view of the worldwide markets in my view would be that the markets continue to improve gradually, in a steady manner, but there is no dramatic change either up or down. Turning to new drill performance … I know there have been a lot of concerns over the Express rigs especially since the contract on the Cajun was canceled, but I want to address some of those concerns and put them in a proper context. Essentially all the new drills have had start up issues and generally the more technically advanced the rig the more issues we’ve had. As you all know the Discover Enterprise had significant problems early on when it came out to work here in December of 1999, but today two of the Enterprise class rigs are actually operating with downtime of less than 2%, and the other, the third Enterprise class rigs with downtime of less than 5%. The four RBF pathfinder class rigs also had significant startup problems, but currently those four rigs are averaging downtime of less than 10%. The RBF semi-nautilus is also running at about 10% downtime. Interestingly, the less technically advanced Marianas has worked for the last 3 years with less than 1% downtime. So in all these cases what we have typically seen is high downtime initially which then settles down to a lower rate and I would say even at 5-10% downtime that’s too high. Our view is that these rigs should all be operating with less that 5% downtime and eventually less than 2% downtime. So we continue to make improvements in the performance on all of these rigs. Turning to the Express rigs. The Cajun express actually went on contract in April of this year. Over the next six or seven weeks it had about 16% downtime not all high by new build standards. We shut the rig down to correct some problems and to upgrade the DB system. Marathon took advantage of what they perceive to being right to contract to be canceled. Obviously we didn’t agree with that and we will be going to arbitration on that issue. The Sedco energy which is a sister rig to the Cajun express, it went on contract in May of this year and it has again has some issues in the first two or three weeks and in the last couple of months it has been averaging less than 10% downtime and we continue to make improvements there. The key point here is that the Express rigs do have operating issues that need to be improved, but all the technically advanced newbuilds have those kind of issues. The major feature that distinguish the Express class rigs from other newbuilds and led to the contract cancellations on the Express and the Cajun was a fact that they had quite frankly, very poorly written contracts. It gave the operators opportunity to re-negotiate rates and cancel contracts and that’s been the major difference between those rigs and our other newbuilds. Turning to Earnings-2001. In our first quarter conference call, the Street at that time was around $1.35 for the year. We said at that time that it is not an unreasonable number, but there were an awful lot of rig days on contract at over 50% for the rest of the year and that you didn’t have to miss those days by a whole lot to make a substantial impact on the earnings. Since then business has definitely turned down. The Shallow Water Gulf of Mexico jackups has seen a utilization drop and the dayrates drop and while we are hopeful and we think we see signs its going to come back in the fourth quarter. We don’t know that for sure. We’ve had the Cajun contract canceled, and as you know, that cost us on earnings about $0.4 a quarter. The Asian jackup market, which has been soft for some period of time, has continued to be soft and three of our five jackups in Asia are idle today. The deep-water market has been stable but it hasn’t really got any better as the sublet market has absorbed most of the additional demand in Deepwater. In the mid water market, while it has continued to improve, it probably hasn’t improved as much as the most people would expect. Also, with the North Sea approaching winter, we would typically expect to see a slow down there and in Norway the winter and Wildcat both appear that they would be coming off contracts sometime in mid November and we are bidding both those rigs in the UK but of course, winter is not a good time for work in the UK, but additional work in Norway doesn’t appear to be available before late in the first quarter of next year. In addition to that, we still have a lot of un-contracted rig days in the second half. Some 48% of our rig days for the rest of the year are still not under contract. All that considered the street today has a mean earning investments a year of $1.28 at a low of $1.2. My guidance to you would be towards the low end of that range for 2001. I think the third quarter would be fairly flattish with the second quarter and the fourth quarter will show improving earnings. Turning to 2002, again in the first quarter conference call, we said that, the Street at that time was around $3.20 or $3.25, our comment at that time was this isn’t an impossible number to achieve, but we thought it was very aggressive based on our view of the markets at that time and we have pointed out that over 83% of our rig days are un-contracted and if you miss those by even 5000 a day over $0.54 a share. In spite of that guidance some of you actually increased your number for 2002 after that guidance was handed out in the last call and it surprised me. Where we are today, I think the outlook is definitely softened from what it was in the first quarter. For all the reasons I have mentioned above, and also because of the uncertainty and particularly because of the uncertainty over the timing of the tightening in the deep-water market, this is really a tradeoff between the rate of progression of development programs and the level of sublet activities among our customers. We have found many times this year that we are not competing with other drilling contractors for jobs we are competing against our customers for jobs, as they are forming out their own rigs in many cases. The other markets, international mid water market and the jackups, we think that is going to continue to improve, but it is not going to improve as fast as most of you have been forecasting. We still have about 80% of our rig day’s un-contracted next year. All that considered, I think the Street today is about 291 which is the mean, 217 is the low, and again my guidance would be towards the lower end of that range. Also, keep in mind with the elimination of the amortization of goodwill said to occur on January 1st 2002 that would add about 52 cents back to our earnings numbers. I don’t believe that is in any of the numbers we’ve talked about so far. Finally, let me say that I personally am optimistic that we are in a multi year recovery cycle. In North American gas markets while there are no longer $10 in MCS are good. I think likely this is to stay more to $3 over most of the next two years, obviously subject to weather fluctuation, but this should be a good price. I think $3 is a good price to have sustained good drilling activity in the Gulf of Mexico. World oil markets are actually more stable than I think they had been in the 30 years I’ve watched this business. OPEX discipline has been pretty impressive. They have defended their price target in spite of reductions in demand growth, as economic growth has slowed. Finally and very importantly our customers have a lot of money. They are flushed with cash. They have very strong balance sheets and they have declining reserve bases and I suspect over time they are certainly going to want to replace that. In that environment, as I’ve said Transocean Fedco Forex should roughly double our earnings in 2001 compared to 2000 and we could see doubling plus or minus again in 2002 over 2001, and at that level we are still well below what our ProForma earnings would have been based on the markets in 1997, and obviously well below our peak earnings potential. So our view is we have substantial earnings growth potential as we are in fact in a multi year recovery. The biggest is the analysts forecast out there. I think that the main place where I would disagree with you is I think many of your forecasts are simply too aggressive on how fast all this is going to happen. I think you are missing a couple of points that really almost structural changes in our business today. One is the improved cooperation among our customers to more efficiently utilize their rigs, through sublets, through the formation of rigs in different areas of the world. Operators are working much more cooperatively to utilize existing rigs in a much more efficient manner, rather than each company thinking that the are just going to go out and get the rigs they are going to need for their own job and not worry about what happens after the job is over. I think its also true that the financial discipline in the business has improved and not just among the mega major companies, but that financial discipline has moved down the size, changed a lot of companies in the mid size and even smaller sized companies. I think that also has led to a lower rap up of activity that we’ve seen in the past. Now by and large, I think I’d say that our customers are really trying to avoid the extreme over exuberance that leads to wildly fluctuating markets and having just come through the experience of you might say 1996-97 and drops in 1998-99, that experience was a wildly exuberant view of how long things will stay good has made them all much more cautious this time around. In the long run, I think this is healthy for the business. I think it is good for everybody. I think it is good for drilling contractors because to that extent that it lessens our projections and what peak demand are going to be and how quick we are going to get there, I think it helps avoid and minimize what could otherwise be too much overbuilding on the part of the drilling contractors. That concludes my comments. We will be glad to take questions.

Please press the * key followed by the digit 1 on your telephone. Once again press * 1 if you have a question. We will go first to Ken Sill with CS First Boston.

Yeah good morning. A couple of questions Mike. With the sublet markets being pretty competitive now, how long do you think it’s going to be before we can see the two Express rigs actually go back to work? Is there an issue on the one that was recently canceled I would assume that most of the repairs and fixes on that what you have already done?

Jeff put a sign up in front of me. I think he said that when I was talking about this side, I’ll come back to it, but he said while I was describing the market, I said that the Asian jackup market was weak. It is the Asian semi-market. Three of our five semis are stacked in the year. In Asia right now the jackup market is very good. So if there is anybody who heard that comment what Jeff did, please excuse me. Turning to the Express rigs, I think it’s a good question. I think the truth is that with both of the Express class rigs that are currently idle we will need to buy work. I don’t think that the rigs would be able to go to work for the kind of dayrates that they should command over time. If the market was tight today, there wasn’t a sublet market available. They probably could, but when a sublet market is out there people are always going to take the rigs that are working for six or 12 months. So the only way to compete with that is we will have to reduce our price and we are looking at opportunities to do that in a number of places around the world for both rigs. I wouldn’t want to speculate on when those rigs might actually go to work, but I would say to you that when we get a contract although the contract itself won’t be material, we get a contract, we will put out a press release on it just so you know that it has occurred.

Okay. On the results, the operating expenses seemed a little bit high versus what I was expecting and I am wondering how much field level overhead is in those numbers and what kind of cost that you might be seeing going forward is the consolidation on force?

The field overhead includes various groups in Houston that are basically allocated the fields. For instance, the engineering group, marketing group, I think it is about 55 million in that number. I think the number is about 394 or something it is 395 something like that was the number that we had for the quarter, and I guess somewhere around 55 million of that was overhead; the rest would have been a direct expense on the rigs.

Is that number going to be coming down as consolidation statements come in. Is that what is shown up in the G&A line already.

I do not see that number coming down dramatically. I would expect this with additional rigs going to work and rig utilization improving throughout the year, the numbers probably are going to be high up for the rest of the year.

Okay and then the G&A line was flattish even though you had Falcons for the whole quarter? Is that a good run rate or is that number going be coming down as we move down?

I think a lot of the savings here we’ve already captured. I think that’s probably a reasonable run rate.

Okay thank you.

We are going over next to Scott Gill with Simmons & Company

Good morning Mike. Going back to the Asia-Pacific jackup market where 3/5 are idle and I think the two that are working roll off contract sometime before the end of this year. Can you give us some feel as to what you think utilizations going to wind up be as we enter into 2002 and where dayrates go in the Asia-Pacific semi-market?

Gill, let me say this again. I think what you said is what I said. When I mentioned 3/5 is not working those are semis. It is the Asia-Pacific semi-market and not the jackup markets. 3/5 are currently not working, but I would also say that those three not working all have letters of intent. Those are three of the LOIs that I mentioned we have probably 13 that we are currently working on that we hope to turn into contracts. Those include the three semis that are currently not working in Asia. So we would expect to see that market improve somewhat from where it has been most of this year.

Okay. And Mike, quite a bit of exposure in Brazil, you just signed three contracts there. Can you review for us what’s your currency exposure is in Brazil?

There really is not any currency exposure. The contracts are written so that our payment in reality is equal to our cost and everything else is in dollars. So we have a contract to hedge to eliminate that exposure.

Okay and lastly, looks like your asset sales, there are a handful this quarter. Have there been any changes in your strategies and what assets you plan to sell and the timing of realizing those transactions?

You know early in the year I think we said we sell maybe $400 million of assets this year. I think year-to-date, we’ve probably sold a couple of 100 million, but a 100 million of that was not on our original list and that included the RBF marine assets. So when we talked $400 million beginning of the year, we thought we sold about a 100 of that have been sold and we probably have sales in progress and when I use that term, I am really talking about letters of intent in the process of turning into a final sale that would roughly be approaching $300 million. Beyond that, we do have some other assets we are also looking at the possible sale. At the end of the day I think that the divestiture process that we are going through in depth ultimately yielding us more money that will be over a little longer period of time. They’ll probably stretch this with things that we are working on now and hoping to sell, my guess will stretch past into the year, but also we will probably sell more than the 400 million and again I am not including the 100 million of the marine assets and MCV also this year.

Okay and lastly Bob, on the second quarter sales gain or loss. Where is that showing up in the income statement?

Bob is on vacation down in Mexico, lying in the sun. Ricardo is here.

Okay, Ricardo….

At the onset of that is most of the sales relate to former RBF assets and is therefore accounted for under purchase accounting rules and any difference between fair values and the sales proceeds is a good job done.

Thank you.

William Sanchez with Howard, Weil, Labouisse, Friedrichs.

Good morning. You did a good job of outlining the downtime that you are having on the newbuilds and I was just curious is there any one issue in particular that you are seeing. You have got a piece of technology that’s causing a common element of downtime with regard to these rigs. Are you having any similar DT problems on these units that you were experiencing with the Cajun express?

Let me take the DT question first. We have not had some of the problems that we have with the Cajun express and although some of these other rigs are basically the same DT of some of the other Express rigs including the one you have seen in Brazil. We did during that test down period that we had on the rigs, we both found the cause of that problem. We fixed it, but we also decided to add additional redundancy and so we really upgraded the DT system on the Cajun and we also then made that adjustment to the other Express rigs to make the system even more redundant than it was before. So we think that problem is taken care of. Regarding other equipment there are the miscellaneous things that affect the lot of rigs. One example I would mention would be the ocean-compensated draw works, which we have on both the Express rigs. It is on all the pathfinder series drill ships and it is also on the Horizon and the Nautilus and that is a piece of equipment and quite frankly, there have been several different issues with it. We’ve continued to improve it and I think we have most of it figured out. Its been a little bit bigger problem on the Express rigs simply because of the location of the Derrick on the express rigs. The operations are a little bit more sensitive to the motions of the rig and so you might say that control system on that piece of equipment that was adequate and satisfactory for the pathfinder class rigs really had to be improved for the Express class rigs. That’s been a common element that crosses over a number of rigs and some of the handling of the Warco Pipe lining issues that we’ve had on many of the rigs. They have also again been somewhat common problems with a lot other rigs not just one particular rig or even one of the classes of the rigs, and also some of the riser tensioner on the Express class rigs and on the Nautilus and Horizon. There are probably some issues there. These are things you correct while you are in operation, but again it is a new technology that has been used on several different classes of rigs and you correct it over time. What makes the Express class rigs stand out is the fact that they had contracts that gave the operators some opportunities to re-negotiate or cancel that these other contracts that did not have.

On the Deepwater Horizon that you know are getting right to deliver this quarter. It sounds like from your comments, the Express design of the rig and the DP system in general, that would be different than what you are delivering on the Horizon different systems or have you gone back and looked at the Deepwater Horizon and some of the issues you have on the Cajun Express and take an opportunity to correct some potential deficiencies with the DP system if they are in fact similar?

This is Don Ray. I would say that there are some differences between the systems, but we have taken a look at the Horizon system to confirm for ourselves that we don’t have some more problems there and I think we are pretty happy with what we have found so far.

One last question. You have got three 300-foot ____00:35:49 in the Gulf of Mexico … I know in early conversations there was some discussion of moving those rigs out of Gulf of Mexico potentially to the south-east Asia … I am just curious what your stocks are currently with those assets?

Well, those are assets that we continue to look for international opportunities. I think as I said earlier, one of the reasons the Gulf of Mexico market is softened a bit right now is I think it got over supplied as everybody flocked to bring their jackups here last year. I think with the international markets where they are today much better than the Gulf of Mexico that there will be rigs leaving the Gulf of Mexico and those 300 or 400 jackups we would certainly take out of the Gulf and we are looking for opportunities for them in other places in the world.

So, you are actively marketing right now Mike?

Yes.

Okay. Great. Thank you.

And moving onto Terry Darleigh with Goldman Sachs.

Thanks. I have a couple of questions. First on earnings guidance for 2001 Mike you know around the low end of the range it is about a dollar I guess, it would imply a very substantial increase in the fourth quarter versus the third. So, I have two questions trying to understand your outlook there. First on the sublets, you indicated, I guess, on that there is something about it and on the other hand you expect that to ease up a bit. What are we looking for, I guess, in terms of that subletting easing up … you had visibility for an instance on Gulf of Mexico development drilling starting to pick backup in the back half of the year.

I do not think, we are not project that by the fourth quarter tat sublet issue is going to go away. That issue started to develop last year. It has been a fairly significant issue this year. It is harder to find that exactly, but it wouldn’t surprise me if 15% of the rig time on lot of these big rigs … the new builds was available. If you want to drill a well here or there it is available, and as I said operators are working very cooperatively to try to meet that demand and most of them do not have a full time need for the rigs they have right now. So that’s a fair amount of excess capacity that’s floating around there. I don’t think that’s going to disappear in the fourth quarter. I don’t think its going to disappear in 2002, although I would expect its going to lessen in 2000. I think this year its been the, kind of, hump year as far as the sublet activity if I can put it that way. I think more likely what we will be seeing in the fourth quarter to cause earnings to start to pick up over Q2 or Q3 will a couple of things. Some of that is the new contract coming in at little better rates. Some of that is going to be as the Shallow Water Gulf, there is the turnaround. I think that Q3 is going to be the low point for that business and I would also say that we probably in the fourth quarter are going to have less downtime from shipyard projects. We had a lot of downtime in the first quarter, a lesser amount in the second; we should have a lesser amount in the third and a lesser amount in the fourth. So, that shipyard activity will also continue to decline through the year.

In the 4th quarter assumption, are you presuming that the Express rigs are back working that that time?

I wouldn’t assume any of the mark. We also have the Horizon going to work here probably by end of August or September 1st. So, we are going to add another rig to the fleet.

But you are assuming that both Express rigs down for the balance of the year?

Yeah I am not assuming that they work.

In terms of the Gulf jackup market …

You shouldn’t assume that they work. I am assuming there are people who are going to find something for them, but you shouldn’t assume that they are going to work. I don’t want to send a wrong message here to my staff.

In terms of the outlook for pickup in the Gulf jackup market … a couple of questions there. You indicated that a large majority of the independents appeared to have drilled up their budgets already. The presumption is that we are going to get a reload on those budgets. I guess that is part A of the question and part B is did I hear you correctly in your comments indicating that your average Gulf Jackup dayrate is now in the low 30s?

No I said that the current dayrates on rollovers is probably in the low 30s. Jon Cole sitting here next to me. He is in charge of all that business and I will let him to make a couple of comments about it in answer to your question.

Yeah Terry, I think where we are standing right now is the smaller gulf coast jackups are in the low 30s. The higher ones remain in the 300 quarters when they work probably around the 40 range … 40 and below, and the market has just recently had a significant reduction utilization. So, we just have to see where it goes from here. But that is kind of our feeling as to where the markets stands right now and really the problem is unique, because of all of the capacity that came in … these big 300 footers … at the same time you had another trend going where the predominant operators became independents and independents actually prefer the smaller jackups because they do not want to pay for the versatility of the bigger ones and so that’s why there is so much weakness in the 300-foot market in the gulf, and once those rigs go back to the international markets, we see as you pointed some of the budgets reloaded, I think we will see a significant improvement in the gulf and right now based on our increase, we are guessing that is in the fourth quarter this year. There are some companies such as Ocean Energy that has significant program, but they are holding off till next year. So, it just depends on how they loosen up their future spending because they do have cash as Mike mentioned earlier.

Jon in the low end of the market do you see those rigs getting softer before they get better or do you think its _____00:42:15?

There is no telling Terry. I hope we find a floor, but you will never know.

Last question, in terms of the deep-water market and really questions on contracting strategy. Mike in terms of some of these announcements, it looks as if you have gone a little bit longer term than maybe I would have anticipated. Is that going to continue or is it a function of when you get the number of rig days up to a certain threshold. You get to a point where you can be more aggressive on rate relative to contract length.

Well I am assuming that you are talking about the Brazil contracts with Petrobrass. Obviously a lot of things affect the contract you signed. One is what your customer wants. Petrobrass has got work. They wanted to get the longer-term contract. There was some negotiation there. Some of the markets had not been quite as long as they wanted, but they are still pretty good term extension. What really affects our thinking there is that we look at our total outflow for Deepwater fleet and we have got some 26 or 27 rigs that can operate at over 5000 ft. of water and in the case of seven seas and the 707, you are talking about two of the rigs in that group that would be towards the lower end of the quality standard. I think the opportunity to put those away a triple digit dayrates for 24 and 30 months in a market that we know that we are going to be there for a while, we felt that was a smart thing to do. We have plenty of big rigs. If you have got somebody who wants one, just give us a call.

Okay that’s all folks, thank you gentleman.

We will go next to Arvind Sanger with Deutsch Banc Alex Brown Inc.

Thank you, a couple of questions. One is on the Gulf of Mexico jackup utilization that you are seeing right now. I think Mike you mentioned that you have had 25 rigs go down to 17 and maybe going to 15. How many of those idle jackups are from that rigs and how many are the 300 footers?

Jon will handle that.

One is a submersible and one other is a 300 footer, the rest are mats.

Why is it Jon that you have a much higher proportion of down rigs than people in either I guess may be not in the other asset class, but people who have matrix … they do not have that higher percentage of down rigs as your fleet does. In the last downturn I thought Falcon was pursuing a deliberate strategy of parking rigs … are you pursuing that same strategy or why are you suffering a disproportionate utilization loss?

Arvind I am not sure. Right now my guess is that this is just what our contracts are ruling as opposed to any other reason. We haven’t been winning any bids but there haven’t been many to win out there. So I think that’s the reason for that. I am not sure what Falcon strategy was during the last end … I am trying to find, so I can’t really comment on that for a while.

You are not deliberately pursuing a strategy of parking rigs and reducing your cost structure?

Yes we are thinking about 3 or 4 ____00:45:27. We are just getting the crews down to an absolute bare minimum, but they’ll be ready to work pretty quickly, but we are not going to bid them until we get the other ones back to work.

Okay, and going back to the international Deepwater strategy, Mike you talked about several new adds on, I guess, taking place in terms of your customers thinking. Your strategy has been to have the deep-water rigs available with some flexible capabilities and timing for customers needing that, but this new thing that has cropped up is a subcontracting. Do you think that changes your strategy a little bit or this is just a temporary lull and that strategy should still workup having rigs rolling over different points of time and being able to offer customers a variety of short term options, because it seems like those short term options are not necessary … obviously meaning that by transfusion rigs are available.

Well, I think the sublet is a temporary phenomenon. If you look at the deep-water rigs and you look at all those rigs that contracts and based on that you can conclude how much capacity is available … basically you are underestimating the currently available capacity, because on an industry wide basis, my guess is that maybe 15% additional capacity available from these rigs under long-term contracts. And that part away coming back to the Brazil question, everything is going to disappear in the fourth quarter and I think it is going to lessen in 2002, but it is not going to disappear and that’s part of the reason that we opted for those extensions is because I really do not know how long it is going to last. I think it really is a function of the timing of the development programs both in the Gulf of Mexico and West Africa and while people make forecast of that, which would make you feel that as you go to 2002-2003, the market is going to get pretty tight. I haven’t seen that happen yet. So, rather than assume it is going to happen, I just assumed if I can tie up 25 year old rigs for two or three years at triple digit dayrates, I don’t think that’s a bad thing to do.

A question on … you alluded to the accounting issue of goodwill going away and your guidance for next year. Did I hear you correctly that in 2002 you were guiding to the lower end of street estimates, which are two in a quarter range and then on top of that there would be another 50 cents or so of goodwill amortization that goes away?

That’s right. After you come up with a number based on the way people are doing on numbers today, I don’t think anybody has filled that into their numbers. You would add about $0.52 cents for the elimination of goodwill amortization.

The tax effect … there is really none from goodwill … so, it is a pretty straightforward goodwill at 41 and odd million dollars that you had this quarter, that goes away and there is no ____00:48:35.

I think it is just worth $460 million or so for the year of that.

One last question. The equity in earnings number took a bit of a jump this quarter from what is has been over the last several quarters. Where is that number headed?

I presume you are referring to the trend in weighted average shares?

No did you have an equity earnings number of $4 million?

The reason for the jump there is that we took a loss in the second quarter of about $2.5 million in respect of our interest in the joint venture during the first quarter in which we had a minority interest and which owned the drills and the Sedco Explorer both of which rigs were disposed off at that time.

So, the point at your level is it is more representative of a run rate that you should be operating at.

That is correct Arvind.

Okay thank you.

For the next, Mark Urness from Salomon Smith Barney Inc.

Yes good morning. Most of my questions have been answered already. I just had a couple of things. Mike you guided earnings in the third quarter to be flat and there is a pretty big implied increase in the fourth quarter, but I was a little confused on the third quarter being flat. If you look at where you know, there has been quite a bit of improvement in utilization, your shipyard time is going to be lower and hence utilization should continue to improve. Rates on the rollovers that have occurred have been higher on the international side and the only area the margin seems to be deteriorating is the jackup market, which makes up less than 15% revenues. So, with those other areas improving, I guess I am little confused how third quarter is flatter than second?

Well I think that’s really the issue … it’s the softening in the shallow water jackup market and the loss of the Cajun contract. I think those things are offset by the continued improvements we see in everything else. Keep in mind all those contracts that we signed may not even start in the third quarter … they may start beyond that point of time. So, maybe the rates in the second quarter, I am not looking at rig-by-rig but the fact that we announced the contract today might start in Q4 or it might not even start till next year.

Okay and one last housekeeping question.

That’s the reason why I am saying flattish Q3. Its weakening shallow water, gulf and the loss of the Cajun contract offset by improvement in really other parts of our business.

Okay.

The Shallow water Gulf we see probably coming back in the fourth quarter and rest of our business continues to improve and that’s what will drive the improvement in the fourth quarter.

Okay and then one housekeeping question on the tax rate that jumped up in the quarter to 27%. What should we be using after the balance of this year and 2002?

The tax rate for 2001 should continue to run at or near the 25% effective tax rate levels that have already been indicated in the previous conference call. The slight uptake that you see in Q2 results is may be one of presentation … there is and element … there is a tax credit associated with the extraordinary loss on the retirements on the debt and that tax rate is at a higher rate because that it is US base and then that which you get in the effective tax rate.

As you move down to 2002, I think it is probably early to comment on that, but it is subject to the timing of assets currently underway that would allow us to benefit from our Cayman incorporation, and we expect the rate to run till at about 25% or slightly lower.

And the next is from Yves Siegel from First Union Securities, Inc.

Hi good morning, just a couple of questions. Mike again just going back to the structural changes that you’ve seen … the question is, is there anything that you might do differently going forward based on the fact that you have seen these changes.

Well, I think the main thing is you have got to be a lot more careful about spending capital and I think those are changes that I would hope that all my drilling contractor friends out there would also look at and realize that the spending a bunch of money as they have in the past to meet with the perception of fleet demand is probably not going to be the right thing to do. I don’t think that the cycle is going to be quite as steep as it has been in the past. I think in the long run that is probably pretty good. The major oil companies and the mid-sized oil companies having all gone through this recent experience of 96 through 99. I think they are being much more careful about jumping ahead with projects. They are being much more careful about their assumptions about commodity prices in terms of guiding in towards capital investment and they are being much more cooperative. Among themselves they try to fully utilize the rig portfolios in terms of sharing rigs, in terms of subletting time on rigs, and it makes it more efficient industry, but the result of that is I think it will cause us a more gradual change in the business. Certainly, a more gradual improvement in the business and the key for me is that you have got to be really careful about investing capitals.

The followup then is, is there any goal in terms of trying to have a percentage of your rig days committed in any one year, and obviously the further out you go the more difficult it is, but in terms of trying to have a base of earnings going forward …

We don’t have a specific target number in mind. I think the truth is that it varies over time and your ability to contract a certain amount of your rig time in advance is a function of the market. Actually, when the market is good, it is the best opportunity to get long-term contracts. When the market is soft you can’t do them. So, you really have to get them when the market is good and that’s why some of those contracts in Brazil for instance, you know someone could look at that and say if the market is really going to get good in 2002, you contracted at too lower rates, but the truth is I don’t know for sure what is going to happen in 2002 and signing a couple of contracts at 24 or 30 months durations given the size of our fleet, probably makes good sense. Those kinds of contracts are available now. I don’t know what is going to be available next year.

Okay and my last two questions, again hoping on the structural deal. You have been a consolidator and you mentioned the barge market holding up pretty well, because that market has been consolidated. What are your thoughts on Transocean continuing to do that as a consolidator or some of your competitors maybe getting together and then finally any targets on what you think the balance sheet should be by the end of next year?

Well, obviously we think consolidation in this business is not just a good idea … we think it a very good idea. Whether we can make it happen or other drilling contractors make it happen, I would encourage all drilling contractors to try to grow to consolidation instead of trying to grow through building a lot of rigs if they don’t have contracts for. I think in the long run this would be a lot better industry if they did that. I am sure they’ll run right out there and take my advice, but I do think it will be a lot better industry if we had fewer players and they were bigger companies and we are more financially disciplined. Whether or not we can make that happen or not, I wouldn’t want t speculate.

Where is the balance sheet and where …

Obviously, our number one goal is debt reduction and the after tax proceeds of the asset sales this year are being utilized for that purpose and any excess cash flow we have is being utilized for that purpose. As you know, we’ve restructured a lot of the debts that we inherited in the RBF acquisition. We’ve restructured a lot of that to get lower interest rates and next year, we would expect if the market looks anything like we’ve projected it to be right now, we would expect to generate substantial amount of cash flow and we don’t plan to be building any rigs and so most of that increasing cash flow would be directed towards reducing debt.

Thanks a lot Mike.

Over next from Paul McRay with Wellington Management.

Good morning. I think all my questions have been asked except for one. Could you comment on whether there was any capitalized interest in the second quarter.

I think it is about $9 million. I am going to get Ricardo for a headshake here.

I think it is about $9 million and I think the rest of the year is pretty much gone.

I am going to say rest of the year is probably less than five.

What was even the five beyond Horizon?

They are ending in Horizon.

Okay. I have all the other ones already asked.

Steve Sherrill with __________00:59:19 Investment Management.

Yes followup question on the balance sheet. Could you just tell us where your cash debt and shareholders equity numbers were at the end of the quarter?

Cash and cash equivalent amounts to about $109 million at the end of June and in terms of debt, both short and long term, totalled approximately $4.8 billion and shareholders equity was 10.8 billion.

With respect to capital expenditure, can you give us an update on what your latest expectations are and what it was in the quarter and what do you expect to be the balance for this year in 2002 preliminary?

I think we spent in the second quarter a little above 115 million and in the first half we spent about 370 million and we currently project a second half probably little under 200. So, our current projection for the year is about 565 million. We think in 2002 that number is going to be around probably more in the range of 200 or 250 million.

Thank you.

Over now to Euzi Zimmerman with JMT Capital.

Just one question. How many credit lines are there with you and the availability of those?

Well we have ___01:00:51 and I think it is under on right now. It is $800 million.

Okay and what is its term and will it mature at the same time?

Five years and unfortunately I don’t have Bob here. So I am looking at my accounting group and I think it is five years.

Five years from now or?

I think we just re-negotiated it with the RBF merger. So, say six or eight months ago we probably put it in place.

Okay thanks.

Now, we have Fred Mutalibov with Southwest Securities.

My all questions have been answered. Thank you.

We will hear next from James Stone with UBS Warburg.

Yes on the LOIs that you referenced earlier Mike. Were any of those LOIs contracts for jackups to move out of the Gulf of Mexico?

No they were not.

Okay thanks. That’s all I wanted to know.

Okay.

Next we will hear from Robert Trace with Hibernia Southcoast Capital.

Good morning. My question relates to the supply side issue of all the units in the North Sea. My understanding that CNV starting to look at the structural integrity of all the floaters and I wanted to know if … from what I understand it is fairly recent issue. If you have any comment on that and secondly if this is the case do you think there will be any bleed over into the jackup market, and if so how would that affect ultimately supply if you do see any effect on supply of either floaters and potentially jackups in that area.

This is Donald Ray. I think that most of the interest on part of CNV is in the Norwegian fleet and as I understand their intent is to encourage the owners and operators of the rigs to evaluate the condition of the rigs with respect to fatigue and that sort of thing with an eye towards development of plans going forward. So, I don’t necessarily think its going to adversely affect the supply of the units. I think its mainly meant to draw attention to the fact that there needs to be some on going maintenance concern and consideration in keeping the units fit for purpose.

Do you think we could ultimately see more downtime with those rigs in those areas?

I think it would be that you perhaps might see a little bit more in connection with the special periodical surveys that they traditionally do. Maybe a few days added to the each one of those overtime to address these kinds of problems, but most of the units that are the subject of this interest were designed and built between 20 and 30 years ago now almost. At that time, the ability to predict fatigue on these units was not as good as it is today. So, it could well be that the same rig analyzed with today’s abilities might show that it has a longer fatigue life than the original calculations were.

My last relates to part A and B. Will this fleet over into the jackup market and the seventh sector with respect to the floaters in your opinion?

I don’t think it would be the same issue necessarily with the jackups. I think the jackups work in different water depths and fatigue issues there, kind of, get spread over the structure with time. As far as the other floaters, I think that prudent owners of the rigs will probably want to look at these kinds of issues on some sort of timetable that makes sense from an operating point of view.

Thanks very much.

Now we will go to Ian Hollander with Janus Capital

Hi most of my questions have been answered. Just have a quick question on the debt paid down. You talked about you number one goal and we saw the 17 million paid down in this last quarter. Can you talk a little bit just about where the goal is going forward as far as the total debt number you are trying to reach or is it more of a leverage ratio?

Well, I can envision in the next couple of years at least all the excess cash is going to depend on that.

Okay, so there’s no specific target number you are trying to reach?

No.

Okay. What is the net debt number this quarter?

4.7 billion.

Is that 4.7?

Yes. When you are seeing that you are assuming short and long term debts less cash and equivalents.

Yes.

Yes. 4.7 billion.

Okay. Thank you gentleman.

We now have a followup question from Terry Darleigh with Goldman Sachs.

Just trying to reconcile balance sheet and cash flow statement as well. Did I hear correctly, cash was a 109 and capital expenditure was 115 and debt pay down was 17 million? Are those numbers correct?

I said the capital expenditure was about 115 and I think I heard Ricardo say that cash and cash equivalent was 109 million or something like that.

Okay. Was there a substantial building in working capital? The cash number was obviously down about a 150 sequentially, your capital expenditure was up actually below my expectation, and your earnings were in line with consensus. I am just trying to reconcile that the decline in the cash balance. Was there a substantial increase in working capital perhaps?

Yeah there was … largely in the receivables as a result mainly of increase in activities and a couple of slow paying receivables that are not causing us concern, but we are actively chasing them.

Okay that’s all and thank you.

No further questions at this time. Mr. Talbert, I am turning the call back to you for any closing comments.

Thank you Tracy. Well, I simply like to thank all of you for joining us this morning and see you in the future. Bye, bye.

That concludes the conference.