Transocean Ltd (RIG) 2002 Q2 法說會逐字稿

Good day, everyone, welcome to the Transocean, Inc., second quarter 2002 earnings conference call. As a reminder, today's call is being recorded. I'd like to turn the call over to Vice President of Investor Relations and Communications, Mr. Jeff Jaspen.

Good morning. The press release covering results for the quarter, including the income statement, balance sheet, cash flow statement and selected fleet operating statistics is posted on the company's website at www.deepwater.com.

Also issued this morning and available on the company's website is the monthly fleet update dated July 30, covering the current contract status of Transocean's mobile offshore drilling fleet and a summer report of the Gulf of Mexico shallow and inland water segment. Take advantage of the E-mail alert feature of the company's website to receive further notifications that an update report is available.

This morning's conference call includes participation from the following Transocean senior managers. Mike Talbert, Chief Executive Officer, John Cahuzac, Executive Vice President of Operations, Greg Cauthen and Ricardo Rosa, Vice President and Controller. Bob Long, President and Chief Operating Officer, is not participating in this morning's call, as he is taking a much-deserved vacation. Mike Talbert will provide the opening comments followed by a question and answer period.

Before Mike begins, I must 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 rigged demand, operational and other risks described in the company's most recent form 10K and other filings with the securities and exchange commission, should one or more of these risks or uncertainties materialize or underlined assumptions proven correct, actual results may vary materially from those indicated.

I also want to mention that due to securities law regulations, we are very limited on what we can discuss regarding our planned divestiture of our Gulf of Mexico shallow and inland water business segment. In particular, we will limit our statements pertaining to value, expected market conditions or projections for the business segment.

Thank you in advance for your understanding on that matter, and, Mike, that concludes my initial comments. I'll turn the call over to you.

Thanks, Jeff. Let me give you an idea of the topics I want to cover this morning or we want to cover before we get into the Q&A period.

I'll begin with a review of the financial performance for the quarter, then I'd like to make a few comments regarding or announcement of July 16th pertaining to the potential IPO, the shallow order business.

I'd then like to make a few comments and observations regarding the discussions ongoing in the news regarding corporate inversions and legislative activity, in that regard.

We'll then have an outlook on the regional markets from jean and Jeff, and I'll then give you some guidance regarding third quarter earnings and then we'll go to Q&A.

Regarding financial performance for the quarter, we've recorded net income of $80 million or 25 cents a share. That's a pretty clean number, and by that, I mean there really are no unusual items in the 25 cents a share. That's up slightly from our first quarter results of 24 cents a share, and it's slightly over the street consensus of 22 cents. The point 'em improvement over the street, I believe, is probably primarily due to our lower operating costs, the operating costs for the quarter were 366 million. That's $15 million less than the first quarter, and it's about $25 million less than the guidance I gave you in our first quarter conference call. Some of this cost reduction reflects ongoing cost control efforts at the company and it is permanent in nature, but most of it is due to lower activity levels in the delay in maintenance projects.

With our expectation of increasing activity in the second half, especially in the shallow water and inland large segment, and the fact that we're going to move ahead with some of the maintenance projects we have deferred, we would expect operating costs in Q3 and Q4 to range more in the range of 380 to 390 million per quarter.

Our operating income before depreciation and GNA for the quarter was about 281 million. That's down about $6 million from the first quarter, with a slight reduction in each of the business units, but that $6 million reduction was more than offset by reductions in our net interest expense, our GNA and depreciation, resulting in the improvement in net income that I've previously mentioned.

Turning to our announcement of July 16th, at that time, we announced it was our intent to proceed to prepare for an IPO of our Gulf of Mexico shallow water and inland barge business segment. We stated that we hoped to complete that IPO by late this year early next year, however as we state in the announcement, the specific timing will be subject to market conditions and other factors.

We also announced at that time that we'd hired the former CEO of [ unintelligible ] To head up the new company. I'd like to announce today that we've also hired Scott O'Keefe to serve as the chief financial officer of the new company currently, we are preparing the S-1 and we expect to file in the next few months.

Turning now to the corporate inversion issue. I must say I find it troubling that certain politicians and members of the media seem to be taking the position that we have a patriotic duty to pay more taxes than the law requires. There's a famous quote from a judge Learned Hand, who, think was on the New York circuit, and many of his decisions have helped shape case law in the tax area. Judge Hand said anyone may arrange his affairs so that his taxes will be as low as possible. He's not bound to choose that pattern, which best pays the treasury. There is not even a patriotic duty to increase one's taxes. Judge Hand goes on to say nobody owes any public it to pay more than the law demands.

Now, as you know, the house and the senate are both currently considering legislation that would change the law. However, based on the current bills, we don't believe the impact of those changes would have a significant impact on our current tax position. That's because generally speaking, those bills are applicable to inversions that are done after March the 20th of this year.

I also have to tell you I find it troubling that many again, politicians and the media, want to judge all companies that have done inversions the same. And I think they really should be looked at on a case-by-case basis. For instance, consider the following facts regarding Transocean. Transocean inverted in 1999, well long before the concerns were raised about this topic.

Transocean itself is the result of mergers between a number of different U.S. and foreign companies in one of those merger, the foreign company's shareholders actually received 50% of the equity in the new company. As you would expect, these mergers have resulted in a very international company. Almost half of our directors come from outside the U.S. Our executive management team includes a number of non-U.S. citizens. Our workforce includes representatives from 55 different nationalities, while U.S. employees represent about a third of the total today, post-IPO, the shallow water business, that would drop to somewhere between 20% and 25% of the total employees.

As you would also expect, most of our revenues, as a company, come from outside the U.S.. In the first half of this year, 70% of our revenues come from areas outside the U.S.. In this, the percent will grow post the IPO of the shallow water business. In addition, as you all know, there's a congressional moratorium on leasing in many of the most prospective offshore areas in the U.S., and that almost guarantees that in the long term, there will be a decline in the amount of the business coming from the U.S. It's not why should we do hand inversion. The real question is, why should we maintain our corporate headquarters in the U.S.? As you know, Houston is really not centrally located to our operations, and it's certainly not the home of our largest customers.

With that, let me turn to an update on the markets around the world, and for that, I'm going to turn it over to Jeff and Jean.

Okay, Mike, I'm going to first cover the Gulf of Mexico, shallow and inland water business, and then let job cover the international floater and U.S. business, U.S. floater business. In the U.S. Gulf of Mexico shallow and inland water business, we indicated during the first quarter call of this year that we expected the activity levels to modestly ramp up above levels we were experiencing at the March/April time frame. We did see that and the Jack upside, it was modest.

We, at the beginning of this quarter, were running roughly six to seven units. We closed the quarter running ten units, where the day rates at the beginning of the quarter were approximately 20,000 a day to maybe just under 20,000 a day. We are currently signing new contracts on Jackups in the area of 24,000 a day. Our active fleet in the Jackup business is 15 today, as you know, we have a total of 26 Jackups and three submersibles in that category. In the barge business, the recovery that we experienced in the second quarter occurred late in the quarter. We ran most of the quarter at about six to ten units. It wasn't until the end of June that we began to see numbers approaching 15, and that's where we are today.

At present, we are signing up units that do possess the ability to drill the deep gas prospects at approximately 21 to 22,000 a day, with units without the deep-gas opportunity, or the deep-gas capability at roughly 18,000 a day. Of the 15 barges working today, nine are drilling wells with a total depth of 18,000 feet or deeper, and of those nine, four are drilling wells with a total depth of 20,000 feet and deeper, so there is very much so at the present time a deep-gas pronouncement in this business. I'll now turn that -- the rest of the discussion over to Jean.

Thanks, Jeff. I would like to provide you with original outlook of our major breaking markets around the world, so starting with Brazil, the deep water market is currently stable, although there is some potential for an increase from -- [ unintelligible ] -- rig activity for the second half of 2002 and full year 2003.

We have decided to move the Express into the region to work following the situation of the seven seas, and there is no significant extension seen by operators in the region and see 2003 at the earliest. In North America, the deep water activity is flat. The 4,000 to 5,000-feet units has had supplies during 2002, but this appears to be slowly working out, and, for instance, which was either for the second quarter, return to work, and should now have contracts, which will keep it working until December 2002.

The recent feature for this type of rate Lang from 70,000 up to 110, 115 dollars a day, depending upon the water depth. One important point to highlight in this market, is also the operators are recognizing the added value of the fifth generation rates. That's true in North America, but would like to mention it's also true outside the Gulf of Mexico, and this added value directly relates to the improved efficiencies of the generation rates. We believe they will maintain full utilization as they represent strong candidates outside the Gulf of Mexico in some of the emerging markets. Recent features for the rigs have been in the $155,000 a day in the Gulf. In North America, the mid water market is flat, but at the northern supply conditions, we do not currently expect to react investigate any idle units in this category during 2002. We took the decision to stack a number of units earlier this year, and we need the markets to -- we need an improvement in the market to restart the units again. Recent feature has been in the $40,000 a day.

In West Africa, deep water, not present, however, discussion of progressing on deep water drilling opportunities mainly in Nigeria and Angola, we expect 2003 to be a more productive year for drilling opportunities. Continuing with the Gulf of Mexico, deep water rates are experiencing full utilization while rates with water depth of 4,000 to 5,000 feet had some near-term availability. Our -- [ unintelligible ] Is one example, but prospects for additional work are reasonably good. However, we have to consider a day rate for this type of unit has been trending lower in West Africa.

On the mid water market, mid water rates are flat to lower at present, and their features have been in the 50,000 at 1,500 feet of water there. On the other hand, the Jackup markets remain strong in West Africa and there are a couple of additional drilling programs which are limited by breaks, recent feature in -- [ unintelligible ] Southeast Asia, deep water market in southeast Asia has been very limited and will remain limited mostly to Australia and Indonesia, and there are no recent features to report. The mid water market flat to lower -- in the $80,000 a day rate.

Outside of Australia, their rates range from mid-50 to low 670s. 60s. Like I mentioned in South Africa, southeast Asia, the Jackup market is very strong with a balance over Europe. Recent day rates have ranged from 50,000 to 70,000 for short-term work and 55 to 75,000 for long-term work. -- fall in first quarter 2003. Recent signing in U.K. has seen a drop of their rates and have been in the upper $40,000 range. We also expect a decrease in activity by first quarter as they drop, we expect to restart by Q2 2003.

As for Q2 2003, next year their rates should remain at premium levels, and 175 to 190,000 dollars a day. The Jackup market in the north seas declining the new rates ands recent feature -- [ unintelligible ] $50,000 range. On the med, the market flat with some risk of oversupply in this part of the world. Rate now in the mid-$50,000 and for high as pecks from $80,000 to $90,000 a day. Middle east market Jackup market balance for the year in year 2003.

With the one area of the world that I've not mentioned, India, we see an increase of activity in India, both on the Jack upside and on the deep water side. GNC had announced that they were going to contract additional Jackups up to ten -- ten Jackups, four of them being replacement Jackups, and we also expect in this part of the world an increase of activity on the deep water floaters. One additional unit up to 5,000 feet late 2002, early 2003, and -- deeper water units in 2003. So I will say India is an area where there is some growth of activity, both on Jackup size and deep water side. And that concludes the brief review of the worldwide market.

Thank you, Jean. Regarding earnings guidance, I think the current consensus of 27 analysts is 28 cents a share, and that's a level that we think is a reasonable, we're not uncome table with that estimate. So with that, we're open to questions.

Thank you, the question and answer question will be conducted electronically. If you would like to ask a question, press star followed by the 1. We will proceed in the order you signal us. We will take as many as questions as time permits. Our first question comes from Kurt from RBC Capital markets.

Good morning. You guys have done a great job on the cost-control side and good to see it taking hold. I think the market explanations were pretty clear. I guess the clarification I'm looking for could be -- would be on the north seaside, sounds like late fourth quarter, early first quarter, is this purely a function of the oil companies getting more comfortable with the new tax regime, or is it a situation where you're actually going to start to see new player noose that market?

Well, it's difficult to provide an intelligence gent guess as to the downturn in the U.K. Some of the things to consider are the following -- The recent U.K. survey which showed that 90% of respondents believe the tax increase will have a detriment effect on drilling. A% of the total operators indicated they would have reconsider of -- [ unintelligible ] On a positive side, they set a date for removal of the PRT on license before March 1982. So it's difficult to guess when the situation will improve again in U.K. but I would say the constraints and tax changes --

Do you see, though, when it does pick up again, do you see the BPs and sales resuming or a more independent role in the north sea, kind of like huh in the Gulf of Mexico?

I think it will be a combination of the two. We receive a commitment and the growth of the involvement of the independent north sea on the marginal sales for cost effectiveness reason, a combination of the two.

Just a point of clarification on India, you said ten additional Jackups and then said four were replacements. He was wondering if you could clarify what you meant by that?

Four as to renew the contract, and when you see they would have the Jackup, the one floater, what we seen in the past is aftering the tender, they may revise their final decision, so it's a four-part figure, but we see an increase of activity there.

Kurt, I think what Jean is saying is even though we're looking for ten rigs, it's likely four of them are already in India.

Right.

If you're thinking about additional rigs required in that area, it may be more like 6.

Right. And then, Mike, any corporate plans for share repurchase at this point?

No. At this point, our bigger priority is reducing our debt, and that debt remains our top priority.

Okay, great. Thank you very much.

We'll now hear from Scott with Simmons & Company.

Good morning, Mike.

Good morning, Scott.

Mike, with respect to Mexico in the past, you've elected not to participate in the bids that, you know, PEMEX has tendered. With a change of management taking place in your Gulf of Mexico shallow water business, do you think your philosophy on Mexico will be changing as well?

Well, I hadn't really thought about changing my philosophy on Mexico.

Okay. Short answer. Mike, can you give us an update on the Sedco class rigs, what their utilization was during the quarter and kind of their performance in the quarter?

Sure. I'm going to let Jean answer that.

Well, we have three Express class rigs, the Vacation Express working in the Gulf of Mexico, the Energy working in Africa and the Express working in India. The three rigs have been very good during the quarters with limited downtime. I can say it seems the initial design, shoe that we had on some of the equipment, even now, have been implemented to correct them. The downtime of the Express-class rig is now in line with the overall new design rig we have and going down. The average downtime for all the rig have been 5.4% in Q2 of 2002, still going down. We have a number of upgrades to be done on some of the equipment, which is being planned in the coming years, but it's in the plan manner, and we will -- we don't foresee a significant downtime for the rates.

Okay, Jean, with respect to the seven seas, what's kind of the outlook for that unit after it, you know, spends some time in the shipyard?

Well, as I mentioned before, we need to make the swap with the express. The reason of the swap is to give us a bit more time to plan the shipyard for the seven cease, which needs now to be complete from certification from before the second quarter of 2003, so we have a bit of time there. As part of the contract, after a year of operation, we have the possibility to swap -- and do a swap again and replay the express back with the seven seas, if we decided to put the seven seas in the other markets, so we are not jeopardizing the long-term future with the express there. Regarding the seven seas, we're looking at different possibilities, both in Brazil, but also outside of Brazil, and once we have centralized a program with the client, we decide on the timing of the shipyard. We will not do the shipyard without some activity --

Okay. And I guess my last question, Mike, regarding capital spending, it look like it was down in the quarter. Can you give us some guidance of what the capital spending plans are now for the rest of the year? Any changes there?

Well, I think we've probably been saying 200 to 225 million for the year, maybe in the past guidance. And boy say that today we'd say it's probably going to be less than that. I'd say we'll be under 200 million.

Okay, thank you.

Ken So with CS First Boston has our next question.

Yeah, just had two questions. First on the outlook, you guys are big players in Norway and that market obviously is going to be soft through the first quarter of next year. What do you see as as opportunities going forward in 2003 for Norway?

Well, we think -- Norway, appears the industry, with the rate reduction demand of 18 units in recent year down to 11 to 12 by mid-2003, we -- reason for this downturn of activity, the reason is completion of long-term development programs, also -- [ unintel jibl ] -- opportunities outside of Norway, and I would say finally a small but growing Norwegian domestic -- becoming an increasingly important factor in causing delay in the commencement of some of the programs. Particularly in the unexplored north. So when you combine all that, we see -- we see activity going down from an industry that's at least up to mid-2003. As I mentioned before, down from 18 to 11, 12 units.

You know, Ken, one of the things, I guess, with respect to Norway that we've been very active there, as you know, since the mid-90s, I guess one thing I do see that I think is beginning to be a change in the Norwegian outlook towards the offshore drilling business is that I think there's a growing recognition that if the government doesn't make offshore drilling open to more players and doesn't make it more attractive economically, that with the other areas in the world for people to put their investments, that it is going to be a declining business.

The labor unions are becoming sensitive to the job loss. We've laid off -- I'm not sure what the number is. Jean says almost 400 people in Norway this year. So, the Norwegian unions are sensitive to that. The Norwegian oil minister has become sensitive to the need for, say, leasing additional acreage. I know speaking with some of the oil people this summer, and I asked them what's going on in Norway, and one of their biggest complaints was the government doesn't have enough acreage available to allow them to develop the prospect list. So I think there is a growing recognition in Norway that they have to do something different, or it's going to be continuing to be a diminished offshore drilling environment. So I find that encouraging, it's a first sign I've seen of that in all the time we've been there.

Okay. And then, just another question on, you know, you guys have been one of the big, you know, drivers in improving technology and automation of the offshore rigs, and I was reading in one of the industry publications that, you know, some of the rig owners are rethinking the need for, you know, all the automated pipe handling and automated drilling controls, because they're not seeing the efficiency gains that they might have expected. What is your experience been there? And do you think there's going to be a change or stay the course in terms of rig automation over the next few years?

Well, Jean may want to expand on this, but I guess our experience would be the opposite of that. With respect to the new technology rigs, I think what we're seeing is that the rigs are proving themselves to be significantly more efficient than the older generation of rigs and that the -- you know, the customers are, you know, paying for that, and they're recognizing that they've done their own studies. You know, among our customers that have used these -- the newer rigs with the enhance the pipe handling capabilities, I think there's a growing appreciation of the efficiency gains that are being achieved.

And do you think there's any need to retrofit some of the shallow water rigs or even the Jackups with more of this automated equipment, or is this really just a high-end application?

No, I think -- I think it's a high range of the rigs which just make -- I mean, to support what Mike just said, we've been able to document now very impressive improvement dur to the design of the rig, bigger pipes which are being used, higher possibility, high pressure of pumping, and that's why -- that's where the value is, and can you not really manipulate under this big equipment without pipe handling.

So to be able to do what we've been doing on the rigs, you need to have this equipment, and overall, the efficiency is there. You should try to install the pipe handling equipment on second generation rig, you are more restricted in terms of deck load, in terms of deck space, and you will still manipulate conventional quip. Still not have dual handling -- no doubt in my mind that's it's the right way to go.

Okay, thank you.

We'll now hear from Doug Becker with Banc of America securities.

Good morning.

Good morning.

Huh another very good quarter in terms of operating costs, and have reduced your guidance by 5 to 10 million S it reasonable to assume that the permanent costs have been reduced by 5 to 10 million over the last two quarters?

Well, I have to tell you, when you look at all the things that affect the costs on a quarter-to-quarter basis, you know, there are a lot of different moving parts. You know, they're moving parts because of ongoing efforts we have to reduce costs in areas such as the maintenance procurement inventory system, in areas like nationization programs.

There are other things going on that have to do with activity levels, how quickly you lay a rig down, you know, how quickly you stack it when you come off of contract, you know, the delay you may have in any projects, you end up accruing costs that are then amortized, once you start that new contract so. There are a lot of moving parts in looking at changes at the costs of operations on a quarter-to-quarter basis. And that's why, you know, the -- I'm not sure I can specifically tell you how much of the improvement is permanent, but of the $15 million reduction that we had from Q1 to Q2 -- I mean -- yeah, Q1 to Q2, I would guess maybe a third of that was permanent in nature, and the other -- you know, the other two-thirds were probably all these other items that can move different directions each quarter. I think we will continue to see an improvement in our basic costs, because the efforts we have under way have -- are still under way, and they still have not fully republican their course, and boy say that's a process that would go on for probably at least another year.

So I think we'll continue to see improvements from these permanent changes, but at the same time, you know, difference in activity levels, mobilization of rigs and other issues, will cloud that on a quarter-to-quarter basis.

Okay, that's helpful. Switching over to India. It looks like Reliant is running into regulatory problems. Does this put any of the contracted time for Discoverer 534 at risk?

You know, on the 534, you know, we have not -- we saw the press release, the article in "upstream" magazine, and we can tell you, we've not been contacted by any Indian officials regarding that article. We have had conversations, obviously, with reliant, and Jean, what did our folks in India tell you about that conversation?

Well, what Reliant told us is they have no necessary impairments with the state agency and that they don't foresee significant problems. They obviously had discussion with the government. We do not believe that it will affect the short-term activity.

Okay. So no adjustments right now? Last question, you mentioned huh 22 bids outstanding last quarter on the shallow water business. Are you able to give a comparable number at this point?

You said 22 bids outstanding in the first quarter update that we gave?

Correct.

Yeah. I wouldn't be able to give you a comparable comparison at this time. I can tell you that the inquiry levels depend on the week. Some weeks they sk up a little bit, some weeks they're down. At this point, there's no real consistency from week to week in inquiry levels, but if you're talking about bids outstanding for work, no, I do not have a response for you on that.

Yep, fair enough. Thank you.

Kevin Stanton with Merrill Lynch has our next question.

Thanks, and good morning.

Hi, Kevin.

I wanted to be -- I haven't been Fassel enough to get the complete update up and running, I guess it's a post-50 syndrome or something. But wondered, are there, you know, any significant rig moves that you, you know, have in there that are contemplated, particularly, I guess, with the north sea being in excess supply? We've heard of a couple of other people speak of rig moves out of that market.

Kevin, it's Jeff. The most significant rig move that isnd way at present is the express out of the eastern med to Brazil. That's a process that began about three weeks ago, and the rig will probably arrive in Brazil in September. There's an opportunity to do a program for another operator, I say another operator, prior to actually beginning work with TETRABROS, but if we were able to secure that work, it would probably begin spudding a well sometime in late September, early October, and then proceed to PETROBROS from there.

The Cunningham is also en route, or just arrived in the eastern med. It has left west Africa and will begin a program with Apache. We're also looking at bidding some Jackups that are currently outside of the India market for the anticipated increase in activity with ONGC. So you may see some units leave markets where you see some weakness today, such as the north sea Jackup market, where we're not a big player, but we do have two units with near-term availability, one currently idle.

Okay, Jeff. And so, nothing planned on the North Sea yet?

We do not plan to explore the mid waters from the north at this date.

Okay, Jean. Jean, on another conference call, there was talk of a couple of jackups, opportunities, I guess, one new and one maybe that's going on now in Nigeria, being kind of deferred because of quota issues. Could you speak to that?

Well, as you know, the Nigeria situation associated with communities, a problem between the operator and the communities, it's challenging environment, we've made a lot of progress to solve some we had with our own personnel, and we are ready to take opportunities in Nigeria if the right jobs come with additional rigs.

So you're still comfortable, even with that, that that market is net -- probably net undersupplied right now?

Yeah, there is a limited number of projects, but there is a short edge of rigs and there are good prospects on the development side, Beth on the Jackup side and the ported side. There's only a question of the timing, but the work is there.

Okay, and this may be a little bit of an off-the-wall question, Mike, but there's one semisub drilling a deep-shelf prospect in the Gulf. Any thoughts about the, you know, efficacy of those rigs in that marketplace? And, you know, whether you'd -- you'd look to market those rigs there?

When you say those, which rigs -- are you talking the mid water semies?

Yeah, fear of man drilling power on it, like -- you know, something like that?

Yeah, we haven't -- we haven't looked at using the semies in that real shallow water in the Gulf of Mexico. We are bidding in Asia, we are bidding our 600 series rigs for shallower water work, but we haven't done that in the Gulf of Mexico.

Okay, thanks. That's it for me.

And our next question comes from or Win Stamer with Deutsche Banc.

Good morning. Mike, we heard a lot of details from Jean about different markets in the deep water and the mid water and the -- I guess the conclusion seems to be that mid water is soft almost everywhere in the world, or softening further and that deep water, two pockets, but otherwise, that's also kind of flattish. What's your sense of, you know -- what is the problem? And is there any time rather than we can see some return, or will this remain for the foreseeable future market, pockets of demand but overall oversupply?

Gosh, if I had the answer to that question, you know, I'd be doing something else probably. Yeah, I've been, as I'm sure many of you have, I've been surprised at the level of activity in many parts of the world is not picked up more in light of the commodities price environment we have. But it seems like there's just a general -- things keep happening, whether it was the September 11th, you know, the stock market in general, you know, collapsing. I think that creates uncertainty in lots of people's minds, the changes in the tax laws in the U.K., creates changes, you know, people all of a sudden, when I was there this summer, a number of the operators were just extremely upset the government would do something like that with no consultation at all. It almost became a trust thing.

In fact, some of them talked about the political risk in the U.K. being very, very high and would change their whole view of operations in that area. But it appears as though we just have, you know, one thing after another that creates kind of a negative mood, and companies aren't moving forward as quickly as you might otherwise think.

You know, Jean said, the activities in Nigeria, you know, with problems at Chevron-Texaco has had this recently, ends up spreading to other rigs. The strike ongoing in Norway, which whether or not our workers aren't striking were affected by it, because, you know, the service companies' workers are striking and that affects the ability to conduct operations. There's just a lot of things that seem like they continue to get in the way of the market really becoming really robust, and so, you know, the market, as it has for really much of the last, you know, 18 months or so, it's kind of been flattish, you know? Some pockets, some areas a little bit better, some areas a little bit worse, and many areas relatively stable, and I can't tell you when that's going to change in any particular way.

Why do you think that the Jackup market, all of these activities exist, why do you think it's doing so much better and companies are moving to commit capital in that?

Yeah, I can't -- I don't really know the answer to that. The Jackup market in the north sea isn't very good. Pretty bad. And the market in the Gulf of Mexico has been bad, it's improving some, but it hasn't been very good either. Clearly, the increased activity in Mexico helps some, because that takes some Jackups out of the market, but certainly in Africa, in India, and in Asia, the Jackup market has been, you know, pretty good for at least the last year.

Okay. One other question on a numbers standpoint, what is your interest expenses? Is that going to continue to trend lower? Can you give us a sense of where that is headed?

I think interest net -- if you look at kind of net interest expense, including interest income, you know, I think it was probably around 48 or $50 million. What do you think has happened --

That's correct, Mike. It was net of interest income is around $48 million. That will trend lower as we continue to generate cash flow and build cash and reduce debt. That may be offset slightly, depending on what happens with the economy, and with short-term interest costs in the U.S., so I'd Shay it's probably going to be flat to, know, right around that net of $48 million for the rest of the year, third quarter.

Yeah, one point that Greg mentioned that I think is worth elaborating on a little bit is, you know, there is some sensitively to short-term rates, and our effective interest rate today is pretty low. You just might mention that, what our effective interest rate is today. our effective interest rate today is about -- a little over 5%, 5.13%, and that's driven low by a variety of things. One, about 38% of our debt is floating rate debt, and so, we've enjoyed quite a benefit from the very low floating rate environment, and then some of our fixed rate debt, our zero coupon conversion that has a rate of around 275 in the cash pay convert we did last year that has a rate of 1.5. So all those have driven our costs interests rather low. But with that 38% floating, it is sensitive to changing interest rate environments.

Any plans to lock that in at current interest rates, given how low they are?

Yeah, we've done a lot of extensive analysis, and over the long term, floating rates are always cheaper than fixed rates, and at roughly a 40% floating rate mix, that lowers our cost of interest significantly over the long term, and so, we're very comfortable with that level of floating rate.

And one other question, I know you don't want to talk too much about the IPO, but I'm assuming the money goes to pay down debt S there likely to be a significant tax hit when that happens in terms of what the -- what the tax basis of that business --

Well, I was going to say, yeah, that's something we probably don't want to talk about. We're going to be filing the S-1 in the not too distant few turbs and I think that information will probably be in there.

Okay, thank you.

Operator: We'll now hear from Terry Darling from Goldman Sachs.

All right two. Follow-up questions on the cost side. Mike, first, try to understand the drivers of the expected increase in contract drilling, operating costs in the third quarter versus the second quarter -- does not suggest thank you got any rigs, you know, coming on incrementally. You mentioned the golf Jackup market improvement as a driver. Wondered if you could talk about some of the other things?

I think the really two drivers, Terry, one was the expectation that the shallow water Gulf -- it definitely has picked up here at the end of the second quarter, so, you know, definitely as we came out of June, those costs would have been running higher than they had been the rest of the quarter, so we would expect the cost there is to be higher. And in addition to that, we have some maintenance projects in our international deep water fleet that we have delayed earlier in the year that, you know, it's likely we will undertake some of those as we move into the third and fourth quarter, and, you know, the combination of those, I would expect to cause our costs to go up.

And will those projects result in, you know, meaningful downtime for any of the real high -- -end rigs that maybe you want to mention here for us? Or is it work you can do while on location?

Yeah, we're not result in any meaningful down time that you need to worry about.

Okay. And huh also mentioned, Mike, your ongoing cost-cutting efforts, you know, that have really not made an impact yet. Wondering if you could detail what you're doing there, and if we're a year from now, what would you think is a conservative guestimate as to what the dollar amount of the savings might be?

Well, you know, I guess you weren't listening very closely, Terry. I didn't say they hadn't made an impact. They're making an impact for the last six to nine months, and what I said is the $15 million reduction from last quarter probably a third of that was part of the ongoing efforts that we have to reduce costs. You know, I also said that those efforts are ongoing, and we expect them to continue to come down over time. And those costs, a lot of those are in the areas of maintenance, procurement and inventory controls as well as nationalization efforts ongoing around the world. Those are all permanent reductions. Those also get offset by things like insurance increases that, you know, as you well know, are increasing significantly, so it's -- you know, when you ask yourself, how does that net-net out over time, it's hard to give you a very specific response. Jean, you want to add anything to that?

I think it's a fair comment. One point which also for the costs -- [ unintelligible ] Where we are planning more and more the maintenance rather than fighting as we did when we started this new rig. So there are a number of components which go in the right direction, difficult to definitive figure at this date on the cost savings.

Okay, thanks. Jean, you had also mentioned that the outlook for deep water west Africa was brightening up for the '03 time period, some of the equipment suppliers in the subsea, equipment side of the business are indicating expectations of the big water ramp there, really a window into the pickup and development activity there. But I'm wondering if you could elaborate at all as to specific programs or rather, you know, incremental rigs of demand that you see, you know, at this point? Difficult at this point?

I mean, it's definitely a general trend we see in west Africa, specifically in Angola and Nigeria, the air kroo we're facing, some of them have been delays by a couple of months, delayed next year, so it's very difficult to give you exact timing. I was referring more to a trend that we see, and we see an improvement for next year that can change for political reason obviously.

Yeah, I think, Terry, when we look at those areas, the fields are clearly there, the discoveries are there, and in talking to our customers, they clearly plan to develop the fields --

I was referring to the 4,000 feet to 5,000 feet water depth for conventional mortar rigs. Like we've been operating in north Africa.

And maybe in percentage term, how much weakness are you talking about there?

We're talking a%, lower 30%, lower their rate in the --

all right. Last question, Jeff, I'm not sure that you had talked about barge rates, with the additional units going back to work, are we seeing, you know, rates move up there, or are we still needing to see incremental demand to get to that point?

Well, the barge is capable of drilling deep gas targets, have seen an improvement in rate. They're currently running about 21 to 22 a day. We were probably running closer to 20. The barges are less capability are around 20, probably around 18.

Okay, great. Thanks very much. Keep up the good work.

Pierre Conner with Hibernia Southwest Capital.

Some simple follow-ups. Greg, first, I heard very clearly from Mike he wasn't going to pay any extra taxes. What guide ance would you give us for tax rate go forward, assuming a similar mix of international domestic revenue range?

The 15% is still a good rate going forward. I think this quarter, you know, it dropped a little bit to 14.9, but, you know, that will certainly mix changes that could flip up above 15 or down below 15, so 15's still --

run with that. Good. And on the insurance side, I realize we are faced with increases, what about timing of renewals? Are they recently behind you coming up? Could you give us a feel for that?

We just renewed our D&O in June, but our whole package and our P&I programs, P&I renews in December and our whole program renews in January. So we'll be in the markets this fall working on those programs. Certainly given current market conditions, if we were renewing those programs today, we wouldn't be looking at significant increases, and so, we're going to be looking at restructuring our programs and exploring all of our alternatives.

Okay. And then, Mike, on -- one more time on cost savings, I know huh a lot of success with the procurement systems. Would you give us a feel for what percentage of your process improvement you're through, 50% through with your plan or 90% there?

I would think Bob is responsible for that, that's why he went on vacation, not wanting to answer that question. I think regarding the maintenance procurement process, I'd say we were less than 50% through, and that's just because of the -- the process requires, first of all, getting the systems on all the rigs around the world. That's not completed.

Once the system is in place, you have to then, to make it most effective, you have to start capturing your maintenance history on equipment, so you can start to optimize how to best maintain the equipment on a global basis, and, you know, that part of it is even an a longer -- it's an even long-term process as we gather the information on a global basis, how to best maintain various types of equipment. I think as a total -- as a total effort, that will be ongoing for a number of years and will probably, what, another year or so away from having it on most of the rigs, having a system installed on most of the rigs.

Yes. And probably a year away from that, we also have embarked with the suppliers and the manufacturers, to reduce some of the processes and that takes some of the time.

All right. That's helpful. I hey it. And one more, I don't know if you can give details on specific rigs but I was maybe interested in what the opportunities or what you're pursuing, without giving too much on the Jack phase. Jean, can you tell us more about what the potential opportunities are there, or you don't want to get into that?

The opportunities for the Jack dates in the U.K. sector, and that's what we are focusing on for the time being without ruling out other possibilities, but they -- the base is going to be delayed this year, and we are radioing different identities. The Jack base is quite a good competitive rate.

And your current expectation is you have till the end of the year?

Yes.

Okay. And then, I'm sorry, one more back to Greg on the insurance, because I was thinking about it, is then if one of your potential options as you're looking at your insurance renewals is potentially higher retention, higher deductibles, would you begin to build accruals, is that something we would expect to see within the next quarter, even though it's later than you actually pursue new insurance terms?

No, under -- under GAAP, we cannot accrue for losses. We can only accrue for losses as the incidents actually occur.

Okay.

So, yes, we would be looking at higher retentions, seeing if that makes sense, but you wouldn't see any accruals.

All right. Great. Thanks very much for the info, guys. I'll turn it back.

We'll now hear from Adrian Day with Global Strategic Management.

Yes, good morning. One quick question. I appreciated your comments on the inversion issue and you mentioned the current bills would have minor impact on your company. Some of the proposals, as you know, would be to prohibit any company that's done an inversion from all government business? Do you have much government business? Historically?

No. Not in the U.S.

Okay, thank you.

Next, we'll hear from Phillip --

yes, good morning. Just wanted to come back to the incremental demand in India, which has been pretty well covered, but I understand one of the uncertainties is the timing of the tenders and what the specs will be, give us the detailed specs in the Jackup part of it the semi part of it? Can you give us any help on that? The Jackup specs are for -- unintelligible ] I know this isn't your favorite subject, Mike, but on the inversions, the house bill is different than the senate bill, you know, not as aggressive, but in that, is this issue of allocation of interest among tax jurisdiction? I don't know if Judge Hand had any thoughts on that, but is that something you looked at and feel comfortable in how do you it in case there are changes?

I mean, we are constantly monitoring all the different pieces of tax legislations, you know, clearly the main bill out of the senate finance committee and then the competing legislation of the house. We're comfortable that if either of those bills were the past, as Mike indicated, there would be no significant impact on our tax position going forward. I mean, would there be some minor impact depending on provisions like you just described, on interest allocation? Possibly. But it's really hard to speculate until you see the final piece of legislation.

Fair enough. Thanks for the help. Hi. I was wondering if I'm looking at the balance sheet, your near-term debt maturities, there's a significant bump up quarter over quarter, just wondering what that is. I assume it's related to the converts and just wondering if you could outline what all is included in the nearly $925 million?

Yeah. You're exactly right. A significant part of that relates to the converts that are first putable to the company in may of 2003, and given our current stock price, it would be highly likely that though would be put to us and is he created value of those converts in may of next year is about $540 million. Then there's a bond, 6.5% bond due in April of '03 for about $240 million, and so, that just -- those two just kicked in in the second quarter, so that's why you see that increase. There's probably about $125 million of debt that's due on our bank term debt, that's due quarterly, so over the next four quarters. And then the difference is just some of our amortizing debt, like on our amortizing facility on --

and in terms of commercial paper, you're still at zero outstanding at the end of the quarter?

Zero outstanding commercial paper, we have $800 million free and available on our corporate revolver.

Okay, great. Thank you very much.

Andy Parr.

Thanks. My question's been answered.

We have a follow-up from Kirk Hallead.

It's been answered, thank you.

We appear to have no further questions at this time.

I appreciate everybody joining us this morning, and see you next time.

That concludes today's conference. Thank you for your participation.