Transocean Ltd (RIG) 2004 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Transocean first quarter 2004 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 during the conference, please press the star followed by the zero. As a reminder, this conference is being recorded on Tuesday, April 27, 2004.

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

Thank you, Kristen. Good morning and welcome to the review of Transocean's first quarter 2004 results.

A copy of the press release covering first quarter results, along with the supporting statements and schedules, is posted on the company's Web site at deepwater.com. You will also find at the company's Web site the monthly fleet update covering the current contract status of the Transocean mobile offshore drilling fleet at April 27. The monthly fleet update is posted in the Investor Relations segment of the site under Financial Reports.

Participating on this morning's call are the following Transocean 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, Vice President of Marketing. Bob Long will provide opening comments, Rob Saltiel will provide comments on our markets, and then we will take your questions.

Before I turn the call over to Bob, I'll remind you once again that during the course of this conference call, participants may make certain forward-looking statements regarding various matters relating to our business and company that are not historical facts, including future financial performance, operating results, the prospects for the contract drilling business, and certain matters relating to our majority-owned subsidiary, TODCO.

As you know, it is inherently difficult to make projections or other 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 Commission. Should one or more of these risks and 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 will find the required supplemental financial disclosure for these measures, including the most directly comparable GAAP measure and an associated reconciliation, on our Web site.And for your convenience, non-GAAP financial measures and reconciliation tables are included with today's press release.

And that concludes the preliminary details of the call. I will now turn it over to Bob Long.

Thanks, Jeff. Good morning, everyone, and thanks for joining us on the call.

You saw from our press release that we had a good quarter. We reported earnings of 7 cents per share, and that was net of a loss on retirement of debt in TODCO IPO-related costs of 9 cents per share. Adjusted for those items, we earned 15 cent per share, which is a significant improvement from fourth quarter of last year.

Revenues increased to $650 million versus $591 million in fourth quarter of '03. Some of our largest contributors to the revenue increase were the consolidation of the Pathfinder after purchasing Conoco's interest in the rig and the commencement of operations of the 534 and the Seven Seas in India, in addition to $23 million of integrated service revenue, primarily in the North Sea.

On the cost side, you'll note that our costs came in at $412 million for the quarter. I think we had previously guided to a range of $380 to $395 million, so it might appear that our cost efforts are not on track. However, we are having continued success in our cost reduction programs. In the $412 million, there's $13 million of additional costs related to the integrated service program I already mentioned, which are unrelated to rig costs.

In addition, there's $7 million of additional costs related to expensing options, which vested as a result of the TODCO IPO, and about $5 million of cost relating to consolidation of Delta Towing which was required by FIN 46. If you adjust for those costs, we're in the middle of the expected range despite additional activity in our international and deepwater fleet and increasing dollar costs due to the weakening of exchange rates.

Looking forward, I don't think we'll be giving you as much guidance on costs as we have in the past. We had previously indicated that we hoped to have costs come down to an average of $370 to $380 million for the remaining quarters of this year at the levels of activity we were experiencing at the time. However, there's a lot going on in the markets these days, and it's difficult to forecast what the impact in timing and cost is going to be.

As an example, the Leader and Arctic, going to work in Norway, will add at least $8 million per quarter to the previous guidance. Also, the startup of the Trident 20 and the Sedco 600, together with several other possible rig moves, will increase costs.

Now, as far as what's going on in the various market segments around the world, we are happy to be able to report term extensions of both the Enterprise and the Horizon, two deepwater rigs here in the Gulf of Mexico, which were scheduled to end contracts in the second half of the year. We remain optimistic for the long term outlook for deepwater, although we do have some concerns near term and expect to see some idle time on a few of the lesser capable deepwater rigs.

The Marianas has been out on the Gulf of Mexico but is in the process of starting a new contract today. In West Africa, we're anticipating some idle time on both the 709 and the Rather starting in the second quarter, and the P 1 in Brazil has already come down. In addition, the M.G. Hulme will have about a month downtime for survey and modification work. Rob Saltiel will comment further on the outlook in just a minute.

Looking at the market segments for our other floaters, the outlook has improved a little but can still only be characterized as weak. Activity in the North Sea has been higher than we expected, and it appears that Brazil may be a little more active than previously thought. However, the oversupply remains substantial, and we don't see any single catalyst that will trigger a near-term upturn in this segment.

We are continuing to look at ways to take capacity out of the markets. Last year, we scraped the 708, and recently we announced that we're selling two of the 600 series rigs in the Far East for use outside the drilling market.

In the various international jackup market segments the outlook remains good for us. We are going to be moving one rig from West Africa to Italy for a term job at a nice day rate, and we'll be putting the Trident 14 back to work in Angola. Also, the Trident 20 has commenced operations in the Caspian after being idle for some time. We do anticipate that the Shelf Explorer contract will end soon in West Africa and is likely to see some idle time.

In regards to guidance, we can't give anything specific due to the amount of uncontracted time for the rest of the year. Looking just as the second quarter, while there are a number of positive developments in comparison to the first quarter, including a startup of the Trident 20, Trident 14, and the Leader, as well as full utilization of the Seven Seas for the second quarter, these positives are more than offset by the likelihood that we will not have the same level of integrated service work in the North Sea, idle time on the 709, Rather, and Hulme in West Africa, and the Marianas in the Gulf of Mexico, and the P 1 being stacked for the entire quarter in Brazil. In addition, the Polar Pioneer could see a month's downtime late in the second quarter, as it finishes on troll and does some survey work and upgrades prior to starting on the Snow Beak project.

With that, I'll ask Rob to give a little more in depth rundown on the outlook for the various market segments before I open it up for questions.

Thanks, Bob, and good morning to everybody on the call. I'll give a brief rundown of our other floater and jackup segments before turning the majority of my attention to the high specification rig arena.

In the other floater market, as Bob said, we're finally starting to see some strengthening in the U.K. North Sea. And this is in large part due to reductions in supply as opposed to increases in demand. A number of rigs have now either left the region or have been stacked so long that they're effectively out of the market. As a result, we expect the remainder of 2004 to look a bit better than the same period in 2003, both in term of rates and utilization.

Currently, all five of our actively marketed semis are working, and we expect them to stay working with little interruption throughout the year. In addition, we expect our floaters that are currently working shorter term in the Med, West Africa, Brazil, and the Far East to stay mostly active, as well, throughout 2004.

The announced sale of two of our assets in the Far East in the nondrilling applications is expected to relieve some of the capacity overhang in that market, which will be welcome. Our focus is to keep our active rig fleet busy, and we do not plan to reactivate any of our stacked rigs unless there is a significant pickup in activity and/or rates.

The international jackup market, as Bob said, it continues to remain generally good in the markets where Transocean participates. Currently, 22 of our 25 marketed international jackups are working, and two others are getting ready for new jobs with signed contracts. The Far East and India jackup markets remain strong, and we believe that both markets could be undersupplied versus expected demand.

In the Far East, supply -- spot day rates for standard 300-footers are moving to the 60,000-plus range. In India, despite some upcoming explorations of contracts on some of our rigs, we are relatively confident that we will be able to roll these contracts over successfully.

The West Africa jackup market, however, continues to be relatively weak, and some of our competitors' recent conference call comments have echoed this sentiment. As a result, we've taken the opportunity to relocate one of our 300-foot rigs from Nigeria to the Med where it is expected to begin a one-year job for [Augent] at $60,000 a day by July of this year. Also in the Med, we recently received a one-year extension of one of our jackups already working for [Augent].

In the high specification rig market, we continue to believe that the fundamentals are excellent, and that the second half of 2004 will see improvement in rates and utilization versus the first half. Currently, 30 of our 32 rigs in this segment are either working or preparing for agreed work.

In the Gulf of Mexico, I'm happy to report that all 10 of our high spec rigs are now on the payroll. The big news, of course, is our renewal of the Enterprise and the Horizon with BP for a combined four rig years of firm work. This will relieve some potential oversupply demand and perceived by operators in the ultra deep segment of the Gulf. In addition, we've managed to keep our three big rigs that are doing spot work in the Gulf, the Cajun, the Pathfinder, and the Millennium, busy without missing a payday.

The Pathfinder is heading to Canada midsummer and won't return to the Gulf until late October or early November. The Cajun will be busy under current contracts until September, and the Millennium has only one window to fill between now and the early fourth quarter.

As we look past the current contracts, the prospects for exploratory work in the ultra deep water and the deep well miocene, eocene structures of the Gulf look quite good. We are hopeful that the fourth quarter will start to see an increase in rates as competition for our bigger rigs intensifies.

Turning our attention to Brazil, our activity there is expected to remain steady at 6 deepwater rigs. During the first quarter, we closed on the Frontier for our 700-day contract, in line with expectations that we set during the last call. Also as we mentioned, and Bob touched on this, the Peregrine 1 has been released in early April and is currently seeking prospects.

Although we were low bidder on a 1700-meter tender for Petrobras last December, we were unable to reach agreement, and we understand this opportunity may be retendered. Two of our rigs in Brazil, the Navigator and Express, are approaching contract expirations that will occur sometime this summer, and we expect to have a clearer view on our renewal prospects in the next month or two, once Petrobras has completed its annual budgeting process.

In Norway, we had an excellent quarter. We agreed to a 15-month exploration contract with Statoil for exploratory work with the Leader. This is very helpful as the rig had been idled at the end of last year. The Leader is currently undergoing shiftyard work and is expected to be on the payroll sometime in May.

We were questioned on the last call about whether we might be able to put another rig to work in Norway, and we've done our level best to accommodate. The Transocean Arctic has been selected by Statoil for a 580-day program on Statoil's Norda development which is expected to begin sometime around mid July of this year. Once these jobs start, we will have 4 active rigs in Norway, with only one rig idle.

In the U.K. North Sea, we landed a one well job west of Shetlands for the Jack Bates that dovetails nicely with its upcoming expected move to Australia. As we said before, the Bates is expected to leave the North Sea late this summer for its drive toward south and eastward before embarking on a nearly one-year combined program with Woodside and Santos.

West Africa, similar to the jackup story, has had its share of ups and downs since our last call. We had expected renewal for the 709 with Shell in Nigeria, but the announced delay in Shell's bonded development has caused the rig to be expecting release sometime this summer. The Rather is finishing up its work in Angola and will be expected to be available by mid May.

Despite the lack of firm work for these rigs, we've identified good prospects that are under discussion. The M.G. Hulme is finishing up its shipyard work in anticipation of its return to drilling for Total in Nigeria. The Deepwater Discovery continues to enhance its reputation as a highly efficient rig for West Africa. Having just concluded a short exploratory program in Nigeria for Exxon, the rig is now en route to Pakistan where it will drill an 8800-foot water depth well before returning back to West Africa. We anticipate the rig will stay busy on exploratory wells in Nigeria throughout the rest of this year.

Bob, I'll turn it back to you. That's all we have on the market side.

Thanks, Rob. That's really all we have in terms of prepared comments, so with that, I'll open it up to questions.

Thank you, sir.

[OPERATOR INSTRUCTIONS]

Our first question comes from Dan Pickering with Pickering Energy Partners. Please pose your question, sir.

Good morning. Actually this is Jeff Tillery. Can you help us understand a little bit more exactly what's involved with the integrated services work?

Sure, I will let Jean Cahuzac to explain what we're doing there.

Yes, we -- to support our day to day operation, we have in Aberdeen a group of highly qualified drilling and completion engineers who provide support for well operation worldwide. This available expertise is also to propose on the project basis, integrated services, which means that we add to the [INAUDIBLE] services some well downhole services.

We had such requests from independents in the U.K., and from [INAUDIBLE] in India. And when we -- when we did quote the job, we proposed services with incentive type contract which are based on the overall recoverments and the total cost of the well, compared with cost of the well versus the operation IET. It's a kind of an added value contract and such contracts increase the opportunity for improved revenue for the rig and higher rig utilization.

I just want to highlight, it's not junky. The contract's risk got capped. We have -- we receive day rates when we are on standby, for instance waiting on weather, et cetera. So the risk is capped and the reward is based on the overall government of the project.

We don't -- there are a limited number of opportunities, mainly in the North Sea. We expect these opportunities number to raise when the independents become more active in the U.K. But at this stage, it's still a limited number of opportunities which are available worldwide.

Okay. Thanks. That's very helpful.

And the second question is, you guys had reduced cap ex quite a bit over the last year or so, and that's helped generate some strong cash flow. One of the things that's tough for us to measure is if this reduced cap ex is having any negative impact on operations. Can you speak to unplanned rig downtime during the first quarter, and how this compares to say a year-ago levels?

Well, I don't think that the low cap ex levels are having any impact on our operations. You have to remember that we spent a lot of money maintaining the rigs that is expensed.

If you look at the some of the big rigs, it is not unusual for our maintenance expense to run $12,000 to $15,000 a day. That's $4 or $5 million a year of maintenance expense separate and apart from whatever would be capitalized under the capitalization policy. So the fact that weve been reducing our capital expenditures has not impacted our performance.

In fact, our performance in terms of downtime has been steadily improving. The number of our big rigs, in particular, that experienced less than 3% downtime last year was, I think, 6 or 7 of the rigs, it's over half of our fleet, and that's significantly better than we've ever done since we brought these rigs out. So I don't think you should be concerned about the condition of our rigs.

Great. Thank you. That's all I had.

Thank you. Our next question comes from Scott Gill with Simmons and Company. Please pose your question.

Yes, thank you. Bob, you gave a number for the costs associated with the integrated services revenue. What was that for the quarter?

It was $13 million. So we had $9 million of operating profits from the integrated services.

Okay. And is there any way you can give us some guidance as to how significant that will be contributing to revenues in the second quarter?

Not really, Scott. We don't have a lot of backlog in that work. We do have some continuing work going on. But the way we accounted for it, unless we complete the project in the second quarter, it's not going to have an effect. At this point, I think that we're not anticipating that we have very much at all in the second quarter.

Okay. And I guess my question, with respect to operations, you've got your three, you know, Sedco Express type rigs up for renewal sometime during the year. You know, we've seen the Cajun Express in the Gulf perform well in its operations. You can talk to us a little bit about how the Sedco Energy and Sedco Express are performing, and what you expect for contract renewal rates later this year?

Well, I'm not sure I want to talk too much about the renewal rates, but I'd say from a performance standpoint, the Sedco Express in Brazil is doing a terrific job. They're drilling wells in, I think, 9 days down there for Petrobras. And in our discussion with Petrobras, they are extremely pleased, and are willing to consider some kind of additional day rates to reflect the enhanced performance of the rig. Now having said that, we're about to get into some negotiations, we hope, for extension of that contract, so I'm not -- I'm not really prepared to discuss what day rate levels we expect.

The Energy has been doing well in West Africa. There are a number of the development projects over there that we're hopeful that we can capture with the Energy. And we obviously have a number of all of the Express class rigs bid on several of these term opportunities that are coming up in West Africa. And several of those we hope we're going to find out about here within the next two or three months.

And as you're looking out, Bob, are you expecting any downtime on those rigs in between contracts?

Well, with the Cajun in the spot market, you can never tell. Right now, things look pretty strong in the Gulf, wo we're hopeful that we'll be able to keep it working continuously.

Right now, we don't anticipate any problem with the Sedco Express in Brazil, but Petrobras has a pretty steady program, and they're very pleased with the rig. Now, having said that, there's still a negotiation to go through with Petrobras.

And West Africa, it is -- a lot of different opportunities. Right now, I don't anticipate any idle time on the Energy, but I can't guarantee that we won't have some.

Okay. And lastly, the Sedco 709, talk to us a little bit about your view as to what happens to that rig following the Bongo workplace.

Well, there's a number of different opportunities for the 709. First, at the completion of this well, the 709 is going to come down for some shipyard work which could keep it out of commission here for a couple of weeks to a month. And then go back with Shell for a while. After that, we have a number of different prospects for it in West Africa.

Whether we'll be successful -- right now, we're pretty optimistic that we will -- after finishing with Shell and going back into shipyard for some additional work, go to work in West Africa. That's not firm yet. We're also looking at possibilities outside of West Africa. Right now, we haven't gotten the rig specifically bid to anybody outside of West Africa, but we are considering some opportunities we think we can develop.

So I can't give you any specific contracts other than the completion of the Shell work and a very strong possibility. We've been in discussions with one operator for some time now, and I think that we're going to get a follow-on job that could take the rig to about the end of the year.

Okay. Thank you. One final question with respect to West Africa, and I'll get off. When do you think we'll start hearing about contract awards in that market for deepwater?

That's a good question. We had expected that BP's [Luconios] job would be awarded by now. There is a possibility that that decision is going to be delayed again. In which case, I'm not sure -- and I would have told you a month ago that we'd know this month, now I'm going to tell you that we should know within the next month, but it could slip again.

The Oxbow award, which is for two rigs, we anticipate coming out by the middle of the year, I think by June, July, a decision should be made. But again, everything in Africa seems to slip beyond when you expect it.

So those are the three awards, three rig awards that are imminent, I think. And there's also the [Agbomi] bid that's coming, I'm not sure when they think that they'll make a decision, but it's probably going to be fourth quarter.

Okay. Thank you.

Thank you. Our next question comes from Mr. Robin Shoemaker with Bear Stearns. Please pose your question.

Yes, Bob, you mentioned that you may move a rig from West Africa to the Middle East, and we've been hearing different views on the incremental need for jackup rigs in the Middle East. And I wonder if you could share what your view of the incremental requirement for jackups, obviously tied to development drilling programs, on large gas fields in the Middle East, and how many potential rigs you might move to that market?

Well first, we're not moving any rigs to the Middle East. The rig we're moving from West Africa is going to the Mediterranean.

Right.

As far as demand in the Middle East, I'll let Rob comment on that.

Yeah, I mean we've -- we certainly take a good look at the Middle East and try to assess whether that's got an opportunity for us going forward. We expect that there's going to be increased demand in Qatar, and I think you've heard others talk about that, as well.

By the same token, I think you've also seen that additional rigs are moving into the region. So we continue to study that market and assess whether or not some of our excess capacity in West Africa could be absorbed there.

As I said before though, we see strength in the markets where we're already active like India and the Far East. So those would probably be markets we'll look at, as well, and in conjunction with the opportunities in the Middle East.

Okay. Well then on the Asian market, the Asian jackup market, you seem, in a few cases, to be rolling over at higher rates. Where -- you know, roughly, is that Thailand, Vietnam, India market in terms of -- it seems to be kind of the mid 50 range currently, and is that holding? Or could it move higher?

I think it can move higher. In fact, I would say the market today is at around $60,000 a day.

Okay. Thank you.

Thank you. Our next question comes from Mr. Pierre Conner with Hibernia Southcoast Capital. Please pose your question.

Good morning, everybody.

Good morning.

Rob, first I wanted to ask you a little more about if you could characterize Norway? It seems to be an area of interest. And I guess the one idle is -- let me double check first, is that the Winner?

That's correct.

And could you talk about the market there in terms of number of idle rigs, and where you see the demand? We've heard your competitor talk about two to several more rigs, the incremental activity, and then what would be the outlook for the winner, Rob?

Well, I think that putting the Arctic back to work was clearly our priority. And -- or, you know, while nothing's been signed yet, we feel very confident that's going to happen. So we're very pleased with that outcome.

When you talk about the Winner, that's a rig that, you know, to the extent that the market picks up even further, we would look to reactivate, but at this point in time, we don't have any immediate plans to reactivate. We do agree that the market seems to be strengthening. There was some recent announcements of awards in the Berent Sea and maybe some additional work on the troll development. So, we'll continue to stay abreast of that market and assess our prospects for reactivation or movement of other rigs into the region.

Okay. Great. And then, I'm not sure who to address, Rob, or maybe Bob. On the recent -- these new extensions with BP, the Enterprise in particular, are there any incentives in here, or is this basically a flat rate?

They're basically flat rates.

Okay. Okay, great. I appreciate it. And then last for Greg is, going back to this other income, other revenues line, and breaking out the integrated services piece, is the balance of that all reimbursables? Or is there anything else going on in there, Greg?

As you said, there's $23 million of integrated services, and there's about $5 million related to Delta Towing. That's the boat business at TODCO that under FIN 46 had to get consolidated, so -- and then the rest was all reimbursables.

And then on those -- in those reimbursables, there -- we just -- no margins on that at all, correct?

They're very small margins. You know, but essentially no margins.

Okay. And then the -- and then I think right at the beginning, I just want to double check, Bob mentioned the option expensing showed up under the other expenses line, is that correct? Is that where that ended up?

Yes. I mean, the option expenses all relate to TODCO.

Right.

While the TODCO shows it in their G&A, we show it in our operating and maintenance costs.

Understand. Great. Okay. I think all the others had been addressed. I appreciate the information. I'll turn it back.

Our next question comes from Mr. Roger [Riezenschleich] of Schroeder. Please pose your question.

Actually, John Malloy here. A quick question. Just, could you comment a little bit further on your goals for debt reduction by year-end? If not for debt reduction, what's your targeting for uses for free cash flow?

We are continuing to be committed to debt reduction, to deleveraging. Our long-term goals are really to reduce our debt more than half, down to the $1 to $2 billion range. So we're going to continue to take free cash flow from operations, proceeds from asset sales, proceeds from any additional TODCO transactions and apply those toward debt reductions as that makes sense. So our goals really depend on how much cash we generate, but you're likely to see more early debt reduction this year.

Thank you.

Our next question comes from Mr. Andrew O'Connor with Strong Capital. Please go ahead with your question, sir.

Good morning, guys. Congratulations on your quarter.

Thank you.

You know, as a follow-on to the free cash flow question, is there a stated amount of cap ex for 2004? I may have missed that.

We anticipate that our cap ex would run around $140 million in '04. That's about $100 million of sustaining of maintenance cap ex and $40 million related to projects like upgrading the Arctic for its new contract and the Searex 4 for its contract out in the Far East with Total.

Okay. And how much was spent in the first quarter?

I think it was about $18 million.

$18 million, of which $3 million related to TODCO.

Okay. And then you guys have kind of talked around this, but wanted to know, can we quantify how much -- related to the mid water market, sorry -- how much capacity do you think would have to be taken out of this market to impact pricing, and how long would you think, if -- that it would take to get the capacity out? Thanks so much.

That's a difficult question to answer. I think there are a lot of different competing factors that are going to be operating to make the mid water market a reasonably good business again at some time in the future.

One is capacity reduction, although I don't see a tremendous amount of capacity going out of the market. The option value of holding these rigs, particularly when you can get the carrying costs down to next to nothing by completely demanning them and just holding on to them, is something that's tough to overcome.

Sure.

So I think you'll see a few more rigs scrapped. We're looking at at least one more ourselves, but whether we'll do that or not, I don't know. In addition, you'll see some pickup in activity in some various markets. I don't see any one market being a big catalyst like the North Sea used to be.

Okay.

But as you see a little bit of pickup in activity in Trinidad and Venezuela and potentially India, coupled with the independents getting a little more active in the North Sea, you see a pickup, a little bit of a pickup in demand. And if we continue with our discipline in this market, which I think we've had pretty good discipline in terms of keeping rigs staffed, then I think you can see the day rates react.

Now I'm not talking about day rates going back to $100,000-plus where we had at one time with this segment of the business. But I think that a combination of those factors could move day rates from the $50,000 range to the $75,000 or $80,000 range. And when that happens, whether it is two years or three years, I don't know, but I don't think it's going to be driven by one single big catalyst like a bunch of rigs getting retired or scraped.

Okay. All right, sir. Thanks very much.

Our next question comes from Mr. [Rune Jillison] with Carnegie. Please pose your question.

Good morning, gentlemen.

Good morning.

First, I know you're aiming just to keep your current active fleet working, but I was wondering about your longer-term thoughts on the Sovereign Explorer currently idle on the Canary Island, I think. A tightening North Sea market has been mentioned. And do you consider it to target the rig for the North Sea?

Secondly, I have a question on the Mexican market. Because there are some rumors out that Temex could be needing more semis in Mexico.

And thirdly, could you expand on your tax expense for the quarter, please?

I'll ask Rob to answer the first two, and then Greg'll tackle the last one.

Yeah, on the -- with regard to the Sovereign Explorer, that's a stacked rig for us, as you know, and you know, to pull that rig out of the stack and make it active, we would be looking for long-term contracts to justify that move. I don't want to be too specific about where that would move, because I think it depends on the opportunity, but again, we're not going to pull that out of the stack for short-term work. It'll have to be term work.

With regard to Mexico, obviously that's a market that we continue to study. We don't have any conviction right now that necessarily the semi market is going to be strong in 2004. But we continue to study the market and assess what's the right entry strategy and timing for that market.

And I think on the Mexican market, at one point, there was an intent by Temex to pick up 5 floaters down there, but that kind of got dropped by the wayside some time ago. And frankly, we have not heard recently any discussion about reactivating that. So I suspect that the floater market in Mexico is at least a year off before we start hearing anything about that again.

Greg, you want to answer the tax questions?

Certainly. Our tax expense for the quarter includes $31 million of valuation allowance related to the TODCO IPO. What that relates to are the net operating losses that we have tax benefited that relate to TODCO. They approximate somewhere between $350, $400 million dollars. Prior to IPO, we had valuation allowances that brought that net asset down to about $220 million.

With the IPO, we are required under FAS 109 to evaluate TODCO on a stand-alone basis, and that required us to put up additional valuation allowances, bringing the net asset down to about $190 million. So that $31 million relates to the TODCO IPO.

Now, I will say, because of the complexity of calculating that valuation allowance, because it involves forecasts of see through activity, it's possible, probably probable, that during the year, we'll have to make adjustments to that valuation allowance. So you could see additional valuation allowance adjustments related to TODCO during this year.

Without the valuation allowance, our normalized effective tax rate for the quarter is about 27%. And so that's what we'd expect for the rest of the year.

Thanks a lot.

Our next question comes from Mr. Jude Bailey with Jefferies and Company. Please pose your question.

Yeah, it's actually Jud Bailey. Good morning. I had a couple of questions.

First, on the Gulf of Mexico deepwater market, can you give us any more details on the demand you're seeing for the second half? Is that coming just mainly from discussions you're having or are those bids inhouse or could you maybe clarify that to the extent that you can?

Sure. It's a bit of both, actually. We have had discussions with some operators, and then some of the other work is prospective work that we expect will be announced sometime in the near future.

The one thing I do want to point out, though, when we look at the Gulf of Mexico going forward, are a couple of trends we're seeing. One is that we are seeing an increase in ultra deep drilling. And as well, we're seeing a number of wells that are being drilled in deep water go to very deep total depths. And a lot of this, as I alluded to in my prepared comments, relates to what people are calling this miocene, eocene structures and success in drilling those structures.

So both of those really call for bigger rigs. So even if the water depth doesn't necessarily require it, there's a lot of advantage to having large drilling package, high pressure mud pumps, and capacity, et cetera. So that's all very supportive of our big rig inventory in the Gulf of Mexico. And we think that'll be helpful.

The other trend that's taking place that you may be aware of is the increased activity we're seeing from independents in the Gulf of Mexico. This used to be the province of the majors and super-majors, but now we're seeing a lot of activity with the likes of the Anadarkos's, Dominions, Kerr-McGees, et cetera, and that's encouraging. It helps us diversify our customer base and gives us a lot more opportunities to put rigs to work.

So again, as we look forward to the second half of this year, we continue to remain optimistic that in the deep segment of the Gulf, that we'll have a well-balanced, if not favorably balanced, supply and demand in deepwater drilling.

If, given what you expect as far as tightness in the fifth generation market, would it be reasonable to expect then -- would there be some sort of trickle down effect, in that kind of standard deepwater rigs, but also you'd see utilization increase there and potentially day rates?

Potentially so. Of course, our fleet in the Gulf of Mexico is very much skewed toward fifth generation rigs, the Marianas being the one exception.

Yeah.

But certainly, that's a possibility.

Okay. And would you give us any type of magnitude of day rate increases you might suggest for the second half of the year for your fifth generation fleet?

I think it would be premature to do that at this point in time. Hopefully, we'll have a better story for you a quarter from now.

Okay. Great. Thank you.

Our next question comes from Mr. Jason Gilbert with Goldman Sachs. Please pose your question.

Hi. Good morning. I was wondering if you could just help me out with the road map from the 7 cents per diluted share to the 15 cents in the press release.

Greg, you want to do that?

Certainly. It's attached to the press release. But you start with the 7, the gain on the sale of TODCO was about 12 cents that we take out, then you have the tax valuation allowance related to TODCO, which is a 9-cent add-back. You have the after-tax loss on the early retirement of debt that occurred in the quarter. And that's another 9-cent add-back. And then you have the stock option expense related to the vesting of stock options on the IPO of TODCO, and that's about 2 cents. So you take all those into account, and you get to your 15 cents.

Okay. Thank you.

Our next question comes from Mr. Tom Rinaldi with Deutsche Bank. Please pose your question.

How're you doing? On the tax rate guidance, what sort of -- without going into the -- trying to get you to explain how all the different international markets impact that, what kind of activity is that based on? Is that based on this quarter's activity or some sort of projection of recovery in the second half?

Well, under the accounting rules, we are required to project our tax rate for the full year. So -- but that is really an internal matter. We don't get into the details of that tax rate calculation. But it -- the 27% is our expected normalized tax rate --

Okay.

-- for the full year.

Well, I guess then, is the rule for accounting the same as sort of the tone of your commentary? Or is it somewhat more conservative than that?

For accounting purposes, we certainly are consistent with our views of where the market's going and everything, certainly. Now with -- there's certainly no applied conservatism.

I see. Okay. And on integrated services, just sort of looking at last quarter, and then a year-ago quarter, what -- how should we think about that going forward, you know? Basically, nothing last quarter, a couple of million dollars a year ago quarter, and then 40 this quarter. How should we be thinking about that going forward?

I think that you ought to think that -- you're going to see limited integrated service revenues. We do have another job in the North Sea, but I don't think you'll see anything from it in the second quarter. So you'll see a little bit, I hope, in the third quarter.

But I don't think that you can plan on seeing any significant amount of integrated service on a continuing basis. It's going to be kind of a bit of a spot market, and when we get it, we get it, but you can't count on having any of it.

Okay. That answers my question. Thanks. That's all I have.

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

Our next question comes from Mr. Jason Povarza with Howard, Weil. Please pose your question.

Yes, guys. Actually Jason Podraza. Just to follow-up on the integrated services line there, we talked about $23 million in the quarter kind of as the revenue for integrated service, but on that line item of integrated service and other coming in at 40 million, I'm just wondering what the delta is there, what that other piece relates to?

The $23 million relates to the North Sea integrated services that we were talking about, but the $40 million relates to all our integrated services, which now includes our operations in India.

Okay. And then also, just housekeeping type item. Could you maybe detail what was flowing through in the minority interest line this quarter? Maybe a run rate there?

That's all predominantly related to the TODCO, the IPO of TODCO, now that the public owns 23% of TODCO.

All right. Thank you very much.

Thank you. Management, at this time there are no further questions. Please continue with any further remarks that you would like to make.

Okay. Well, thank you, everybody, for joining us today. And I don't really have any other comments, so we'll talk to you again at the end of next quarter. Thanks.

Ladies and gentlemen, this concludes the Transocean first quarter 2004 results conference call.

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