Transocean Ltd (RIG) 2002 Q1 法說會逐字稿

Good day, everyone. Welcome to the Transocean Sedco Forex first quarter 2002 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, [UNKNOWN SPEAKER]. Please go ahead, sir. [UNKNOWN SPEAKER]:Thank you, good morning and welcome to the review of first quarter 2002 results of Transocean Sedco Forex. The press release cover and results for the quarter including income statement, balance sheet, cash flow statement, and selected operating statistics. are posted on the company's web site at www.Deepwater.Com in the investor relations section. Later this morning the company intends to post to its web site it's monthly fleet update report. Covering the current contract status of its mobil off-shore drilling fleet. And a summary report of its U.S. Shallow and inland water business as of April 30. You can receive an automatic e-mail alert that an update report is available by signing up for the e-mail alert feature found at the company's web site. This morning's conference call includes participation from several of the company's senior managers. They are Mike Talbert, Chief Executive Officer, Bob Long, President, John Cole, Executive Vice President Gulf of Mexico shallow and inland water business, Greg Cauthen, Vice President, Chief Financial Officer and Treasurer, Mike Unsworth, Vice President marketing, and Ricardo Rosa, Vice President controller. Also Don Ray, Executive Vice President technical services. Mike Talbert will offer some initial comments followed by a question and answer period. 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 various matters relating to our business and the company. Including future financial performance, operating results, and the contract drilling business that are not historical facts. As you know, it is inherently difficult to make projections in a cyclical industry since the risks, assumptions and uncertainties involved in these forward-looking statements include; the level of crude oil and natural gas prices, rig demand and operational and other risks that are described in the company's most recent 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 while I covered these initial items, and I'll now turn the call over to Mike Talbert.

Thank you, Jeff. Let me add my welcome to all of you at our first quarter conference call. I'm going to talk briefly about the financial results for the quarter and how the market looks out there today. Then we'll have Greg talk to you a little bit about the FAS 142 and explain to you how that has worked. We'll then give you some earnings guidance, and then we will go to some questions and answers. Regarding the financial results, as I think most of you have seen, we've reported earnings of $77 million, about 24 cents a share, on revenues of right around $670 million dollars. This was all before a noncash charge of about $1.3 billion related to a goodwill writedown for our Gulf of Mexico shallow and inland water business unit. This writedown is required under FAS 142. And it really reflects the highly cyclical nature of that business unit. Initially the Goodwill allocated to that unit was based on the fair value when the business was moving towards a cyclical peak at the time of the acquisition in early 2001. Under FAS 142 we have to relook at that fair value on January 1st of '02, and of course at that time the segment had deteriorated to somewhere near a cyclical low. So the fact is 142 rules don't work very well for a cyclical business that those other rules we follow. And as I said Greg will talk a little bit more about this later. Other than that, the 24 cents a share is a what I'd call a relatively clean numbers in that there aren't really many unusual items in that 24 cents. The 24 cents is above the top of the guidance we gave you which was 20 cents, and it's I think significantly above the street at 16 cents. I suspect the primary reason is that our operating expenses are well below what many of you were expecting. I know Q1 compared to Q4 operating costs are down about $59 million. Those are due to a number of reasons, part of it's just lower activity level. That lower activity caused us to make some quick decisions about stacking rigs which helped cut costs quicker than otherwise would have happened. We sold a few rigs, we deferred some maintenance, we have some cost reduction programs under way in a number of different areas. All of those things contributed to the reduction in costs in the first quarter. Many of those reductions will continue while we're at current activity levels, and some of them are really just only deferred, but as far as giving you guidance regarding those costs going forward, I would suggest that you assume the total operating costs in the range of 390 to 395 million a quarter. And recognize that that could vary if activity were to pick up. Regarding markets today, we can talk more about this in the Q&A's, I'm just going to make a general comment about the markets overall. And what I'd say is that the supply and demand for the various classes of rigs in many of the markets around the world is very close to being in balance today. Obviously there are a few exceptions to that. The shallow water Gulf of Mexico and the mid water floaters in the Gulf of Mexico continue to be notably oversupplied. But we are starting to see an increase in inquiries, just in the last few weeks for those rigs. I note with very much interest that U.S. Gas production, a recent report I saw, was down 7% from the first quarter of '01 to the first quarter of this year, and some of the larger operators had--their production was off more than 10%. So that significant decline in production I think bodes well for the shallow water and mid water business starting to come back. Also the increased activity in Mexico that we anticipate seeing pick up as the year goes on should also make those markets come back. So we're guardedly optimistic that the shallow water business is starting to recover. We've also, regarding other markets around the world where we're not in balance, Norway has clearly been a disappointment, activity has slowed down there fairly significantly, it has created an excess supply of floaters in the North Sea. But to date the contractors have kept a few rigs off the market and rates have been holding up fairly steady in the North Sea. Deep water, I would say globally, it's relatively in balance, but I do think I can see the need for a few rigs to leave the Gulf of Mexico and move to some other areas around the world where there seems to be a little better demand in the near term. And with that, let me turn the call over for a minute to Greg and let him give you a little more background on the FAS 142 process so you understand how that really works.

Thank you, Mike. As Mike indicated, we reported an on cash charge of $1.3 billion to reflect the impairment of goodwill. As a reminder, FAS 142 eliminated the amortization of goodwill and really replaces it with an annual test of goodwill impairment. The initial test had to be performed on January 1, 2002, and will then be performed annually thereafter on October 1. The goodwill impartment test is performed by comparing the fair value of reporting unit to its caring value, it must be performed separately for each reporting unit. Our international U.S. floater reporting unit did not have any goodwill impairment as its fair value exceeded its caring value. However the application of FAS 142 to the Gulf of Mexico shallow and inland water reporting unit resulted in a goodwill impairment since the fair value of the segment was less than its caring value. The shallow and inland water segment became part of Transocean as a result of the acquisition of R&B Falcon on January 31st, 2001. The caring value of the shallow water goodwill was established at that time by the term the fair value of the segment in January 2001, and using such fair value to allocate the goodwill between the shallow water and floater segments. The evaluation was performed as if shallow water reporting unit was a stand alone drilling contractor and is thus subject to the same cyclical volatility as such a drilling contractor would be. At the time of the R&B Falcon acquisition, approximately 2.7 billion of caring value was allocated to the shallow water reporting unit and that included about 1.8 billion of unamortized goodwill. This allocation occurred in January 2001 at a time as Mike indicated when the shallow water segment was nearing a cyclical peak. Under FAS 142, 11 months later we were required to test the goodwill for impairment by determining the fair value of the shallow water segment, at January 1st, 2002, and comparing it with the caring value that was established as I just described. The FAS 142 valuation process used was very similar to the valuation process used to establish the initial caring value. However, by January 1, 2002 the shallow water segment was nearing a cyclical low, and consequently the fair value of the segment had fallen in half. This change in value is very similar to the stock price performance of other drilling contractors as they move from the top of the cycle to the bottom of the cycle, especially those contractors with significant shallow water exposure. This temporary decline in the shallow water fair value translated directly into the impairment of goodwill. The application of FAS 142 is very mechanical. We are required to test each reporting segment separately, thus no goodwill impairment on the international and U.S. Floaters segment, even though there is significant impairment on the shallow water segment. The rules required that the first tests of impairment be at a very specific point in time, which were the implementation, was January 1st, 2001. We could not take into account that the valuation decline was temporary in nature. Even though we have seen evidence of a strong reversal by the end of the quarter. In fact, our timing was almost perfect. We set set up the goodwill during its cyclical peak, and we had to revalue it under FAS 142 near a cyclical low. One interesting result of the goodwill impairment is that it will actually improve our return on capital in the future by reducing our net look value. This highlights the return on capital using historical costs can be very distorting. Transocean has been involved in three significant mergers that involve the issuance of stock, and in each case was essentially a merger of equals. Under accounting rules that issuance of stock must be recorded at its current fair value, resulting in a revaluation of assets in the creation of goodwill. The same number of shares issued at a different point in the cycle, would result in a totally different amount of goodwill, possibly no goodwill, even though the economics of the merger would be the same. For example, we paid only a 15% premium in the merger with R&B Falcon, but because of the timing recorded significantly more goodwill than other industry mergers at significantly higher premiums. We believe a better way to look at return on capital would be to eliminate the effect of artificial purchase accounting. This modified return on capital would not be distorted by cyclical timing issues and stock acquisitions, and would also be unaffected by impairment of goodwill. Using this approach, Transocean's return on capital would almost double and would then be comparable to the return on capital of the top two or three drilling contractors. Mike-

Okay, thank you Greg. I hope that gives you a better understanding of how this FAS 142 process works. It's the first time we've been through it and it's obviously very mechanical in nature. Let me just make a brief comment regarding earnings guidance for Q2, and then we'll move to questions and answers. Today I think the street is at about 21 cents for the quarter, and quite simply we would say that we think that's a pretty reasonable level. And with that we'll open it to questions.

Thank you, and at this time if you would like to ask a question please press star 1 on your touch tone telephone keypad. Our first question today comes from Scott Gill with Simmons and Company.

Good morning, gentlemen. Mike, the operating costs differential from quarter to quarter was very impressive, roughly 59 million dollars and you kind of gave us a few data points as to what drove the favorable cost variance there. You also mentioned some cost reduction programs. Can you give us some sense as to how much of that $59 million was a result of the cost reduction programs? And going forward, you know, how much permanent cost have you taken out?

I'm going to let Bob answer that question.

Scott, let me start by just kind of trying to break down the significant elements of the cost reductions for you between Q4 and Q1. First was just activity driven. In the shallow water areas the reduction in activities resulted in about $13 million less cost, and we moved pretty quickly to cold stack a number of the rigs so we got the costs down fairly rapidly. We also had another $10 million or so in activity related cost reductions related to the deep water and international fleet. We actually stacked out about eight rigs from late Q4 through Q1, and we moved again very aggressively to stack the rigs, some of them in a cold stack mode. Four of them now have no crew on board, so that was an additional $10 million. About $12 million of the reduction was due to lower maintenance costs. But I'd caution you there that while we took a hard look at maintenance in particular, anything that was discretionary, I think that some of that $12 million is really deferred and will probably be spent later in the year if activity starts to improve at all, so I wouldn't count on all of that being a permanent cost reduction. We did have another $6 million that went away with the sale of a number of the rigs that we disposed of. And then there was another $7 million of cost reduction associated with our indirect overhead and regional office costs that we ramped down our costs in the support structure as activity went down. A significant part of that will be a permanent reduction if activity levels stay the same. There was another $3 million or so that was related to what we call a variable pay element. We have, part of our pay structure for our rig crews is variable and related to the activity of the fleet in the various areas. That resulted in about a $3 million reduction quarter to quarter. So put all those together, you get to about $53 or $54 million of the total reduction. We do have ongoing a number of cost reduction efforts and efficiency efforts both in terms of looking at the crew requirements on our rigs, the nationalization of our ex-patriot crews in various areas around the world, particularly Brazil and the far East. And a significant effort in our materials and purchasing process, which last year we thought that the materials purchasing process resulted in about $12 million of savings and we're hopeful of getting an additional sum roughly equivalent to that this year. But in terms of quantifying specifically for you how much of the $59 million is permanent and how much is not, I'm not sure I can give you a really crisp number and of course it's going to rely to a large extent on what happens to activity levels going forward.

Ok, Bob, that was very useful going through the items there. One thing not part of the direct operating costs but the SG&A side was up about $5 to $6 million depending on if you want to look at it year over year or sequentially. Is that a permanent level for SG&A, and if not what drove the quarterly increase?

Scott this is Mike. The first quarter had a lot of costs row lated to the exchange offer, the RBF debt, or TSF debt. And I think that was probably around $4 million or so, so that's a big chunk of the difference. I think going forward we would say G&A uses around %15 million dollars a quarter. Is a pretty good run rate.¶

Okay. And Mike, I know others want to get on here and ask some questions. So let me just ask one more. You kind of gave guidance here, operating cost, we call it 390, 395. Your earnings guidance for 21 cents for the second quarter kind of rolling in lower operating costs may seem conservative, is there some type of air bar you'd like to put on that guidance? Is it more like 20 to 25 or could it be even something greater than 25?

Scott, for the last couple of quarters I've had to sit here and tell you guys why you were too high, now I'm just telling you you're ok. Can't we leave it at that?

Ok. We'll leave it at that, Mike.

And our next question today comes from Ken Sill with CS First Boston.

Yeah - Good morning, guys. Wanted to just ask or get an update on what the operating performance has been of the Sedco Express designed rigs and how customer acceptance is going with those?

Ken, this is Bob Long. It's actually going pretty well. The Cajun Express of course has been off-contract and we actually used it to recover the pathfinder BOP stack and it did an excellent job working for ourselves there, we did recover the BOP stack without any problems. Sedco Express is working in the Mediterranean right now for Apache. The rig I am sure you all know has had some problems with the station keeping. Those problems were repaired, the rig has been back on location and has been performing particularly well right now. The Cajun Express, I should also point out, has just recently in the last few days gone back to work for Anadarko and that so far is all going well. The Sedco Energy has been performing extremely well. We have not had any significant downtime on the Energy, so I think as a class that rig is starting to perform well, we're starting to get some interesting inquiries from a number of different customers who are very interested in the prospect of being able to use those rigs. So I think we've turned the corner there.

Ok. Then just as a follow-up on the whole deep water. In the press release you guys talk about the second half clearly getting better with some more development stuff coming on. I kind of feel like a broken record telling people I see this development stuff coming and here we are a year later and we're still waiting. What specifically do you guys see on the horizon that's going to either kick off or be actually tendered for bids between now and say your next quarter results coming out? [UNKNOWN SPEAKER: Mike Unsworth, head of marketing is going to address that.

Hi, Ken. I think as you're probably aware in West Africa where there is a lot of development that is planned to come on stream and several rigs due to come out over the next few years and that's the optimistic area in the deep water side. We're at a little bit of a loss as to knowing exactly when those programs are going to start we've got some dates plugged in. As you know the problems in West Africa are both political, there are all kinds of issues which hold some of our customers back from starting up programs. There are problems in Angola with getting started up, and there are problems in Nigeria with getting approvals for programs. So the only answer I can give you is that we can see the programs are eventually going to start but we just can't give you a clear answer of when that will happen. [UNKNOWN SPEAKER]: You might want to talk about India and Asia.

The deep water market in the far East, as you all know, is quite a small market, but India has recently come out and told everyone that they're going to tender for three fairly long-term contracts in deep water, three different rigs. One rig over 2500 meters, one rig between 15 and 2500 meters, and one just below 1500 meters. So there's some signs that in the far East and the Middle East that the deep water activity is picking up, and we also expect the program to start up fairly later on in the year in Australia. And we have one rig that we moved for a program in India, the 534 went to India at the end of last year. So these programs are on the books, they're still there waiting to happen, but delayed as I'm sure you're all aware.

Anything in the Gulf of Mexico? Or Brazil?

Well, Brazil's pretty much in balance. The number of rigs that are down there, and the number of rigs that they need at the moment are pretty much in balance so I don't see any cause for enthusiasm about trying to put an extra rig in there. If there is a need, we'll be going down there. The Gulf of Mexico, as Mike said, is a little bit over supplied. So no, the plans that are out there are out there but don't see any cause for short-term encouragement. There is a program in Magnolia, Conoco, which is 18 months coming up. And there are ongoing developments of course at BP and other majors. But still an over supply of deep water rigs in the Gulf.

Ok. Thank you.

Our next question today comes from Mark Earnez from Citigroup.

Yes, good morning. Mike, I wanted to ask about your assessment of the potential impact of the 10% profits tax in the U.K. That's been imposed - or proposed to be imposed.

Well, I think clearly that the 10% profit tax is a negative. That's partially offset by the also the proposal to eliminate the royalty on some of the older leases and to grant a faster writeoff of investment which should encourage new investment. Mark, I'm not quite sure what the net net result of that's going to be. Certainly most of the press you see so far and certainly the response of the major companies over there, Shell and BP, has been pretty highly negative. Some of the smaller companies see it as a potentially a positive. You know, how it shakes out over time I'm really not sure at this point. I would say this though. I think at the end of the day if it turns out to be a big negative, my guess is that the authorities in the U.K. would change things because the importance of U.K. to that country, the importance of the industry to that country is fairly significant. I don't think it would be their intent to do any long-term harm. Now, whether or not the net result of all that starts to show up as a reduction in investment, just the opposite effect of what the government seems to want, then they might make some changes. But right now on balance I'd say it probably is slightly negative. [UNKNOWN SPEAKER]: Second question. You sold a couple of semi's here recently. Could you update us on the status of your efforts to dispose of assets?

Well, I think those efforts are kind of timed to where things are in the market. Obviously right now isn't the best time to be selling assets. We've sold about $240 million of assets starting in probably starting in the second quarter of last year as a result of the RBF acquisition. We sold about 240 million. We probably have $25 or $30 million worth of sales that are "work in progress" that we expect to close. I think ultimately we will, with the assets that we still have in that list to dispose of, the original goal of raising $400 to $500 million, I have no doubt that we can achieve that. But the timing of it will just depend on how the market develops. [UNKNOWN SPEAKER]:Thank you.

And moving on to Arvin Sanger with Deutsche Bank.

Thank you. A couple of questions - Mike, firstly after this goodwill writedown on the shallow water business, can you give us some sense of the shallow water and inland water business, what is the book value at which this carried either fair value or if there's any goodwill remaining on top of that.

The total book value of shallow water is now about $1.4 billion and that includes a little over $300 million of remaining goodwill on shallow water.

Mike, can you give us a sense of what your thinking about that business is. You've talked about it being down for a few months. Are there any buyers, or is given the improved valuations of drillers in general including ones with Gulf of Mexico exposure, is there any consideration to doing an IPO?

Well, Arvin, as you said, I have said in the past, we don't look at that business as really core, long-term core to our company. But at the same time we -- it certainly is starting to come back and we're not in a hurry to dispose of it. Having said that, you know, if I were to look out five years I'd probably say I would be -- I would expect that it may well not be part of our company five years from now, but exactly when we might do something different is- depends on a lot of different factors. Certainly right now that business has started to look up, and I see John Cole who runs that business, he's been walking around with a smile on his face for the last week and I haven't seen that in six months or nine months, so that business certainly appears like it's starting to turn a corner and maybe moving back towards a cyclical high.

Ok. And then trying to understand one other market segment that I don't know if you directly addressed, but the international jack-up market, not just the North Sea end of the world, seems to have, at least from hearing from some of the other companies, stabilized after some moderate softening late last year early this year. What are you seeing in terms of the jack-up market around the world in terms of rates and utilization. Are you seeing things continue to improve or the softness receding whatever there may have been?

We've tried to secure some long-term work in the last few months and we've been pretty successful of that and the rates have been I would say getting towards the bottom end of the cycle of some of those contracts, and going forward we can see the rates improving and in fact we've been submitting higher rates on recent tenders. The market is in just about in balance, of course, jack-up market we always take separately the Gulf of Mexico shallow water because it's still got some problems as we pointed out. The international jack-up mark-up is very much in balance and it's looking as if it is going to stay that way for the rest of the year. The projections are that the demand internationally is going to be pretty much flat throughout this year but, that's still with utilization rates of over 90% on marketed equipment. So, yes, we can see the rates increasing throughout this year.

Sure. And one last question. Your high speck floater utilization from the fourth quarter to the first quarter was down 8%, your other floaters utilization was down 7%. Do you see if you're seeing some signs of life, how quickly can we expect those utilizations to start turning the other way? Is it the second half, is it late this year - What's your sence of? Obviously utilization should hopefully lead to rate tightening - what's your assessment there?

Sorry, Arvin, that was the high speck floaters you said?

Yeah, the high specs dropped from 90 to 82%, and the lower spec dropped I guess, from 89 to 82%.

My guess, Arvin, is that was related to the movement of some of the rigs. On Q1 the 534 and [INAUDIBLE] were being mobilized in new locations. And they'd both been a high spec group and of course a number of the other mid water, we started stacking and that's part of what Bob talked about that turn down in activity. We started stacking some of the mid water floaters in the Gulf of Mexico and I think we stacked one over in Africa. That slowdown in activity in Q1 is what's reflected in that turn down in the utilization rates.

So should we expect at least the high specks to turn pretty quickly in the second quarter and then the other floaters may take a little longer? Second half or later?

The 523 and [INAUDIBLE] are certainly back to work. The Arctic though - is still down. Another one of the high speck floaters, and that probably isn't going to be back, that's probably not going to be working Q2 based on what the outlook is right now. The Richardson is down right now. While there's prospects for that rig, it's certainly going to have downtime in Q2 also.

Okay. Thank you.

And we'll hear next from Kevin Simpson with Merrill Lynch.

Good morning. Mike, I wonder if you could elaborate a little bit on strategically what you're going to do with the shallow water market. Not so much in the eventual disposition of it, but how you're going to, what you're going to need to bring rigs back on and how imminent some of that may be.

Why don't I let Jon -- let me let Jon address that question. Jon if you want to talk about that business.

Sure, Mike. Kevin, right now we've maintained the core crews such that on either the inland barge or the jack-up side we can start up about five rigs each with just a couple of days notice. Beyond that we can probably start up five more of each type with, you know, minimal notice. We have core crews that we'll pull off of other rigs, and we'll have to do a little recruiting. Much beyond that is when we really have to start to test the labor market and go out there and start recruiting new people, and opening our training facility for those new people. I think that the five rigs startup in each group is imminent. Our bid activity, particularly on jack-ups, we've got about 22 bids outstanding and that's up from about zero in the past three months. The overall market has tightened significantly. The players with the big 300-foot cantilevers are finally bidding above cash break even and they're actually even charging for mobilizations now and edging the rates up. So that means that our fleet, which tends to get work after they do, is going to start to come back to work. So of those 22 bids, I think we'll see easily four to five rigs go back to work in the next month or so. The inland barge side is not quite as active right now. It started off the year very active. We are seeing a lot of inquiries right now, a few bids and the permitting activity with the Louisiana state has picked up dramatically. So I think once again in that business you're going to see a pickup of three to five rigs over the next month, so overall I think we'll probably see five to 10 rigs go back to work in the next 30 days.

On the jack-ups, can you -- do you think there's enough firmness in the market now to be able to put rigs back to work at positive cash, reasonable positive cash margins? Forget the reasonable part. Just positive cash margins.

Thanks Kevin, reasonable would be about $20,000 bucks a day in my mind, but our customers may think differently. The 300-footers right now, best information we've got have moved up to the neighborhood of 22, 24 a day. We break even variable cash break even at 18, and we have not really cut our rates much below 20. So we're putting rigs out at 20 for very short-term work and if people want anything above that we're trying to move our rates up toward that 24 as well. I think that with near full utilization of big rigs you'll see a fairly rapid increase in jack-up rates in the Gulf.

Thanks. One other question Mike, on the deep water side. The majors, I guess a couple particularly, have been fairly negative about their batting average in the deep Gulf over the last year which I suspect is a reason for part of the weakness. What's your take on that, and then I guess if the deep Gulf really doesn't use incremental equipment, do you think that the -- how long do you think it will take the deep water market from the strength in the rest of the world to get the point where they need that extra rig and rates really begin to move up sharply?

Gee, Kevin, if I knew the answer to that, I'd be doing something else. I tell you, that's a tough question, that's a good question. A lot of uncertainties. I don't really know exactly what the success rate has been of the oil companies in the Gulf of Mexico. Clearly it's backed off some. It has eased off some. I know there are -- there's still a lot of discoveries out there to be developed. As Mike said, there's a lot of programs on the books in other parts of the world "To be developed." It seems like they continually suffer from delays, and certainly what happens in apparently in this respect, the floater market's kind of like the Gulf of Mexico jack-up market. When business softens the big rigs get the work and the small rigs, like more the ones that we have and [INAUDIBLE] have, end up being the ones that stack first. I think you kind of see that phenomena in the floater market, too. Just like the job we have the Cajun on now, that Bob mentioned, working for Anadarko, it's working on a job that a rig like the Richardson or Rather could have done or some of the other upgrades that other contractors have could have done. But the bigger rigs have real operational advantages and so when the market is a little soft, they move down and do work that other rigs, lesser technically capable rigs could have done. So I think that the big rigs will tend to work, utilization will stay high just because of those advantages that they have, and that's part of the contributing factor to the softness in the mid water markets I think that we've all been experiencing for the last year or so. Regarding how quickly it turns around, this is a business where it seems like things turn on a dime, and if the programs on the books were to actually get started, it could turn I think very fast because I don't think there's a big difference between supply and demand. And if some of these areas like India, where Mike mentioned, they're looking for three deep water rigs, and probably the demand for another deep water rig in that area, you start pulling three, four deep water rigs out of the Gulf into other parts of the world then that market tightens up pretty fast.

Just on India specifically, do you expect to have -- do you think that all three will be there by, be working by the end of this year?

What's the timing on that, Mike?

Between the end of this year and into next year I would say. If things don't move that fast in India so I wouldn't expect them all to be on this year, no. I would say though to add to what Mike said, if you look at the list of just take West Africa, if you look at the list of development projects which are due to come on stream between this year and 2006, there's a list of 20 developments out there. If you go on some projections from some of the people that publish the data, the African market from a deep water perspective should be between four and six rigs short from 2003 to 2004. It's just a question of timing at the moment. The list of projects are there, and I'm counting [INAUDIBLE] as just one development project which in fact it's split up into several. So the programs are out there, Kevin, it's just a question of timing.

Thank you very much, good for me.

And if you do find that your question has been answered today, you can remove yourself from the queue by pressing the pound key. That is star one to ask a question. We'll here next from Teri Darling with Goldman Fax.

Yes, Good morning, Gentlemen. I wanted to follow up first I guess on the cost issue. Great job there trying to understand if the $12 million of deferred maintenance which you would anticipate finding its way back in at some point is assumed in the $390 to $395 million quarterly run rate guidance and also wondering if you've made any assumption for a higher insurance cost or just what the insurance cost picture looks like overall right now?

On the first part of your question, Teri, the deferred part coming back in is assumed in the 390 to 395 guidance. On insurance costs, I'll let Greg answer that.

Our insurance program is in place through the end of this year, so we really see no rise in insurance costs this year. We're going to be going into the market this summer to put in place our program for next year, and whether or not there's a rise then depends on what the market conditions are later this year and how we potentially restructure our insurance program.

Ok. Question for Bob. Bob, you've had your hands on the wheel here as Chief Operating Officer for a little while. We've talked about the near term cost picture. I'm wondering if you can share with us any views that you're developing here in terms of other potential positive changes that might be made either to the marketing side or the organizational structure or from the cost side of the ledger on a longer term basis.

I don't think I'm ready to comment on the marketing side or the organizational structure side at this point. But on the cost side, as I indicated, we do have a significant number of efforts going on right now which I'm very hopeful will result in some pretty significant long-term sustainable cost savings. Both on the personnel front with our nationalization efforts are proceeding very nicely both in Brazil and the far East, a little bit less so in Africa where it's a little bit more difficult, and the savings there I think ultimately are going to be very nice, and our MVI process I think has significant potential advantages. We're just beginning to tap the potential benefits that we can get out of the new system that we are installing fleet wide. We only have it on part of the fleet right now, our new integrated maintenance procurement and inventory system. As I indicated, we estimated we saved about $12 million last year and that was solely from one aspect of this which was the ability to utilize our size and scope to negotiate worldwide purchasing agreements, and we achieved that $12 million of savings with about 15, 16% average utilization of these worldwide agreements, in terms of looking at what we buy fleet wide through these worldwide agreements. Last year we only averaged 15 or 16%. We're presently up to about 24% and hope to get up to over 30% before the year is out which should significantly increase our savings this year and going forward. There are some other benefits that we hope to obtain through that same system in terms of the maintenance that we do standardizing the maintenance and the requirements there that should result in significant savings also. I can't specifically quantify any of those savings for you right now, but I am hopeful that on the long-term systemic basis you're going to see our costs starting to trend down.

You know, Bob, just trying to gather some of the numbers you've given out here, moving from 15, 16% to 24%, then you talked about $12 million of lower maintenance last year and this year. Is it fuzzy math if I try to apply those two numbers together or does that actually work?

Well, the math that I would do Teri, is if we get to our target of over 30% this year, then we'd add another $12 million of savings roughly versus what we did last year. So if you compared the savings over two-year period, it would be $24 million.

I guess where I am headed with this is if at at some point out there we get to 100%, is the relationship reasonably linear?

I think you have to be careful because it's not realistic to assume that we could ultimately purchase everything through these agreements. I don't know what a realistic upper limit target is, but I know that several of our rigs are now in the 45% range, so it might be realistic to assume we could get to a 50% range, though that will take a long time to get that way fleet wide.

Ok. Great. A couple questions for Greg I guess. The valuation methodology on the writedown, can you explain that to us? Is that a straight up DCF? What is the methodology used there.

We actually used a blended approach of a DCF and comparable multiple, trading multiple analysis and comparable merger and acquisition multiple analysis. So we used a blended approach to minimize the error factor in any one approach.

I guess I'm just trying-- is there a dish connect between the methodologieses used to make acquisitions and the methodologieses you're required to use from an accounting standpoint, I guess is where I was headed with that question?

Not really. We actually went out and engaged in outside valuation -- an outside valuation firm to do the valuation for the FAS-142 process and we also used an outside valuation firm to do the valuations last year when we allocated goodwill. So that the process, the valuation process was very similar and is very similar to the valuation methodology you would use in evaluating an acquisition. You're looking at a variety of either comparables or DCF's, and in this case we blended them to come up with the answer.

I guess in next question is a combination of folks potentially, but the debt position overall right now, are there additional opportunities to restructure the debt situation and therefore some potential for further interest expense savings or are we largely through that process at this point?

Well, early this year in the first quarter in February, we did float more of our debt. We did another $900 million of interest rate swap, so our total debt portfolio is right now about 40% floating, and so that significantly reduced our interest expense going forward the rest of this year. Our net interest expense, interest expense net of interest income should trend to $50 million and falling over the year. Probably average $50 million a quarter for the rest of the year. And so after that restructuring, right now our main focus is on debt reduction, and so we'll, as you've noticed, we're building cash to deal with some of the debt maturities that we have next year, so we'll be focused on debt reduction so as that debt reduces that will also naturally bring down interest expense.

I think the average -- I think Teri, the average interest costs on our debt after the swaps was somewhere 4.5, 4.8%. That's right. 4.8% so there's not a whole lot more benefit to be achieved in terms of the interest rate.

And Teri, we've looked at this although we could go out and issue in the convert market, we've already got two converts outstanding so we're not sure that makes a lot of sense and a lot of the rest of our debt is long-term, and if we retired it early it may be MPV negative. So we don't want to do anything that takes away value just to artificially to improve interest -- to artificially improve interest expense. So that is why we've focused on the restructuring that makes sense from covenant relief and it makes sense in terms of adding value by optimizing our mix of fixed and floating.¶

That's helpful. The last question for me. Can we get an update on capital spending and depreciation guidance for the year?¶

Capital expending this year should be, for the year, should be in the $200 to $220 million dollar range. It was about a little less than $50 million in the first quarter, and depreciation should run between $125 and $130 million a quarter for the rest of this year.

Thanks very much, guys.

We'll hear next from James Stone with UBS Warburg.

All my questions have been answered, thank you.

We'll go next to Jordan Horshak with CIBC World Markets.

Good morning, I wanted to get your take on the shallow water jack-up market. Given the fact that the MMS royalty release is for deep gas drilling, it appears that a lot of the more premium jack-ups have started to move into the shallow water depth and sort of, started to infringe on the jack-ups that drill in 200 feet of water and less. Obviously those rigs can't go any deeper and if they don't have the power to drill for deep reserves, do you think that this will be a sort of material threat to their usefulness and position in the market.

The -- you're exactly right. Deep gas is receiving a lot of interest right now in the market. For the most part our fleet is not suited for the -- our jack-up fleet is not suited for the deep gas drilling although most of our barges are - I think your premise is correct and you'll see some of the larger deeper water rigs coming into the shallow water, and drilling the deep gas reservoir, but what that means is that a lot of things that they have been working on, some of the platforms in 200 feet of water with more conventional reservoirs will now be open for us. I think overall deep gas is not a zero sum game. It actually increases the demand for shallow water rigs in the Gulf of Mexico. And although we won't be drilling a lot of the deep gas wells, the rest of the work is what we'll pick up as those big rigs move in to take the work.

Do you think it's possible if we get back to a strong market condition like we had in the beginning and middle of 2001, that the more commodity type jack-ups in the Gulf of Mexico really could, kind of, get back to that high 90 to essentially 100% utilization?

We're certainly hoping that's the case. It depends on what happens in the natural gas market here, but right now the signs are as it were at the beginning of a cyclical recovery and I don't see there's much difference in today's market than there was in say the 2000, 2001 up turn.

One last one for me. The mid water market in Norway, what's the sort of outlook you Gentlemen hold for that?

I think we mentioned on the last call that Norway was a painful place at the moment as far as demand is concerned. What's happened is a lot of the development programs have been coming off or have been completed, rather, and therefore gone down from a sort of a peak demand of 18, 19 floating rigs down to what's traditionally been an average number of rigs of 12 to 13, and I think what we'll see is we've had some rigs come down, we'll probably see another one come down. I think the lowest speck, the older rigs will start to come out of Norway. And Norway will stabilize at somewhere between 11 and 13 rigs, something like that. So it's a long-term issue that we have to deal with. And I think Norway will try to start to move towards keeping some higher end, higher speck units. Because they have a fleet which has got older, older, and older some of these older [INAUDIBLE] have been upgraded, will probably have to come out of Norway as well so it's a long-term issue.

Norway does have a couple of major development programs that may get kicked off next year with [INAUDIBLE], that are scheduled for '03. And [INAUDIBLE] in '04 is kind of on the schedule also. Snow Beat which a year or so ago looked like it might be getting started has been slowed down by environmentalists claiming that there are violations of the EEC rules involved in the subsidies of the tax regime the government puts in place for that project. So that's slowed Snow Beat down. And also the Baring Sea in general has probably been slowed down by some of the -- some environmentalist organizations that have claimed problems there, so there's some environmental studies under way also. By and large, Norway is -- it was slowing down because of these big development programs, but then some of the programs that we kind of thought would be picking up have been slowed down for other reasons. And as we sit here today, like Mike said, this is probably -- this may be a cyclical low for the Norwegian market this year if in fact [INAUDIBLE] do pick up in '03. It be a couple of big programs to get started.

Thank you very much.

Hey, George, this is Jon Cole again, I forgot one other factor that's going impack the Gulf is the pemex requirements for additional jack-up capacity. They're taking four rigs, one out of Mexico and three out of the U.S. right now. I've just returned from a visit, and they intend to pick up 15 more jack-ups in the relatively near term, meaning between this summer and the next six months. So that will be very positive for the U.S. Gulf market.

Do you plan to participate in that?

Yes, if their contract is suitable for us, we will definitely participate.

We didn't participate in the first round because of some of the liability clauses, but we've been told those have been changed and if they've been changed, in fact the way we've been told they've been changed, then we very likely would participate in the future.

That was my question. So they have -- I know you thought the contract originally was a little too risky, but there's been some changes to that from what you understand?

That's what we're told. We haven't seen it yet but we're told, there wasn't very many, not many companies bid that first round, and I think for many of them didn't bid didn't bid for the same reason we didn't bid and I think that message was heard and I think at least we've been told that some changes have been made that we'll find acceptable but we have to see the contract.

We'll hear next from Gary Nushler with Sanders Morris Harris.

Actually it's Robert Ford. Just need to double-check something real quick. Jon, could you refresh my memory, how many of the barges that you acquired from R&B Falcon did you end up scraping? Wasn't it like 28 or 30?

We started off with 61, Robert. We sold four and we're down to 32, scrapped the rest.

All those, the carrying value of all those was written down two zero at the time of the acquisition, correct?

Yes.

So we don't have to worry about that being in in number that was just written down.

No. We knew they didn't really have 60 barges at the time. That wasn't a surprise.

Ok.

Moving onto Teri Darling with Goldman Sachs.

I just had a couple follow-ups on some rollovers for some of your key rigs here. You touched on Norway, I'm wondering if you could get a little more specific. The Arctic is still stacked, do we have any better visibility at this point on that unit? Either moving out of Norway or picking up some work in the back half of the year? And then the winter also I guess is rolling in July, what's the outlook there?

Well, at the moment, as we stand in the short-term we don't have something we can see for the Arctic outside this year, necessarily. And one of the reasons for that would be if the winter does come down toward the end of the year, that's one rigs I was referring to that could come down, if it finishes with Shell in Q3, Q4. Then we will be probably trying to put the Winter to work in the U.K. sector as opposed to the Arctic. We aren't going to try to be putting them all to work all at the same time. That's really pointless and we've actually taken a few rigs off the market in the North Sea, [INAUDIBLE] we're not bidding them at all. So prospects for the Arctic are pretty thin on the ground for the rest of this year because we will probably be marketing the winner.

The winner, is that likely to remain at rates with Shell similar to where it's been or is there a downdraft there?

Well, at the moment it's doing some premium HPHT work for Shell, high pressure stuff, so I don't anticipate the rate coming down if the work is there. The problem is if the work is not there, then we're going to be chasing work in other areas. If the work continues, it will continue at that rate I would say.

Okay, and the 534 in India, it's at a very high rate as well. You mentioned three deep water jobs there. Is that likely to continue working, or is there potential for some down side there?

We had to, it's a firm two well with options contract with Reliance the one we're on, but we're pretty comfortable that Reliance has more locations than the two firm wells. We think there's somewhere between four and five locations which should keep the rig pretty busy through--into Q4 on the current program. And there's also opportunities as you've just mentioned on the -- with ONGC with one of their deep water opportunities. So I would expect with such a long distances between where the supply is and where the demand is that the rates will remain pretty high.

Lastly, we talked a little about the Gulf already, but the Richardson is idle now, do you think that gets back to work in the second quarter, then the Sedco Express I think is rolling in June or July? Do you think there's enough work for that rig, too?

Well, the fifth generation rigs right now are beginning to prove themselves from an efficiency standpoint. What was before kind of mathematical calculations on their efficiency is now when we've got some experience proving to be in some cases efficiencies which are much better than we even calculated when we were designing and building the rigs. So, and we did quite a bit of work on this now in testing where we've got them to efficiencies. So the fifth generations rigs are actually having a lot of inquiries at the moment. We've been asked by some customers to try and do some substitutions, to go to those bigger, higher speck rigs. Which are proving in some cases to be twice as efficient as an upgraded second, third generation unit on say a short-term contract in the Gulf of Mexico. On the fifth generation side now we're starting to see very positive signs that we will be able to put the Sedco Express into, I wouldn't say long-term right now, I don't think it's the right time to go long-term, but to put the Sedco Express and keep it in continuous work. Same goes for the other 5th generation rigs which are proving, as I say, to be far more efficient. For the Richardson, we are discussing a project at the moment. We missed one last week. We were hopeful we'd got a job last week with a customer and we missed it, but we are discussing with customers at the moment, so we're very hopeful we'll put the Richardson back to work. And we are not planning in the short-term to cold stack the Richardson, we intend to keep it in the market. Having said that, we've got a list of other rigs which are indeed cold stacked. Which are the P3, the [INAUDIBLE], [INAUDIBLE] and the [INAUDIBLE]. We're not bidding those at the moment .

Our next question comes from Yves Siegel with [UNAUDIBLE].

In the interest of time, I'll just pass.

We'll move onto Robin Shoemaker with Bear Stearns.

Just one question for me. On the cost issue again, if we look back when you acquired R.B.Falcon you estimated $50 million in savings from that merger which was exclusive of the savings you would achieve from refinancing the RB Falcon debt. I just wonder if today if you believe you exceeded that $50 million target or simply met that, and if you have an estimate of on an annualized basis what you've achieved in refinancing the RB Falcon debt in terms of savings.

Regarding the -Greg you can think about that- I'll answer the other part. How much time should I take? Robin- regarding the $50 million, I think we've probably have achieved that. It's hard to be specific because as part of the savings there we felt we were going to get within the insurance area. Of course things happened in the world to cause insurance costs to change dramatically from what they were when we were looking at this transaction in 2000, but I think when we look at what we think the insurance would have been had we not done this transaction and what it actually has turned out to be, we take into account those savings as well as the savings from the overhead reductions that we made at times zero. At times zero the initial round of reductions was probably over $20 million, then add into it the savings we're achieving from the maintenance, MPI process Bob has talked about. that was about $12 million last year, it could be double this year. You could see $20 million of people, there's $24 million of savings in purchasing, and we've saved certainly saved money in insurance, so to say have we achieved our $50 million target. I would say we I think pretty comfortably say we've achieved that. As far as on the refinancing of the debt, I don't know if you guys --

It depends on how you look at it. A lot of our restructuring efforts have really been focused on our entire debt portfolio, so you can't necessarily say they're just attributable to the refinancing of the RB Falcon debt, however since the merger we've optimized our mix of fixed and floating rate debt and certainly most of that debt that was being optimized was the R&B Falcon debt, so right now at current interest rates that's saving us between $45 and $55 million a year. In addition we refinanced a lot of the R&B Falcon long-term debt last year by issuing new debt - 10 year debt, 30- year debt in converts. On a cash basis, that saved us another $40 or $50 million a year in interest. Most of that though, those high yield falcon debt had been marked to market as part of the accounting process, so you don't see that same savings in that refinancing effort in terms of from an accounting perspective, but it clearly was a savings in terms of a cash interest expense.

Great. Thanks a lot.

We'll move onto Paul McCrea with Wellington Management.

A couple of questions. Good morning. Could we discuss a little bit why there was $12 million of deferred maintenance? Was there an operating reason for deferring it?

Paul, under the accounting rules, when we mobilize -- are you talking about the -- are you talking about the delayed maintenance?

Yeah, delayed or deferred.

Difference mechanics here.

The delayed maintenance, we just asked our people to take a hard look given the uncertainty of the market here and in every budget that we prepared there are -- there's required maintenance by our preventive maintenance program and there is things that people want to do on the rig to improve the rig in kind of a continuous improvement process, and so some of the money is what you could call discretionary. It's that part of the maintenance costs that we've taken a hard look at and asked for deferrals on.

That won't keep you from activating any rigs later they otherwise would then, is that the case?

No, this is primarily all on the active rigs that are working now.

The other question is going back to the barge rigs with Jon Cole. As one looks at the first quarter versus the fourth quarter, utilization and day rates continued to decline not unexpectedly. Do you believe they will decline still further in the second quarter or do you think we are effectively pretty much at the bottom of that particular part of the cycle?

I certainly hope we're at the bottom, Paul. The bid indications and the level of permitting which is going on tell you that it's going to pick up significantly from where we are right now in the next quarter, meaning this quarter.

So in effect we could say we're pretty much at the bottom now?

It can't go much lower, but we did a pretty good job of maintaining rates even though our utilization --

Right, thank you.

Paul, just to add a comment to that because when you say are we at the bottom now, I think I would agree with Jon's comment that right now we kind of think we're at the bottom, but that business wasn't at the bottom -- at the beginning of the fourth quarter,- or the first quarter so the results of the quarter kind of reflected --I think you had - 10 - 11 barges running?

We had 19 running in January. It dropped to six in two weeks.

We started the year at 19. If you were down running six or seven for a quarter it would be worse than the first quarter. Does that make sense?

Yeah, and in fact we're turning now.

Right.

I'm not trying to imply how the second quarter results would look versus the first quarter but rather directionally we are operationally pretty much at the bottom.

And we'll hear next with Pierre Connor with Hybernia South Coast Capital.

Morning, guys. I appreciate y'all sticking in there to handle all the way to the end here. Quick question, most of them have been answered but follow up a little bit more on the barges. Of the 22 bids outstanding in the shallow water, were you implying those were all jack-ups or could you give me a split on barges and jack-ups there?

Those are all jack-ups. On the barge side we've probably got more like six or eight outstanding.

I realize we're not talking about equipment that's for the deeper gas trends, but are you seeing the trend towards longer wells on these bids at all? Do you get a feel for that, or this is too early to say?

Well, a lot of the work we're doing right now on the barges is deep gas, 15,000 foot plus. The majority of our fleet is capable of doing that. But on the jack-ups side it's different. We're drilling several wells in the 15,000 foot but not the 20,000 foot like we're doing with the barges.

Sure. Ok. And then maybe Greg, just simple question, on the impairment test, what was the -- can you tell me what the utilization was when you ran that test on the jack-ups for example?

We actually used a variety of scenarios in the DCF portion of that test which is really only part of our valuation methodology, so we used like five different scenarios, quick recovery, slow recovery, and then probability weighted them. So each of those scenarios would have different utilizations depending on how quick or how slow the recovery was.

So it wasn't a point in time utilization you actually --

No. I mean we tried to value this based upon our expectations for that business, the same way you will be valuing it if you were attempting to sell it, not that we would ever have sold the bills at the low point of the cycle.

Ok, great. Thanks a lot for all the help with questions. I appreciate it.

Our final question today is a follow-up from Scott Gill with Simmons and Company.

Just a real quick one, Mike or maybe Jon. How many 300-foot independent leg cantilevers do you have remaining in the Gulf. I think there's only one, correct?

It's the Galloway. We're finishing at the end of May and moving it to Italy.

Ok, that's what I wanted to check on if it was moving out of the market.

It's got a two-year contract in Italy.

Thank you.

That does conclude our question and answer session today. Mr. Talbert, I'll turn things back over to you.

Thank you all for sticking with us. We're about an hour and fifteen minutes and I hope we've been able to answer your questions. Look forward to talking to you next quarter. Thank you.

And that does conclude our presentation. We thank you all for your participation.