Transocean Ltd (RIG) 2003 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Transocean Inc. fourth quarter and full year 2003 results conference call. At this time all participants are in a listen only mode. Following today's presentation, instructions will be given for the question and answer session. If anyone needs assistance at any time press the star followed by the zero.

As a reminder this conference is being recorded today February 3, 2004.

I would now like to turn the conference over to Mr. Jeffrey Chastain, Vice President of Investor Relations and Corporate Communications. Please go ahead, sir.

Good morning and welcome to the review of Transocean's fourth quarter and full year 2003 results.

If you have not received a copy of the press release issued this morning, you will find it along with the supporting statements and schedules posted on the company's website, and that's at deepwater.com.

Also issued this morning and available on the company's website is the monthly fleet update covering the current contract status status of the Transocean mobile offshore drilling fleet at February 3rd. The monthly fleet update is posted in the investor relations segment of the website, under financial reports.

Those of you familiar with the report will note that a new category has been added to the fleet classification in an effort to better reflect the company's strategic focus on the ownership and operation of premium high specification floating rigs. The operating statistics page issued with the press release reflects operating revenues, average day rates and utilization according to this new fleet specification.

Participating on this morning's call are the following senior managers. Bob Long, President and Chief Executive Officer, Jean Cahuzac, Executive Vice President and Chief Operating Officer, Greg Cauthen, Senior Vice President and Chief Financial Officer and Rob Saltiel, the Vice President of Marketing. Bob Long will provide opening comments followed by a question and answer period.

Before I turn the call over to Bob, I will once again 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 companies that are not historical facts, including future financial performance, operating results and the prospects for the contract drilling business. As you know it is inherently difficult to make projections or forward-looking statements 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 which are described in the company's most recent form 10-K and other filings with the U.S. Securities and Exchange Commissions. Should one or more of these risks or uncertainties materialize or underlying assumptions prove incorrect, actual results may vary materially from those indicated.

Also, please note that we will use various numerical measures in the call today which are or may be considered non-GAAP financial measures under regulation G. You may find the required supplemental financial disclosure for these measures, including the most directly comparable GAAP measure and an associated reconciliation, on our website and for your convenience non-GAAP financial measures and reconciliation tables are included with today's press release.

And finally ,the company previously announced on January 21 it commenced marketing of the TODCO initial public offering. Because we are in the process of marketing this offering, we will not be taking any questions relating to TODCO. You should direct any inquiries you have to Morgan Stanley who is leading the effort. That concludes the preliminary details of this conference call, I'll now turn the call over to Bob Long.

Thanks Jeff, and good morning, everyone.

As you saw from the press release, our earnings came in pretty much in line with expectations. We reported earnings of 2 cents per diluted share despite a 5 cent charge related to some restructuring in Nigeria.

Our effective tax rate came in a little lower than we had previously estimated, so we realized a tax benefit of 3 cents which puts us at a normalized earnings of 4 cents for the quarter.

Revenues were down about $33 million from Q3 and there were a lot of factors contributing to that movement. The Discover 534, one of our deep water drill ships in the Far East, the Marianas, a deep water rig in the Gulf of Mexico, and the Trident 20, a large jackup in the Caspian, all had significant time off contract in the 4th quarter, which contributed to about $18 million between the three of them to the reduction in revenue. In addition the winter slow down in the North Sea resulted in idle time on five rigs there, with a corresponding reduction of revenue of around $10 million.

Our operating costs came in at $407 million. I think that we had guided to a range of 390 to410. If you adjust for the $17 million Nigerian charge mentioned in the press release, we came in just under the $390 million, or the low end of the range. We're going to continue to work hard to reduce our costs, consistent with maintaining excellence performance for our customers and doing everything we can to ensure our people work in an incident-free environment.

There are a couple other financial items I want to comment on before I turn to comments on the market. First we did our analysis of goodwill as required on the FAS 142 and determined that we did not have any impairment. We'llcontinue our analysis every October so we'll look at this question again at the end of the year.

Second, you'll note our capital expenditures totalled $422 million for the quarter. This is made of of about $39 million of maintenance Cap Ex and minor upgrades and $383 million related to the Pathfinder and Frontier. Pathfinder and Frontier are 2 deep water drill ships that were owned by joint ventures between us and Conoco. We acquired Conoco's interest in those joint ventures during the year.

You should understand, however, that the $383 million was not the purchase price for the 2 rigs or for Conoco's interest in the rigs. It's a number that results from paying off the leases and bringing the assets onto the balance sheet. If you have questions on either the goodwill or the $383 million, or the effective tax rate, Greg Cauthen will be happy to answer those in the Q&A period.

Now I want to make a few comments about the market, primarily the contract status of some of our big rigs. Then I'll turn it over to Rob Saltiel, who is responsible for our marketing efforts, and let him give you a run down of the markets around the world.

As we mentioned in our last conference call, we had 4 fifth generation rigs coming up to the end of contract by the end of year 2003. They were the Pathfinder, the Millennium in the Gulf of Mexico, the Frontier in Brazil and the Discovery in West Africa. I want to update you on where we stand on these rigs before I turn it over to Rob.

First, the Frontier continues to work in Brazil for Petrobras, and we're close to finalizing an extension which will take the rig through 2005. We will take a small reduction in rate from the current level, the mid-150 level, but it does look like well-be successful in keeping this rig working continuously.

The Millennium was low bidder on another term job with Petrobras in Brazil, and we're in discussions regarding a possible 18 month contract with that rig but these discussions have a long way to go. Meanwhile, the Millennium continues to work in the Gulf of Mexico at reasonably good rates in the spot market.

The Pathfinder continues to work in the Gulf of Mexico spot market and we have several opportunities for additional work, but it's all relatively short-term for the near future.

The Discovery in West Africa is currently idle, having completed its contract in January. We have three different contract possibilities for the rig and negotiating a fourth. Unfortunately, none of the three possibilities start immediately so unless we are successful in the current negotiation, the rig is likely to be idle a good part of the first quarter.

We also had another fifth generation rig, the Cajun Express, working in the spot market in the Gulf of Mexico. That rig has experienced some idle time recently but is about to go back to work for a short contract and has a follow-on contract confirmed which should take it into the third quarter.

With that I'm going to ask Rob to give a quick overview in the markets all over the world.

Thanks, Bob, and good morning to the folks on the call.

I'll give a brief rundown on the midwater and jackup before turning to the deep water arena.

On the midwater side, we continue to see relative weakness in the UK North Sea market. Currently, five of our eleven midwater semis are operating, and we expect this summer we'll likely to see a similar number or slightly higher busy, based on current visibility. The bright spot is that we are seeing increasing opportunities for term work materializing by midyear, which we hope to capture.

In Norway the news is a bit better. We bid on three tenders in January that involve midyear starts, and are hopeful that our rig count in Norway can increase from the current two that are currently running to three or four rigs by midyear.

Additionally we recently signed the Transocean Searcher to one-year firm on Statoil's Asgard development, meaning it will stay busy until mid-2005 at the earliest. The midwater floaters we had working in other parts of the world are expected to continue throughout 2004 at roughly current rates and relatively stable utilization, with the exception of one of our midwater rigs in Brazil, which was recently idle and is now pursuing follow-on work.

The international jackup market continues to remain generally strong in the markets where Transocean participates. Currently, 22 of our 25 marketed jackups are working and two others are expected to be working by next quarter.

The West Africa jackup market is probably the flattest, so we may take the opportunity to relocate rigs from this market to other markets based on current interest levels. In India where we have eight of our working jackups, we are expecting an increase in activity in 2004 as renewals by ONGC and new tenders will drive market growth in that region.

The Far East jackup market is also robust, with rates firming through the $55-60,000 a day range for standard 300 footers. In addition, we recently extended contracts for 2 of our lower spec rigs in the Gulf of Suez, and we have a preliminary agreement to place another jackup in the Med.

On the deep water side, we're experiencing some near term weakness, as Bob alluded to, as 5 of our 28 deep water rigs are currently idle. However, 3 of these are expected to be working within the month and the outlook for the remainder of 2004 is improving.

Strategically, we are focused on maintaining a high level of deep water fleet utilization and increasing our deep water backlog from current levels.

In North America, the deep water market continues to be characterized by short-term work coupled with a continued lack of clear visibility. As a case in point, as Bob mentioned, the Cajun Express has been idle since early January, but will return to work for Dominion in the next two weeks, and then perform a well test for Chevron that will keep it busy until late September.

The Millenium and Marianas are both currently working and pursuing follow-on exploratory work, although gas and utilization are possible throughout the year.

The Pathfinder will stay busy until mid-May, and is still hoping to spend the sure in eastern Canada with Marathon, pending a resolution of a dispute initiated by a competitor.

Despite weakness in utilization, day rates have held up relatively well on recent fixtures, although we have seen some aggressive pricing by some of our competitors that suggests the market is still a bit skittish.

In Brazil we have 70 deep water rigs currently operating. In December, as Bob alluded to, we agreed to an extension of the SEDCO 707 for 23 months through a direct negotiation with Petrobras. In addition, we were low bidder on two of the Petrobras tenders in mid-December, one for the 2700 meter tender with the Frontier and the 1700 meter tender with the Millennium. As Bob said, we are close to agreement on the Frontier, which would represent another 23 months of firm work, and we're still in discussions with Petrobras regarding the Millennium. We have received an early termination notice from Petrobras on the Peregrine I as they continue to look to upgrade their fleet, but the rig will continue to operate for at least mid -- at least until mid-March on its current assignment.

In the North Sea, we are planning to relocate the Jack Bates from that region to Australia for an estimated 300 days of firm work with Woodside's Enfield Development on the northwest shelf. This work will be preceded by at least one deep water well in Australia, and likely a final job in the West of Shetlands area, before commencing a dry tow eastward. This move not only positions Transocean to capture future opportunities in the Far East, but will also take some supply pressure off the North Sea market.

The Transocean Leader, recently idled when BP reduced its West of Shetlands program, is now targeting a string of exploratory work in Norway that could keep the rig busy until mid-2005.

West Africa has also seen a relatively slow start, even while tender activities for longer term developments continues. The deep water Discovery, as Bob mentioned, has concluded the contract with Chevron but has bid successfully, we believe, on exploratory work in Nigeria that could start in October and extend throughout the majority of 2004.

Shell is looking to renew the 709 on its Bonga development, and we expect to come to agreement on terms for that extension. And the MG Hume, which is scheduled for an outage for maintenance, will continue, we believe, working for Total throughout the year. We continue to target term development opportunities in Nigeria and Angola, especially where our high spec dynamically positioned rigs are beneficial to reducing overall development costs for our customers.

Finally, in India we commenced new work with Reliance as Bob mentioned, that will continue for four months to a year depending on the options exercise, and the Discover Seven Seas, which has completed its shipyard work in Brazil, is currently in route in India to begin the three program with ONGC, expected to spud later this month.

That's all I have on the market side. I'll now turn it back over to Bob Long for summary comments.

Thanks, Rob.

As you can see, there's a lot going on in the market but we do have a couple of difficult areas. In the deep water market near term, we have 4 fifth generation rigs in the spot market. While we're getting good range while working in deep waters, they are likely to experience periods of idle time, like the Discovery and the Cajun are at present, for short periods where they work at low rates when drilling in shallow waters.

Also, the North Sea is likely to get worse before it gets better. We have 9 rigs currently idle there and that could probably go to 10.

Longer term we are encouraged. The pick up in activity in Norway is an unexpected surprise and should result in some nice contracts at good rates for term jobs.

Deep water activity in the second half of the year and in 2005 continues to look very promising, with a lot of exploration opportunities in the Gulf of Mexico and appraisal and development work in West Africa and possibly India. Meanwhile, the international jackup market is solid.

As far as earnings guidance goes, we are unable to give any specific guidance even for the quarter. With the number of big rigs in the spot market, there's just too much volatility. In general, I don't see a lot of changes from fourth quarter to first quarter, other than the continued decline in the North Sea and the potential for some down time on the fifth generation rigs in the spot market.

With that, we'll be happy to open it up to questions.

Thank you, sir.

Ladies and gentlemen, at this time we will begin the question and answer session.

If you have a question, press the star followed by the 1 on your push button phone. If you would like to decline from the polling process, press the star followed by the 2. You will hear a three-tone prompt acknowledging your selection.

Your questions will be polled in the order they are received. If you are using speaker equipment, you will need to lift the handset before pressing the numbers.

One moment, please, for the first question.

The first question is from Scott Gill with Simmons & Company. Please go ahead with your question.

Yes, good morning.

Bob or maybe Greg, could you talk to us a little bit about the decision not to take the impairment on goodwill. What has changed over the past quarter where you don't need to take the impairment?

Scott, this is Greg.

It really wasn't a decision not to take the impairment. It was, we completed the analysis under FAS 142. Remember as we talked about this in the past, FAS 142 is very mechanical. We actually have to do the analysis for each of our business segments, our U.S. and international floater segment and TODCO, the shallow water segment. Now, TODCO has no more goodwill remaining, we impaired all that last year, so our analysis was just really focused on the U.S. and international floater segment.

We expected a decline in value in that segment because our stock price year over year had declined, and when we went through the analysis, there, in fact, was a decline in value of the floater segment. But under FAS 142, you compare that to the carrying value, the book value of the segment, and the book value of the segment, because of depreciation and a few other things, had actually declined more than the fair value of the segment had declined during the year, so the fair value of the segment was greater than the book value and under FAS 142, you then just stopped there. If the fair value is greater than the book value, you don't go through all the complicated purchase price allocations.

So it wasn't a decision, it was just going through the mechanical tests and determining that we had no impairment under FAS 142.

Greg, what is the fair value of those assets?

Well, I really don't want to get into the detail, but it's basically, you value the segment as it was an ongoing business. So we look at discounted cash flow, we look at comparable analysis, multiple analysis, the same type of analysis, as you were, value.

The whole company we apply to the segment, but the stock price is a good indication since that segment accounts for 90% of the revenues of the business, so the movement of the stock price gives you a good indication of what's going on with the segment. It's not the value of the assets, it's the value of the whole business.

Okay, thank you.

And, Bob, just talking about the operations for just a little bit here, can you give us some guidance for your operating expenses as we look into the first quarter and for '04, please?

Scott, I think that we are continuing our focus on trying to get our costs down and we've actually been doing a pretty good job and seeing some continuing opportunities to reduce costs in '04. Right now, I'd guide you to 380-395 range anticipated for Q1, and we are having a little bit of difficulties caused by the weak dollar which makes some of our costs go up overseas in dollar terms, but we do expect to see our trend continuing to bring costs down through the year.

Okay.

And lastly, any more Nigeria type costs that we should look for in '04?

None that I know of right now, Scott.

Thank you.

Thank you.

Our next question comes from Geoff Kieburtz with Smith Barney. Please go ahead with your question.

Thanks, good morning.

Bob, I'm going to take you up on your invitation to ask Greg about the tax rate. Could we just walk through, you gave us the after-tax amount for the Nigeria charge. What was it pre-tax?

The Nigeria charge, pre-tax, was essentially the same as after-tax. There was just about half million dollar difference due to the way that Nigeria tax works.

Essentially what happened is, if you adjust out the unusual items for the year as we've shown in our press release, our effective tax rate for the year came out to about 30%. Previously in the third quarter, that same effective tax rate was around, on adjusted pre-tax income, was around 43%, so that decline in the effective tax rate for the year, we effectively had to book a catch-up adjustment in the quarter of almost $11 million and so that's what generated the tax benefit in the quarter.

We put a reconciliation of all that on the website so you can see the components of each item that we've adjusted both pre-tax and after-tax.

Okay. That's helpful.

And the guidance going forward then is -- a 30% tax rate is what you think we should be using here?

Going forward, 30-35% tax rate makes sense, although, I will emphasize as we've seen in the fourth quarter, that our tax rate is very volatile, is very subject to where we're working. When our rigs move around, they can produce very different tax results, and is subject to what happens during the year, if we settle various tax litigation issues or other matters, so it can be very volatile and its very sensitive to the overall level of earnings.

So if earnings are a lot higher than the street expects currently, the tax rate would be toward the low end of that range. If earnings are lot lower, they would be towards the high end of that range or potentially higher.

Right. Okay.

Shifting over, with that information now we can make sense of the operating expense line in the quarter, it was a little bit lower than what had been forecast.

I guess, two questions. Bob, could you talk at all about what actions you've been taking to bring that operating expense down, and perhaps you could also just help us understand why if you got to 390 in the fourth quarter your first quarter outlook is, kind of straddles that number?

Jeff, let me tell you some of the things that we tried to do here to bring costs down and I think we are pretty successful in 2003 and we are going to continue in 2004. I think I mentioned most of this before.

We did a lot of restructuring and reorganizing in 2003, including some pretty significant reductions in our head count here in Houston in our support group. We had a pretty significant reduction there. We also reduced our overseas operational support from 6 regions to 4 region offices.

We've also been very successful in '03 in our efforts to recruit and train qualified people in the countries that we're working in, particularly in Brazil. That allowed us to replace expatriate commuters with local national people, and that has a considerable amount of cost savings in addition to improving our standing with the host governments and communities and the countries where we are working.

In '03, we succeeded in placing a little over 100 people in positions that replaced expatriates and in '04, we have a budget goal of about doubling that, so we're going to continue with that program and it's been very successful.

We've also continued to focus on our maintenance costs and the way we maintain our rigs, and we are focusing on our purchasing processes and even our financial processes to try to get the costs down. Recently we announced that we are going to close one of our major training centers in Europe and consolidate -- we run two right now and we're going to consolidate into one. Those savings will not be huge but every little bit helps here.

As I say, I think we're going to continue to make good progress here and some of it is longer term than others. We are fighting some countervailing forces like the weak dollar but we're going to continue to make progress there.

I think we also have some accounting issues here in terms of consolidation. I forget the pronouncement that requires us, but we are now consolidating Delta Towing, even though we only own 25%, and I'll let Greg comment on that.

That's correct, Bob.

Under FIN 46, we are required to consolidate Delta Towing, which is the boat business we own 25% of through TODCO, and because we have a note receivable and we're the primary beneficiary to the cash flow from that business, we are now required to consolidate that. That consolidation has increased our fixed assets by about $50 million, but going into '04, will increase our revenues by about $9 million a quarter and our costs by about $9 million a quarter. So that is counteracting, to what Bob described, as our various cost reduction.

In addition, we are consolidating the Pathfinder and the Frontier that were previously off balance sheet, so with the purchases from Conoco, we brought those on balance sheet and at the end of the year we paid off the lease obligations and so those are all on balance sheet. So we brought operating expenses up into operating expense line that were previously all buried in equity and joint ventures. A combination of those two is producing $10-12 million of additional expenses, the combination of the Pathfinder and the Frontier and Delta Towing per quarter.

And those accounting affects were not present in the fourth quarter results?

That's correct. They were not present.

The Delta Towing was implemented as of December 31. So you'll see cumulative effect in change of account principles of about $800,000, so that was the impact on December 31st, but there was no impact on operating income for the quarter. It is represented in our balance sheet at December 31st, and similarly for the Pathfinder and the Frontier, we paid off the lease obligations right at the end of December so they had no significant effect in the quarter. The big effect -- they're represented on the balance sheet, but the effect going forward is in '04.

Great. So just to make sure I understand, if you were to have $390 million of Op Ex in the 1st quarter, that would be an effective reduction of $10-12 million because of these accounting features.

That's correct.

Okay, great.

And just finally -- Cap Ex, if you take out the other stuff, you had $39 million in the quarter, can you just repeat for us your outlook for '04?

Right now we're significantly under $100 million for '04. It will depend on activity levels, but we should come well under $100 million for the year.

What we do have, Jeff, there's a couple of opportunities that we have here for contracts that may require us to invest $10-15 million in various rigs. If those contract opportunities get finalized, you might see that sub 100 number going up to over 100.

Okay. Great. Thank you very much.

Thank you.

Our next question comes from Terry Darling with Goldman Sachs. Please go ahead with your question.

Thanks. Good morning.

Good morning, Terry.

Just to clarify again on the last point, Bob. The $390 million, that includes the Delta Towing, that includes the Conoco adjustments and it includes your assumptions for the impact of the higher Euro?

In the first quarter of '04, that's correct.

Okay. Sounded earlier like Delta Towing was not in there but it is in there.

Yes.

A couple questions for Rob.

First, Rob, can you update us on incremental deep water opportunities in India during '04? Has that slipped to '05?

And then also, a lot of moving pieces on timing of potential incremental deep water rig demand in West africa. Can you also update us with your views as to what that market looks like for additional deep water rig requirements this year and next year?

Sure.

As far as India is concerned, we think that the likelihood for incremental deep water activity in '04 is lower than it was before. We're probably going to see incremental deep water rigs show up in 2005, as some programs have been delayed there.

As far as West Africa is concerned, we continue to compete for both exploratory work and longer term development work. As I said in the case of the 709, it's already working on a development for Shell and that puts us in good position for a renewal there. And we think we are well positioned with the deep water Discovery to do a string of exploratory work in Nigeria for the likes of Chevron and Exxon, that, as I say, will hopefully keep the rig busy throughout the rest of the year.

Our big focus for 2004, though, is making sure we are well positioned on what we call priority projects. These are longer term developments involving deep water rigs and typically high spec rigs, dynamically positioned rigs that really can lower development costs for our customers. And there's a number of those currently under way, either at the prequalification stage or the commercial tender stage, so hopefully throughout the 2004 we'l be able to announce some success in that effort and those rigs will be going to work in the 2005 time frame and beyond.

And just to follow up on India, how many incremental rigs do you see in 2005 required there?

At this point, we would say one or two rigs. Incremental.

And then on West Africa, beyond what's going on with Transocean, I guess it was our sense that you could see some of the higher end rigs leave the Gulf of Mexico for West Africa in the second half of the year. Do you still see those opportunities beyond what's going on with Transocean already in West Africa?

At this point, we don't have any direct plans to move additional rigs from the Gulf of Mexico to West Africa. As I said in my summary notes, the exploratory environment for West Africa started out slower than we would have anticipated, and the deep water developments really get initiated in 2005 even though the awards are made in 2004.

Okay. And I guess I'm trying to lead to a question on the Gulf of Mexico, I think we've got 5 or 6 of the high end units on a well to well basis in the deep water Gulf right now. And two parter, there then, I guess, one is where do you see the rates on a short-term basis here recently? Were you able to hold in and around the 100 range and do you see any opportunities for some of these rigs to leave the Gulf in the second half of '04?

As far as day rates are concerned, I think it's really a function of the jobs the rigs are competing for. Just to give you a couple of data points, as we alluded, the Cajun Express has got a fixture mid year with Chevron in the $150,000 a day range, and currently the Millennium, which is working on the spot market, is working at north of $160,000 a day. We think those fixtures are actually pretty healthy given, that we're competing for spot market work.

So I think the -- going forward, a lot of the rate story depends on the jobs that materialize. At this point, we see that a lot of the deep water work is oriented toward the latter part of the year as opposed to the front part of the year, and I'm talking about work that would be north of 6-7,000 feet in water depth, which is uniquely suite d for our rigs, our higher spec rigs. For the more standard deep water stuff, the 4-5,000-foot range, we are seeing some, as I said in the summary, challenging day rate fixtures being put out and I think that market will continue to remain very competitive.

And what is the water depth on the Dominion job?

That's in the 4-5,000-foot range.

Just to amplify on that, what Rob is saying is when the rigs are working near the rated depths or in ultra deep water, they're getting pretty good rates, 150-165. For the rigs competing in the lower end of the deep water, and that would include the more capable rigs if they pick up a filler job for a shallow well, those rates are probably down closer to what you said, at 100.

Makes sense.

I guess, Bob, where I was headed, is trying to -- that 4-5,000 foot market where the softness is, get a couple of these units out of the Gulf, as indicated by others in the second half of the year, maybe we're able to see some better upward movement in rates there. But it doesn't sound like you're optimistic about a lot of rigs leaving the Gulf here. Have I got that right?

We're not very optimistic about a lot leaving the Gulf here in '04. I think there's a possibility, like with our Millennium if we get the job in Brazil, that you could see one or maybe two leave, and I think that the real demand right now, we sense a pretty significant uptick in demand in the second half of the year. Again, spot market work, all are short programs one or two or three wells, but right now it seems like a lot of it's going to come at the same time in the second half of the year and we're fairly optimistic about the spot market rate structure in the deeper water in the second half of the year.

And, again to amplify on that, as I mentioned before, a lot of deep water developments really don't materialize in West Africa until 2005. So even if awards are made in 2004, the physical rig movements don't occur until early 2005.

Okay, thanks very much.

Our next question comes from Mike Urban with Deutsche Bank.

Thanks, good morning.

You've talked about being pleasantly surprised by the Norwegian sector in the North Sea, which is certainly good news, and U.K. is clearly still visibility, but wondering if there was anything out there that could potentially swing the balance one way or the other, probably moreso in the demand side, I mean obviously rigs are leaving, if there's anything potentially that might be out there that just isn't firm or visible yet? Majors maybe doing some work that they maybe hadn't talked about in the past or just any indication one way or the other?

I don't think they're anything we're aware of, particularly in the U.K. sector of the North Sea. There's a lot of talk and a lot of activity and a lot of efforts to stimulate activity there, but to the extent that it is successful, my guess is and it's nothing but a guess, that it's not going to come from the majors, it's going to come from the independents.

In Norway, I think you're seeing a lot of pickup in interest and a lot of that is coming from majors as well as the big Norwegian companies. We are pretty encouraged by what's going on in Norway and particularly since that work tends to be term work.

Great.

Question on the tax issue again, and I don't know if you can address this. It has to do with the contingent tax liability from TODCO to you guys, and obviously you can't talk about TODCO, I was wondering about the impact on Transocean and how that is treated, I guess to the extent can talk about that.

Greg, you want to try to handle that?

Well, when we initially -- right now we would expect to sell well less than 50% of TODCO, so we will continue to consolidate TODCO. While we continue to consolidate TODCO, there really won't be an impact to that, it will all get eliminated in consolidation. So the only impact is once we sell down below 50%, and who knows when that will be. That's certainly not going to be in this initial transaction.

Great. That's all for me. Thank you.

Thank you. Our next question comes from James Stone with UBS Investment Bank. Please, go ahead.

Sorry, I had my mute button on.

I have just a couple of questions.

The first was, Rob, you mentioned that the Bates is moving from the North Sea to Australia. When is that expected to happen and how long do you expect the rig to be down, in between the two jobs?

And my second question is, with what we've seen, if we look at these West African jobs and went back -- six months ago we thought the jobs were going to start up in 2004, do you have higher degree of confidence today that they're going to start in '05 and not continue to slip than you did, say, three months ago or six months ago and what are the signs you're looking at to give you that degree of confidence?

As far as the first question is concerned on the Jack Bates, as I mentioned we are pursuing a final round of work in the North Sea West of Shetlands before beginning a dry tow this summer, and that dry tow will take about 60 days before it gets out to Australia. It's going to actually go to the southern part of Australia, drill some deep water work there for Santos and then move up to the northwest shelf. And we are getting fully compensated for the mobilization. So again, we feel like that's a good strategic move for us.

In terms of the West Africa developments, there's no question that these dates have slipped. As I say, in some cases where we're the incumbent it's probably not such a bad thing. In the case of the 709 for Shell, we think we'll continue to get follow-on work. With Chevron Agbami development, we've got an incumbent rig there as well.

However, as far as other things we are bidding on, we are getting signs that although there have been delays, that we are still expecting awards here in 2004 and although there's been slight slippage, we expect most of the developments that we're pursuing to be onstream by early to 2005.

Okay.

So even on some of the projects that are likely to be awarded this year, you could still have delays out until the middle of '05 until everything is kind of fully up and running.

That's possible. Yes.

And I just wanted -- just going back to the tax rate for one more minute. Greg, you said the rates this year will be somewhere between 30-35% and I'm just -- I guess that rate sounds a little high to me, given that a lot of your work is in jurisdictions that don't have such high tax rates historically, and maybe you could just clarify that for me or just walk around the world for us a little bit and give us a sense of where you have higher tax jurisdictions or what affects the upper end of that rate.

No, we don't want to walk around the world, get into the details of our tax rate. It's very complicated.

However, I would say, as we've talked about in the past, a lot of our taxes in jurisdictions like West Africa are effectively revenue-based taxes, deemed profit taxes, that at lower earnings levels tend to produce higher tax rates. As earnings pick up, the tax rate will naturally drop because it's a rate on revenue, not on bottom line expenses. So what -- it seems high mainly because our earnings are expected this year, according to the street, to be well under $1 so at those earnings levels, you get this 30-35% effective tax rate.

Thanks very much. I appreciate that.

Thank you. Our next question comes from Bo McKenzie from Sterne Agee. Please go ahead with your question.

Hi, guys.

I want to ask again a few more questions on the deep water side.

If you look out in your crystal ball and obviously you can see some things starting to come together in West Africa, it seems like there's term fixtures into Brazil -- into 2005, do you think industry wide you're still going to have, the industry will still be suffering with the fair amount of short-term well to well market in the ultradeep water fleet in '05, or do you think we will have moved to the point that the bulk of the assets will be working towards term contracts? And more specifically, can you give us an idea for the timing, when the Gulf is likely to move from more of a well to well or short term market to more of a term market with the programs that you see out there?

I'll go ahead and take this one.

I think that first of all about the crystal ball, not sure we've got the crystal ball you're referring to. If we did, we'd be a lot smarter.

I think that we do see improvement in 2005, again, as developments come on stream and we get longer term fixtures to counteract a lot of activity. That said, I think in the ultradeep realm, whenever you've got exploratory work where you've got extensive wells that may be undertaken by a number of players, there's always going to be well to well spot work that we'll see in all the markets and I think we'll continue to see that to some degree in the Gulf of Mexico as well.

That said, we hope to renew some of our longer term -- some of our deep water rigs that are working in the Gulf of Mexico on longer term contracts, and we're in discussions with some customers about doing that very thing and we see some developments coming down the line that could also lead to long term fixtures in the Gulf. But you will always see some degree of exploratory work in the Gulf of Mexico that will be more well to well to well than spot work and I don't see that changing for 2005.

Okay. That's fine.

I think that while you -- it's difficult for us to project that, in the Gulf of Mexico in particular, that you're going to have a lot of rigs tied up on development jobs long term. I think that what's more likely to happen is when the market gets good, that you will see rigs tied up on term contracts, but it will be for exploratory work because of concern that there won't be the capacity when the operators want it.

So while it would be difficult for us to tell you that we think we can see a world where most of the rigs in the Gulf of Mexico deep water are on long term development jobs, I don't think that it's out of the question that at some point you see most of the rigs in the Gulf of Mexico on term contracts, because the exploratory business could get active enough where operators will put rigs on term contracts.

Okay.

And then kind of on a house keeping front, you guys have mentioned a lot of rig moves going on. Of the [Baytooth] coverage, you're getting covered on the mobilization costs. Are there any other ones moving out of East Africa or anyplace else that you're going to have to eat the mobilization expenses on? Are all of those up front? And if they are up front, accounting for it, just is it amortized over the day rate or what?

We don't have any significant rig moves to report at this time.

And any up front revenue payment for the mobilization is amortized over the life of the contract beginning when we start drilling, same with any costs related to mobilization.

But the rigs you are talking about taking out of West Africa are against contracts with [no book] front or is there a spec mode?

No, the plan is to cover the cost of the month, through the contract.

OK, great, thank you.

Our next question comes from Robin Shoemaker with Bear Stearns. Please go ahead with your questions.

Yes, thank you.

Just wanted to ask if there's any further update on the solution of the Discover Enterprise incented midyear, whether the inspections of the various other risers have occurred and the problems have been solved, the disagreement with the customer has been resolved. Could you give us further update on that?

From a technical standpoint, the inspections are done and the ultimate solution is known. We've still got some equipment to receive and then do some replacement in some of the risers around the fleet, but that's just a question of delay in delivery time, manufacturing time.

As far as the customer issue goes, we've had a lot of discussions with the customer and I don't think it would be appropriate at this time since we are not quite finalized to talk about that, but we are having a constructive dialogue.

Okay.

My other question, then, had to do with the further progress on debt reduction. We can see with your $100 million Cap Ex budget, even at the break earnings level you're generating a lot of free cash flow and you may have some proceeds from asset sales. Is the goal for '04 continuing to use all free cash flow to reduce debt?

Yes, it is.

Okay. Thanks a lot.

Thank you. Our next question comes from Mark Earnest with Merrill Lynch. Please go ahead with your question.

Yes good morning, my question was answered. Thank you.

Thank you.

Our next question comes from Waqar Syed with Petrie Parkman. Please go ahead.

Yes, hi gentlemen, good quarter.

You had significant cash tax obligations this quarter. Can you explain those and what kind of cash taxes you expect for next year?

Cash taxes next year should be similar to the cash taxes for this year. In any quarter, we have a variety of things, payment on returns, settlements with tax authorities, and so our tax cashes aren't regular quarter to quarter. And so in the fourth quarter, we had a variety of such issues that came up, but that is not reflective of a run rate of cash taxes. Cash taxes next year should be in the $70-80 million range.

Okay, great.

Now your comments about some delays, pushbacks in West African deep water market, is the same true for the jackup market as well in West Africa? Are you seeing any delays in some the term contracts in Nigeria?

No, I don't think we are seeing delays at all in the jackup market. Those contracts tend to go a little bit faster though, one of the longer term is a recent development job there where the operator was awarding two jackups at the same time, that took a fair amount of time to get through the process and finally get finalized, but we understand that that's done now. But in general we don't see much delays in the jackup business.

Okay.

And you mentioned the Jake Bates is going to be drilling one well West of Shetlands before moving to Australia. Besides this one well job, is any other additional demand for a rig in West of Shetland this year? Is there any drilling program there?

We are looking at opportunities right now but I think it's too early to say whether those are going to firm up for us or not.

Okay.

And the Transocean Arctic rig, is that one of the rigs that you are bidding in Norway?

Yes, it is. And there's a potential that it'll get reactivated if we are successful on a couple of those term developments that we spoke about in the summary.

And that could be sort of mid year kind of start-up?

That's correct.

Great.

That's all for me. Thank you very much.

Thank you.

Our next question comes from Grant Borbridge with Prudential Equity Group. Please go ahead.

Good morning.

Following up actually from your comments on West Africa in the shallow water market and some comments from a couple of your competitors of the West africa jackup market is expected to tighten up in the not too distant future, I was just wondering if you could provide a little insight into why you are considering moving one of the jackups out of West Africa?

The simple answer is we got an attractive offer in another region.

I will also say, though, that we do see potential for additional work in West Africa. The term I used was relative flatness, because we are seeing such strengths in the India and the Far East markets, that the West Africa market looks weak in comparison. But that doesn't mean we are not getting new fixtures there, in fact we hope to put another rig to work there in the next few months.

Okay, thanks.

And just one other, I realize you can't comment specifically on TODCO, but can you talk a little on your general expectations for the Gulf shallow water?

I don't think it would be appropriate for us to talk about that at this point with the TODCO offering.

Okay, fair enough.

Thanks. That's all for me then.

Thank you.

Our next question from Pierre Connor with Hibernia. Please go ahead.

Good morning, guys.

I wanted to ask you all a little bit about performance contracts, Rob. Does the Dominion job have performance incentives in that contract or a flat day rate?

It's a flat day rate.

Okay. Are there any in the Gulf currently that you could tick off for us that are operating under performance contracts?

I don't think we have any that have a performance component right now in the Gulf.

None right now? Okay.

Let me ask a Gulf question that's been kicked around a lot but I might ask a little different on it, Bob, the visibility on this second half that gives you confidence, is it because of what you're hearing generally from customers or could you give a percentage of that confidence that's a result of actually seeing bids in house, and then of course if you could even take us down to, say, there's x-number of jobs. That would be most helpful, if you've got that kind of perspective.

Talking about the deep water Gulf?

Yes, of course. The deep water.

I think what we're seeing is on the exploratory front, we are just seeing a lot more potential activity for the second half of the year than we are for the first half. And again, some of those opportunities are north of 7,000 feet of water depth, which gets to a narrower niche of rigs that can fill the bill.

Absolutely, and I guess, Rob, what I was looking for, what is that you're seeing? Is that permits you're seeing, is that conversations that people are beginning to talk about -- I've got plan a well, what type of rig would fit this plan, and that's what I was trying to get clarity on that.

These are discussions with specific customers regarding particular programs.

They're not bids that have come out yet but they're preliminary inquiries and just our day-to-day discussions with the operators.

Okay, alright, that's helpful. That is what I was looking for.

And then back to West Africa, Grant's question, what I was interested in too, but it sounds like you have a specific rig in mind that you plan to move. Rob, could you tell us which one it is at this point?

You're referring to a jackup rig. At this point we don't have plans to move a deep water rig.

Yes, the jackup rig.

There's a potential to move one of the Trident rigs.

Okay, and in terms of where it's going at this point, you're not -- ?

I think it's a bit early to talk about where it may go.

That's fine.

That deal isn't confirmed yet.

Not yet. Okay, I understand.

Okay, alright, well good, no, I appreciate all the -- lot of good questions, appreciate the input. I'll turn it back.

Thank you.

Our next question comes from Jud Bailey with Jeffries & Company. Please go ahead.

Thanks, good morning.

Most of the questions have been answered but I do have a couple of follow-ups. The first one with Jack Bates. That will probably, I guess, be the second deep water rig to go into Australia this year. How is that market looking going into '05? Is there any need for any more potential, I guess, incremental deep water rigs in the Southeast Asia/Australia market?

I think it's important to keep in mind that the job that we're going to be performing with Woodside and Santos is actually going to keep the rig busy throughout the majority of 2005. We are positioning ourselves really for the latter part of 2005 and 2006. At this point I think it's probably a bit early to say how that may develop around specifically around Australia.

I think in the region in general, you see general increase in optimism in places around Indonesia and others around Australia as well where we think there's longer term potential. And as I said, given the weakness that we've been seeing in the North Sea and the opportunity for firm term work, as well as a deep water well on the front end of it, we felt it was a good strategic opportunity to move the Bates to a higher return market.

I think if you try to identify where the probable growth markets for deep water are on the Far East, it's more likely to come from Malaysia and India, Shell, Total and Indonesia, also, Shell, Total, Murphy, all have some pretty interesting acreage out there. Murphy's fairly active, and Shell and Total we know would like to get more active.

That's where I think the significant growth is more visible right now. If there's any more in Australia, I suspect it's going to be limited to maybe another rig. But right now we don't even see that.

Is there type of visibility for some of the work in Indonesia and Malaysia that you mentioned for deep water needs?

Did you say is there any visibility?

Yeah, for any potential jobs over the next 12-18 months?

There's no specific bids out right now, but we know that the operators have some interesting acreage in that they are interested in getting active at a certain time. Exactly when that will happen, whether it will happen in the next 12-18 months, is tough to say.

In general, we think there's optimism though, in Indonesia and in Malaysia that suggests that those markets could become bigger deep water markets as we go forward. At one point in time we had the 534 drilling in Malaysia, so I think there's always a chance that we'll see additional deep water rigs go to that or the Indonesian market.

And one more question, andI apologize if you went over this already, but would it be possible to get a breakout on the $383 million you spent in the first quarter with the Frontier and Pathfinder? You said that was a few different components. Can we get a breakout of the different parts?

Yes, that's $197 million for the Frontier and $185 million for the Pathfinder.

And that includes, obviously, paying off the lease as you mentioned for each?

That's right. That's not what we acquired from Conoco Philips, that's the entire acquisition of the rigs from bringing them on balance sheet by paying off the lease obligation. The portion of that that related to what Conoco Philips had owned was $177 million, so the 383 is the total of buying out Conoco Philips, assuming their lease obligation, and then paying off the lease obligation and bringing both rigs on the balance sheet.

So the ownership for Conoco Philips then, for the combined rigs, is $177 million? Did I hear you right?

That's right. That was their share of the lease obligation that we assumed.

Great. Thank you.

Thank you. Our next question comes from [Rooney Julieson] with Carnegie. Please go ahead.

Good morning, gentleman.

I have a few questions regarding your standard and intermediate semis.

First, you are quite optimistic about Norway. Are you expecting both to see the Arctic and Winner returning to work? And are you also, in addition to the term contract you mentioned, are you also bidding for shorter work in the Bering Sea in the second half of this year?

On the U.K. side, you're not that optimistic. Can we expect to see a pickup in demand at all this year in the U.K.?

And in Asia, the Asian market seems strong to me, can we expect to see the Sedco 600 and also possibly 702 return to work in 2004?

And, finally, I have a question related to the Frontier in Brazil and your new contract. Is there a performance bonus on this contract?

Okay. I'll try to take those in turn.

As far as Norway is concerned, I think it may be premature to talk about both the Arctic and the Winner going to work. As I said already, we are bidding the Arctic on a couple of development efforts and we hope to get that to work and and subsequent to that, if we saw additional strength we may have an opportunity to put the Winner to work. But that would be highly prospective at this point.

As far as the U.K. North Sea is concerned, as I said in my opening summary, we've got 5 semis working in that segment. We expect that number to hold or possibly strengthen slightly over the summer months, primarily because we are seeing an increase in term work.

Right now we are still doing a lot of well to well spot work and as we get into the summer season, the North Sea picks up and we are seeing some visibility that could portend to strengthening. But I don't think you going to see any drastic recovery in the North Sea this year. I think the region is going to require additional stimulus and further development by the independents in that sector before we see a real recovery, likely to occur not before 2005.

As far as the semis that we have idle in the Far East, 2 of the 5 are currently working. You named a couple that aren't. I think that we'll continue to look for opportunities to put those rigs to work, but at this point I think it would be overstating the case to say that we expect they'll go back to work, although we continue to look at opportunities.

And then, finally on the Frontier, the renewal that we're working on with Petrobras, at this point would not contain an incentive contract; although we have discussed such contracts with Petrobras in the past and currently have such arrangements in place on existing contracts.

Thank you very much.

Thank you. Ladies and gentlemen, if there are any additional questions, please press the star followed by the 1 at this time. As a reminder, if you are using speaker equipment, you will need to lift the handset while pressing the numbers. One moment for the next question.

And, gentleman, no further questions at this time. Please continue.

Okay. Well, I guess that's all we have and I thank you all for participating in the call and look forward to talking to you again in the future.

Goodbye.

Thank you, sir.

Ladies and gentlemen, this concludes the Transocean Inc. fourth quarter and full year 2003 results conference call.

If you would like to listen to a replay of today's conference call, please dial 303-590-3000 with pass code 566555. You may disconnect and thank you for using AT&T teleconferencing.