Transocean Ltd (RIG) 2001 Q4 法說會逐字稿

Good day everyone and welcome to the Transocean Sedco Forex (Company: Transocean Sedco Forex Inc.; Ticker: RIG; URL: http://www.deepwater.com/) fourth quarter earnings conference call. Just a reminder, 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 Chastain, please go ahead sir.

Thank you, .

Good morning and welcome. We appreciate your participation in this morning's conference call and your continued interest in Transocean Sedco Forex. If you have not received a copy of the press release, detailing fourth quarter and full year 2001 results, you can obtain a copy by going to the company's Web site, which is DeepWater.com.

In addition, the fourth -- the company issued on Thursday, January the 31st, it's monthly fleet update report which details the contract status of its mobile off shore drilling fleet. If you did not receive a copy of the report last Thursday you can obtain a copy again at the company's Web sit which is within the investor relations section under financial reports.

Before we begin this morning's call, I'd like to introduce the members of the company's senior management that will be participating. First, Mike Talbert, Chief Executive Officer of the company, Bob Long, President of the company, Jon Cole, Executive Vice President of the U.S. Gulf of Mexico shallow and inland water business segment.

Don Ray, Executive Vice President of technical services. Greg Cauthen, Vice President and Chief Financial Officer. Mike Unsworth Vice President of marketing. And finally Ricardo Rosa Vice President and Controller.

Mike Talbert will begin this morning's call with some initial comment on the quarter and full year just completed. And following his comments, each of the senior managers here will participate in the Q&A segment of the call.

Before Mike begins, I've been asked to remind you that during the course of this conference call, participants may make certain forward-looking statements regarding such matters that the prospects for and development of the drilling business. Exploration and production spending levels. Future earnings and other financial performance. Effective tax rate capital expenditures, debt levels, rate utilization and markets, commodity prices, contract revenue and duration. Contract backlog and prospects.

Projected day rates. Various aspects of the integration of R&B Falcon Corporation, (Company: R&B Falcon Corporation; Ticker: FLC; URL: http://www.rbfalcon.com/) as well as other statements that are not historical facts which involve certain risks, assumptions and uncertainties. As you know it is inherently difficult to make projections in a cyclical industry since these risks, assumptions and uncertainties include the prices of and demand for crude oil and natural gas. Demand for rigs, competition, operating hazards and delays. Rig new build performance.

Risks associated with international operations. Risks relating to acquisitions. Acquisitions by clients and other third parties. Risk of detail -- of drilling contract terminations or suspensions. And other operating risks which are not -- which are defined in the company's most recent Form 10-Q, Form 10-K and other filings with the Securities and Exchange Commission.

Should one or more of these risks and uncertainties materialize or should underlying assumptions prove incorrect, actual results may vary materially from those indicated.

Thank you for your patience as I covered these initial details. And I'll turn the call over now to Mike Talbert.

Thank you Jeff. This is a risky business isn't it?

It is.

I'd also like to add my welcome to all of you for our fourth quarter conference call. I'm going to make some brief comments here at the beginning.

During those comments I'll touch on our quarterly financial results that we release today. I'll talk a little bit about or two business units and how they've been doing. I'll give you a general overview of market conditions that we can expand on during the Q&A period. And I'll give you a little bit of earnings guidance.

After that we will go to the Q&A. And as you can tell, we have a large number of the members of the management team here to hopefully answer any questions you might have.

Starting out with the financial results, we did report today earnings of $56 million or 17 cents a share, on revenues of just under $750 million for the fourth quarter.

There were a couple of unusual items in those results, the most significant of which was a 10 cent charge to earnings from asset impairment. Those asset impairments primarily were on three properties, the Transocean 97, a second generation semi, a P-3, a drill shift that had been operating in Brazil. And our our leases in which we inherited from in the RBF acquisition.

Off setting those asset impairment charges was a nickel a share gain on the sale of the Chalant down in Brazil. So when you make adjustments for those items, our earnings per share in the fourth quarter would have been about 22 cents a share.

Also in the fourth quarter, I think it's worth noting that we've reduced our net debt by some $260 million down to a level of just under $4.2 billion of net debt at the end of the quarter.

Looking at the individual business units, the international and U.S. floater business unit had revenues of almost $690 million for the quarter. That was a five percent increase from the third quarter. And it was driven by slightly higher day rates and slightly higher utilization.

However, the higher revenues were offset by higher direct operating expenses resulting in a slight decline in field operating income. And I'll come back to those operating expenses in a minute because they were particularly unusual this quarter.

In total the international and U.S. floater business group did generate about 92 percent of the revenues for the company in this quarter.

The Gulf of Mexico's shallow water and inland water grew -- saw their revenues drop 50 -- almost 50 percent from the third quarter down to just under $60 million. They were impacted by significantly lower day rates and utilization particular for the jack-up rates. The field operating income declined from about just under 40 million to about $3 million in the quarter.

Coming back to the direct operating expense issue it was up significantly from Q3 to Q4. It was around just under $420 million in Q3. And just under $440 million in Q4 increase of a little over $20 million.

There were a number of unusual items effecting that. The most significant of which was the fact that in Q3, we had an amortization of the gain on the drill star of almost $14 million.

But rather than worry about the unusual items, let me simply repeat the guidance we provided you last quarter for what you should expect direct operating expenses to run. And what we said was that given the activity levels of the last couple of quarters, direct operating expense should be running about $420 million a quarter plus or minus. So that's the guidance I would give you for going forward.

Turning to the -- to the markets, and I'm just going to make some general comments here that as I said earlier we can expand on in the Q&A period.

Starting off the Gulf of Mexico jackup the inland barge business, I think everybody knows that's very week today. Although I would say the barges are certainly holding up better than the jack-ups. Everybody knows there's too much gas in storage. We need economic recovery which may be beginning. We need depletion to occur which I think may be beginning. And we certainly could use some help from the weather.

When all of those things occur in sufficient quantities to create an environment where people want to drill wells in the Gulf of Mexico again, well that's kind of anybody's guess. So I think the outlook for the shallow water Gulf is still pretty difficult.

The international jackup business looks much better. It continues to be good especially in West Africa through the Middle East and in Southeast Asia. But I would say that there is supply moving from the gulf of Mexico. And it's likely that rates will soften if the Gulf of Mexico doesn't continue to improve or start to improve in the not too distant future.

The mid water market continues to be soft in most places around the world. But particularly it's soft and worsening in the North Sea as a result of both the normal weather slow down in the winter months. As well as a reduction in activity which is causing some rigs to be leaving Norway and just additional competition in the U.K. sector.

The other market that's particularly weak in mid water, is the Gulf of Mexico where there doesn't appear to be a whole lot of activity on the near term horizon for the mid water segment.

Deep water markets around the world I'd say are somewhat better balanced. The Gulf of Mexico still has plenty of supply. Most demand is being met. There are still a number of far occurring.

West Africa seems to be in pretty good balance. Brazil pretty good balance. Maybe room for one more rig.

And through the Middle East and Asia you know there is some pick up in demand. That's why we mobilize the 53 to India recently. But I'd say that increase in demand is not significant in the overall context of the deep water market.

So all in all I'd say it's not a very exciting near term view of the markets.

Turning to guidance for '02, and the only guidance I feel at all comfortable giving you is for the first quarter. I think the uncertainty in the rest of the year is significant. But I will tell you that I believe the first quarter of '02 our earnings will be down significantly from the quarter just ended. And we would expect to see earnings in the range of 15 to 20 cents a share in the first quarter. And that's after eliminating the goodwill.

That's a fairly significant reduction. There are a few unusual items. But by and large the vast majority of the reduction and earnings is driven by market conditions. And I'll just mention a few of those that will have a significant impact on us in the first quarter.

The mobilization of the 534 to India from the Gulf of Mexico and the mobilization of the from the North Sea to Africa, both moving to nice contracts. But both rigs will then be -- not be generating revenues in the first quarter. That's a significant income. We also will be stacking the arctic in Norway coming off the $200,000 a day contract. We don't see work for the arctic probably before at least this summer. So that's a significant impact.

We also recently stacked a P-3 in Brazil after swapping it out with a P-1 to finish a contract for Petra . And we've had to stack one of our semi's in West Africa the 708, ad a result of some operational problems that one of our customers had.

We also as you know sold the Seillean in the fourth quarter, the FPSO that generated that nickel gain in the fourth quarter. The Seillean also did generate positive net income. So the loss of the Seillean in the first quarter will effect us.

As well a number of day rate reductions on various rigs that are rolling over in their contracts. And along with all of the rest of that the Gulf of Mexico shallow water will continue to probably -- probably to get worse because I would say the leading edge day rates in that market are well below what our average day rate was in that market for the fourth quarter. So that market does not yet show any signs of turning around.

And with that as a final comment let me turn to questions from the audience.

Thank you. Today's question-and-answer session will be conducted electronically. If you would like to ask a question, please press the star key followed by the digit one on your touch-tone telephone. We will proceed in the order that you signal and we will take as many questions as time permits. Again, that's start one if you have a question. And we'll pause for a moment to assemble the roster.

We'll hear first from Scott of Simmons and Company.

Yes, good morning, gentlemen. Mike, I was wondering if you could talk a little bit about the Norwegian market? I know in the press release you talk about the arctic rolling off contract this month. There's also I think two other rigs that roll off contract this summer.

Can you perhaps give us some guidance what that market is going to look like as we get into the summer and fall of '02?

, let me -- let me have Mike Unsworth answer that. Mike just got back from Norway so he's real current. So Mike.

Yes, the problems in Norway, if you like, reductions in demand are coming mainly from stat. oil. They're coming to the end or have to come to the end of some very big development programs up in Norway. And so activity is coming down.

It's coming back down to maybe what you would call historical levels of about 13 to 14 rigs. And it's been up as high as 18. So we can see one of our rigs coming off later in the year, the Prospect in August.

And we are -- we have some time on the Winner, but that could go through until the end of the year. But this fall off in activity is really down to development work coming off from stat. oil.

OK. And these rigs, the Arctic and the Prospect, any chance that you move them out of Norway? Or do you think things get better sometime later in the year or early part of '03 to keep them in that market?

We don't plan to keep the Prospect in the Norwegian market. This rig will be marketed elsewhere in the world. The Arctic is all ready to go back to work later in the year in Norway. It's specifically designed for the Norway market, that rig, so.

OK.

The Arctic is a particularly attractive rig for the Bering Sea. You know it's built to work up there year around. And that's probably the best home for it. But we do have a three to six month period here where it looks like there doesn't appear to be work available.

OK. And I'll let others ask questions. Let me ask one question about the interest expense in the quarter, it was down from Q3. Yet we saw, you know, total debt go up about 240 million. Can you talk a little bit about what are the drivers on interest expense and what we should look forward to in 2002?

I'll let Greg answer that.

Total debt went up solely because of a year end transaction related to some corporate reorganizations we did. And we went out in the PP market and borrowed $325 million of commercial paper which was right at the end of the quarter. And what was repaid right at the beginning of January. So that's why you also see cash ...

Right.

Go up significantly. So that really had no impact on interest expense. So our debt levels continue to trend. Our real debt levels continue to trend downward as well as we were favorably impacted by declining floating rates of about 25 percent of our debt it floating. And so that also dropped interest expense.

OK. And guidance for this year?

I think -- obviously we will expect to see interest cost to continue to come down. And my guess is that for the year, we ought to be somewhere hopefully net interest cost of less than $200 million.

OK. Thank you very much.

Our next question today comes from Ken of CS First Boston. Mr. your line is open.

Hello? Can you hear me?

Yes.

Oh, OK. Sorry about that. I was wondering Mike, if you could give us a little bit more comment on the Deep Water outlook over the next six to 18 months? Particularly given I guess at least in my view how much slower the development work has been to come on in West Africa and even in the Gulf of Mexico.

Well I'm going to let Mike answer that question also, Mike.

Well the deep water business in the Gulf of Mexico is softer than we would have expected coming towards the end of last year. And so there is going to be some time that we're going to have to try and close off -- close up some of the gaps in our units off Mexico.

But for the most part, the rigs will be kept busy. As Mike said in his comments earlier, in Asia, southeast Asia, India and West Africa. The markets are still looking fairly buoyant. There is work on the horizon. There are very view rigs to come out now, deep water rigs. Most of the rigs are out that are coming out in the supply.

So really the point of concern for us really the Gulf of Mexico. And other markets are going forward are looking fairly good.

Brazil is fairly flat but it looks like it could take another rig. Or perhaps even two if we -- if things go very well. And the North Sea is looking pretty flat to soft. As you know the work up there is pretty sparse. And BP is really west of Chetland. But it's flat deep water, North Sea.

So the only concern is the Gulf of Mexico.

And are there any big projects that have been delayed that are looking like they're going to come out in the next six months? Or are things really being pushed back into '03?

For the main part I would say that things are being delayed. There's no significant changes that have occurred to really over the last quarter. There have been a few projects in West Africa that slowed down. But generally speaking our customers -- big customers are planning to get the developments on line as soon as they can, especially in West Africa.

But as you know they are in fact late. But I have -- there are no changes that I can see at the moment.

OK. And then just on a housekeeping questions, depreciation was down sequentially. Could you give us a little bit of guidance on where that's going to be going this year?

I think probably good guidance would be somewhere in the order of $130 million a quarter. The depreciation was down in the fourth quarter. But that was primarily -- do you want to answer that Greg?

To the final purchase accounting on RB Falcon had an unusual effect in the quarter, but as Mike said, going forward, it's going to be in the range of $130 million per quarter.

OK. I was wondering if there was something. Thank you very much.

OK.

Thank you. Today's question-and-answer session will be conducted electronically. If you would like to ask a question, please press the star key followed by the digit one on your touch-tone telephone. We will proceed in the order that you signal and we will take as many questions as time permits. Again, that's start one if you have a question. And we'll pause for a moment to assemble the roster.

We'll hear first from Scott of Simmons and Company.

Yes, good morning, gentlemen. Mike, I was wondering if you could talk a little bit about the Norwegian market? I know in the press release you talk about the arctic rolling off contract this month. There's also I think two other rigs that roll off contract this summer.

Can you perhaps give us some guidance what that market is going to look like as we get into the summer and fall of '02?

, let me -- let me have Mike Unsworth answer that. Mike just got back from Norway so he's real current. So Mike.

Yes, the problems in Norway, if you like, reductions in demand are coming mainly from stat. oil. They're coming to the end or have to come to the end of some very big development programs up in Norway. And so activity is coming down.

It's coming back down to maybe what you would call historical levels of about 13 to 14 rigs. And it's been up as high as 18. So we can see one of our rigs coming off later in the year, the Prospect in August.

And we are -- we have some time on the Winner, but that could go through until the end of the year. But this fall off in activity is really down to development work coming off from stat. oil.

OK. And these rigs, the Arctic and the Prospect, any chance that you move them out of Norway? Or do you think things get better sometime later in the year or early part of '03 to keep them in that market?

We don't plan to keep the Prospect in the Norwegian market. This rig will be marketed elsewhere in the world. The Arctic is all ready to go back to work later in the year in Norway. It's specifically designed for the Norway market, that rig, so.

OK.

The Arctic is a particularly attractive rig for the Bering Sea. You know it's built to work up there year around. And that's probably the best home for it. But we do have a three to six month period here where it looks like there doesn't appear to be work available.

OK. And I'll let others ask questions. Let me ask one question about the interest expense in the quarter, it was down from Q3. Yet we saw, you know, total debt go up about 240 million. Can you talk a little bit about what are the drivers on interest expense and what we should look forward to in 2002?

I'll let Greg answer that.

Total debt went up solely because of a year end transaction related to some corporate reorganizations we did. And we went out in the PP market and borrowed $325 million of commercial paper which was right at the end of the quarter. And what was repaid right at the beginning of January. So that's why you also see cash ...

Right.

Go up significantly. So that really had no impact on interest expense. So our debt levels continue to trend. Our real debt levels continue to trend downward as well as we were favorably impacted by declining floating rates of about 25 percent of our debt it floating. And so that also dropped interest expense.

OK. And guidance for this year?

I think -- obviously we will expect to see interest cost to continue to come down. And my guess is that for the year, we ought to be somewhere hopefully net interest cost of less than $200 million.

OK. Thank you very much.

Our next question today comes from Ken of CS First Boston. Mr. your line is open.

Hello? Can you hear me?

Yes.

Oh, OK. Sorry about that. I was wondering Mike, if you could give us a little bit more comment on the Deep Water outlook over the next six to 18 months? Particularly given I guess at least in my view how much slower the development work has been to come on in West Africa and even in the Gulf of Mexico.

Well I'm going to let Mike answer that question also, Mike.

Well the deep water business in the Gulf of Mexico is softer than we would have expected coming towards the end of last year. And so there is going to be some time that we're going to have to try and close off -- close up some of the gaps in our units off Mexico.

But for the most part, the rigs will be kept busy. As Mike said in his comments earlier, in Asia, southeast Asia, India and West Africa. The markets are still looking fairly buoyant. There is work on the horizon. There are very view rigs to come out now, deep water rigs. Most of the rigs are out that are coming out in the supply.

So really the point of concern for us really the Gulf of Mexico. And other markets are going forward are looking fairly good.

Brazil is fairly flat but it looks like it could take another rig. Or perhaps even two if we -- if things go very well. And the North Sea is looking pretty flat to soft. As you know the work up there is pretty sparse. And BP is really west of Chetland. But it's flat deep water, North Sea.

So the only concern is the Gulf of Mexico.

And are there any big projects that have been delayed that are looking like they're going to come out in the next six months? Or are things really being pushed back into '03?

For the main part I would say that things are being delayed. There's no significant changes that have occurred to really over the last quarter. There have been a few projects in West Africa that slowed down. But generally speaking our customers -- big customers are planning to get the developments on line as soon as they can, especially in West Africa.

But as you know they are in fact late. But I have -- there are no changes that I can see at the moment.

OK. And then just on a housekeeping questions, depreciation was down sequentially. Could you give us a little bit of guidance on where that's going to be going this year?

I think probably good guidance would be somewhere in the order of $130 million a quarter. The depreciation was down in the fourth quarter. But that was primarily -- do you want to answer that Greg?

To the final purchase accounting on RB Falcon had an unusual effect in the quarter, but as Mike said, going forward, it's going to be in the range of $130 million per quarter.

OK. I was wondering if there was something. Thank you very much.

OK.

And now we'll hear Oll with Morgan Stanley. (Company: Morgan Stanley Dean Witter & Company ; Ticker: MWD ; URL: http://www.msdw.com/)

Thank you. I was just wondering whether you could give us a quick update on the performance of the express class rigs that are working? And also maybe comment a little bit on the operating regularity on the Cajun Express? What it was working on it's most recent contract?

Well I'll give you -- let me make a brief comment and then if Bob wants to add to that, he can do that.

But the Energy which is of course over in Africa right now up and through September it had operated with about 14 or 15 percent down time between the time it went to work in May and September. And it did go through a break in period.

Since moving to West Africa over the last two months of the year, it's down time was only about two percent. So the rig is currently operating at you know kind of a level we'd expect it to.

The Cajun Express while working for Ocean Energy (Company: Ocean Energy Inc.; Ticker: OEI; URL: http://www.oceanenergy.com/) over several wells had about total about seven percent down time. But on the final deep water well that's drilled in about 1600 -- 6300 feet of water, the down time was in the order of two or three percent.

So both of those rigs, their operations currently are meeting our expectations.

Would that be in line with slightly below the average for the rest of your high spec fleet?

Well I would say that it's two or three percent would be comparable to what the enterprise class rigs are operating at. But it's probably lower than what some of the other ones are operating at.

OK. If you sort of see oil prices stabilize a little bit going forward, on the basis of your crystal ball, I mean how long time do you think it will take for the deport of markets go back into balance again? So given the expansion of in the fleet and how that's coming to an end?

Well I have to tell you that I have a hard time knowing the answer to that question with any kind of confidence. You know I think it's not really just a function of what is the oil prices. It's what do the oil companies think the oil price is going to be.

And I think that's one of the difficulties in the market today is a concern about where oil prices might go if the world economy stays soft. And if OPEC and non OPEC oil exporters cannot maintain some cohesion in trying to you know reduce total supply on the market. I think that does create a certain amount of nervousness out there. And probably is effecting our customer's behavior today.

So I think it's a pretty difficult call to figure that out. And I really don't feel qualified to do it.

I understand the variables. My question was kind of on the basis if the GDP starts to accelerate again at some point. And demand for OPEC stuff. And so the psychology goes back to where it was a year ago, given the sort of set backs that it's not had and the delays that they've had in a number of these development plans.

How long time? Are they sort of two years away from a potentially balanced market? Or is it going to take longer if confidence doesn't return?

Well you know I would -- I guess I would tell you there are other people that have done some real detailed studies there that have published studies on that question trying to answer that exact question.

And I think most of their studies would have -- which are as recent as this past December. Some of those studies would suggest that the market by the end of the year, at the end of this year, 2003, the market should be you know pretty much in balance with supply and demand.

But you know again you know calling that very close I found it very difficult to do.

Right. I agree with that. The net net reduction that you had of $260 million, am I looking at the working capital movement of the quarter seemed to be a small positive if you exclude cash investment. How much of that do you think came from proceeds of asset sales?

About 100 million came from proceeds from asset sales. And the rest was all from cash from operations.

OK. Well thank you very much. I'll let somebody else have a go.

Our next question will come from Robin with Bear Stearns. (Company: The Bear Stearns Companies Inc.: Ticker: BSC; URL: http://www.bearstearns.com/)

Good morning. Mike, I was wondering since you mentioned the sort of issue of rigs moving around the world to pursue better opportunities. And that you had two that are moving.

What kind of plans do you have perhaps beyond the two that you're moving currently? I'm specifically wondering whether the West -- the jackup market in West Africa, Middle East, Asia could see further movement of rigs. As you said, if the Gulf of Mexico remains in its current state through the rest of the year.

Well I do think that there is probably -- there is excess demand for jack-ups in West Africa. And there's probably excess demand for jack-ups through the India and southeast Asia. And I believe that there are probably jack-ups, there are jack-ups being mobilized for that.

I think that you know people will bid in our bidding, and we're in fact we're bidding also for work in those markets. So I think that there will be some additional -- that's why I made the comment that the Gulf of Mexico doesn't begin to show some signs of a turn in the not too distant future, I think that you'll have enough additional rigs will move out of the Gulf to cause jackup day rates to soften in some of these other areas where the markets have been very good.

Right. And I'm assuming you don't believe as others have claimed that there's a shortage of heavy lift vessels to move rigs around the world where they're needed?

Well that may well be the truth. In fact, I know when we mobilized our two rigs to India that was an issue for us at the time was getting access to a heavy lift vessel. So that might be a bottleneck on how quickly assets can be redeployed.

That's why I say if the markets stay soft long enough in the Gulf of Mexico you know I'm sure rigs eventually will move.

Right. OK. My last question then on your asset divestiture plan that you had laid out and had sort of gotten a good ways through it before the downturn hit. Are you -- do you -- where do we stand on that in terms of your total anticipated proceeds from asset sales? And are you resuming your initiatives there? Or is it still kind of on hold?

TALBERT: Well it's kind of an overall status report would be that we probably sold a little over $200 million worth of assets since we started the program.

We probably had well more than that in terms of letters of intent that ended up falling apart in response to the market deterioration. We still have a few deals that we are working on today. But by and large I would say that you know I wouldn't envision that asset divestiture activity picking up when the market is like it is today.

You know I just -- it's just unlikely that -- we're not willing to sell at fire sale prices. And in today's environment that's what -- that's kind of where it's at. So I think that we have more assets valued to sell than we've sold so far. But the timing of the -- of doing that is really going to depend on when the market turns around.

OK. Thank you.

Our next question comes from Kevin with Merrill Lynch. (Company: Merrill Lynch & Co. Inc.; Ticker: MER; URL: http://www.ml.com/)

Good morning. Mike, maybe I missed this when you were going over the Express with regards to Cajun performance. But could you broaden that to the other new builds, the R&B rigs? And then I'm going to make an assumption that the enterprise class is performing with minimal downtime but you can maybe confirm that?

Well I guess I don't have the most recent numbers in front of me Kevin, but yeah the new builds have all improve in performance. And the enterprise class rigs have certainly been -- had been operating in pretty good shape for some period of time.

As I've said before we have some longer term issues with some of the equipment on these rigs that gets dealt with over time. And most of that I don't think will be a major issue. But I would say that those two express rates and the three enterprise class rigs have certainly shown that they can perform at the level that we expect them to perform that long-term.

The -- the horizon I think is also done very well. It's probably been the most successful of all of the new builds in terms of the start up. The rest of the new builds, the Pathfinder class and the Nautilus, I think, are probably in the upper single digits on average for their down time. And you know we expect them to get down at that level around three percent or so also.

OK. Another question, this may be too far out in the future to give an answer on. But the Millennium is coming off very last this year at a pretty high day rate. You know any sense on I guess first of all you know from the customer, as to whether they would like to keep that rig?

And second you know what's your -- is there any sense and where you know a rate might go? Or is that part of the uncertainty in terms of guidance for the rest of this year?

Well I think it'd be fair to say that's part of the uncertainty of where the year is going.

And then -- I'm sorry to go on specifics on some of these rigs, but I guess are important indicators. I didn't pick up -- what was the status of the Cajun right now?

The Cajun is currently -- it's got operations underway to try to recover the BOP that the Pathfinder dropped in the Gulf of Mexico.

OK. And then after that?

Yeah, it was dropped several years ago, by the way.

I don't remember.

OK. I don't want somebody to think it just happened last week. Yeah, it was dropped a couple of years ago. And part of the reason we're doing that is because you know the -- we were working for Ocean Energy. The program was going -- the drilling activity was going very well.

I think Ocean Energy was -- they -- they like the performance of the rig enough that they put it on their Christmas card. So I consider that to be an endorsement of the performance of the rig. But their drilling program ended early. And so the rig was about a contract. We decided to go do this operation while we were looking for additional work, which we are looking for. But as I've said earlier the deep water market in the Gulf of Mexico is -- you know got plenty of rigs there.

In terms of how you would act on a rig like that. You know are you going to try to hold a certain you know price -- significant price increment to what fourth generation rigs are getting? Or are you going to go after cash flow and half to go down to a fourth generation rate in order to you know to get work?

Well I think that we would try to get the rate commensurate with the work that was available. If we had to take a job that a fourth generation rig could just have easily have done, you know we clearly couldn't be successful getting that job if we were trying to work it day rates for rigs that can work in 8000 feet of water.

So it depends on the -- it depends on the job that's available and who -- what we have to compete with to get the job. But clearly, you know the softness in that market is such that the jobs are short term. And we would prefer to keep the rig working at a day rate that is like a fourth generation day rate for a period of time, rather than not have a job at all.

OK. And one last question. Do you think we're going to evolve towards a situation for the whole deep water market that we seem to bee seeing with the fourth gens that operators are really going on a very short-term basis. Maybe you guys are as well? You know because they really don't have to kind of reach out and take you know commit to a lot of rig time because the supply is out there.

Well I don't -- I think there's -- that's absolutely -- the market will move -- let -- the interest of the customer is never to have any more rig time under contract than they know what they're going to do with. Particularly when they're moving around to different programs and have different partners.

The risk aversion of the oil companies is such that they don't want to take the possibility of having a more -- having a rig at a rate that's above the market. So the only time they're going to contract for longer term is when one of two -- either they have a long term program, a big development program and they're fixing the cost.

Or they're concerned about availability. And right now with the current status of deep water market and the ability to get time for you know Welsh lights on an existing rigs to farm out, I don't think the operators are certainly not overly concerned about availability.

So you know until that -- until either that availability becomes tight, or you have a long-term program you want to lock the rig up for, the operators will be signing short term contracts. That's no difference in the business. It's always been.

OK. Thank you, Mike.

OK.

That's it for me.

We'll move next to Eve with Wachovia Securities. (Company: Wachovia Corporation; Ticker: WB; URL: http://www.wachovia.com/)

Good morning, Mike.

Hey, Eve.

I've just got a few. One is if you can discuss, and I'm not sure if you mentioned if Mark was there or not. But talk about where you see the tax rate going for 2002? Number one.

Number two it would seem that even with you know softening of the markets you still are going to generate a lot of free cash flow. So maybe you could just again just reiterate what your cap ex looks like going forward. That would be pretty helpful.

And then the third is I know you have guidance of 420 million in terms of operating expenses going forward. And any thoughts what's actually happening at the root level? Are you seeing that much change in the cost at the rig level? Thanks.

OK. This -- the first issue had to do with the tax rate. And I'm sure certainly I'm sure some of you noticed the tax rate in the fourth quarter was around 15 percent. And that was just really the result of the continued integration of the two companies. And going into 2002, we would hope to be able to have a tax rate around that 15 percent level.

But I would caution you that you know we work in a lot of areas that are deemed profit areas. And the tax rate in those areas it can go up when day rates are going down, the effective tax rates. So with that as a caveat you know I would say that the tax rate we had in Q4 would be what our hope would be for 2002. But there is that caveat that, depending on how day rates move and effective tax rates can change in those deem profit counties. It could differ from that.

I think certainly when we have our conference call for the first quarter of 2002, we'll you know probably have a better handle on where we think the year is going to be. But right now I think at 15 percent if what we'd hope to achieve.

As far as free cash goes, you know our capital plans really haven't changed from what we've said before. I think we've been saying that -- well what we had been saying that cap last year was going to be about 560 I think. And we said this year it was going to be about 200.

This year probably it's going to be maybe a little above that but right around 200 to 220. And partly because we didn't spend the 560 last year some of those -- you know you always get an issue here between commitments and expenditures. And some of the money that we thought we were going to get actually spend last year and paid for last year from a cash flow standpoint probably don't show up until earlier this year.

But still somewhere in that 200 million to 220 is about what we'd expect cap ex to be for the year.

And I would also say if the market continues -- if it gets worse, just as I said you know when we talked about operating expense, and I said 420 a quarter. I said that based on the activity levels of the last couple of quarters, if the market were to deteriorate, you know obviously we take steps to reduce that.

And the same would be true for capital expenditures. If the market would continue to soften for many -- very many quarters here we would take steps there also and would reduce those numbers.

Mike, just what's going on at the rig level in terms of cost?

Yeah, by and large, I don't think there's much change. You know there some things going up. There are other efficiencies from activities we've under taken at cost savings. So you net all of that out and I don't believe we're -- you know I wouldn't say that we're seeing a significant cost increase at the rig level.

Thanks, Mike.

Our next question will come from Mark with Salomon Smith Barney.

My questions have been answered. Thank you.

Thank you. If your questions have been answered you may remove yourself from the queue by pressing the pound key. And now we'll move to James with UBS Warburg. (Company: UBS AG; Ticker: UBS; URL: http://www.ubs.com/)

Yeah, Mike I just wanted to follow up a little bit on the cost side again. Can you give us a sense as to when you look at your direct operating expense, how much of that is maintenance oriented expense? And have there been any changes in your maintenance expense trends over the last couple of quarters?

I would say of the total direct operating expense, the maintenance cost probably run in the order of 20 percent. You know the vast majority of those costs are associated with people. I'd say the people -- the people part of the direct operating expense is at least 60 percent.

OK.

And the maintenance is probably 20 to 25 percent. And I don't believe we've seen any significant change in the trends of the maintenance expense over the last several quarters. Bob -- any different?

No, I don't think we've seen any trends at all. We're continuing to put a lot of effort into solving some of the problems with the equipment on these new rigs, which sometimes results in a blip here and there where we incur some higher costs to solve a particular problem. But, in terms of trends, I don't think you're going to see the cost change much from the guidance that Mike's giving you.

OK. And just in the first quarter with the mobilizations of the 534 and the , how are you treating the mobilization expenses in the quarter?

The mobilization expenses are all deferred, along with any mob. revenue we receive on the contract and then that's all amortized over the contract period.

And in those particular mobs. Is there mob revenue with those deals?

Yes. We were reimbursed for the mob. cost in these deals. And that's why Mike said there's a significant negative impact on earnings in the first quarter, because those two rigs, one goes on contract the end of the quarter and one goes on contract the beginning of April. So there's essentially no profits coming off those contracts during the second quarter.

OK. And then, just my last question, Greg, could you just clarify for us just a little bit why you