Transocean Ltd (RIG) 2004 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Transocean second quarter 2004 conference -- results conference call. At this time all participants are on 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 on the touch-tone phone. And as a reminder this conference is being recorded today; Tuesday, July 27, 2004. I would now like to turn the conference over to Mr. Jeffrey Chastain. Please go ahead, sir.

Thank you, Dustin. Good morning, and welcome to the review of Transocean's second quarter 2004 results. A copy of the Press Release covering second quarter results, along with supporting statements and schedules are posted on the Company's website, and that's at deepwater.com. You will also find on the Company's website the Monthly Fleet Update covering the current contract status of the Transocean's Mobile Offshore Drilling Fleet as of today the 27th of July. The Monthly Fleet Update is posted in the Investor Relations segment of the website under Financial Reports.

Participating on this morning's call are the following Transocean Senior Managers. Bob Long, President and Chief Executive Officer. Greg Cauthen, Senior Vice President and Chief Financial Officer. Rob Saltiel, Vice President Marketing, and Bill Henderson, Vice President and Controller. Bob will provide opening comments. Rob will provide comments on regional markets and then we'll take your questions.

But 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 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 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 correct actual results may vary materially from those indicated.

Also, I'll remind you that we will use various numerical measures in the call today which are or maybe considered non-GAAP financial matters 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 website and for your convenience, non-GAAP financial measures and reconciliation tables are included with today's Press Release. That concludes the preliminary details of the call. I'll now turn it over to Bob Long.

Thanks, Jeff. Good morning everyone. Consistent with past calls I'm going to comment briefly on the quarter and the market and then ask Rob Saltiel, who heads our marketing efforts to give you some more detailed information on the various markets. I assume you all have a copy of the Press Release so I'm not going to repeat all the numbers. Revenue and earnings at $633 million and 8 cents per share adjusted were down from the first quarter where we had 652 million of revenue and 15 cents per share adjusted. This was primarily because we did not have the same level of drilling services activity in the North Sea and because our effective tax rate moved up significantly in the second quarter from 27% to almost 35%. This gave us an effective tax rate of 45% for the second quarter alone which had a significant impact on the results. We continue to generate good cash flow and brought our net debt down to 2.75 billion from almost 3.2 billion at the beginning of the year. Despite the decline in results I think we've seen some gradual improvement in business and all of our business -- all of our different assets segments.

In the Gulf of Mexico Deepwater Market we've put the Marianas back to work and right now the prospects would be to keep it working. We also recently got a contract for the Cajun Express at $140,000 a day, that's up from $90,000 a day from the time of our last call. In West Africa we've got a nice contract with the Deepwater Discovery, which is just returning from Pakistan and has been more successful than we thought in keeping the 709 and the Rather busy. West of Shetland we just extended the Loyd at a day rate of $144,000 a day. I will also say that the general tone of our discussions with operators is much more positive than the guys at Deepwater. A number of Deepwater rigs are going to get committed to term jobs which start next year based on business that's been outstanding for some time, and we've recently received additional tenders for term Deepwater work to start late this year or early next. Our discussions with operators indicate that a number of additional tenders should be out before year-end and it's even possible that some other jobs may be awarded in direct negotiation.

We're also seeing some small signs of improvement in the other Florida market which nonetheless, remains very depressed and the international jackup with the market remains very good. Rob's going to give you some more detail on that in a minute. Despite the improving conditions in a general optimism, I need to caution you regarding expectations for the near term. As we indicated in the Press Release results for the third quarter are likely to be below the second quarter, and here I'm talking about adjusted earnings. The Trident 20 being out-of-service for the entire quarter and the costs associated with repairs, together with the potential effects of the strike in Norway will have a significant negative impact.

In addition, we'll have a lot of rig time spent mobilizing and preparing for new contracts in accordance with our accounting convention no revenue or profits will be recognized during those periods. Rigs involved in the Mobile contract perhaps will include the Actinia which will be moving for almost the entire quarter. The Jack Bates which will be moving from part of August and all of September, the Trident 6 also part of August and all of September, the Angel probably most of September, and the Deepwater Discovery which has been moving for a good part of July. We've also had some downtime in July on the Millennium, one of our 5th generation rigs in the Gulf of Mexico which had about 2 weeks of idle time between contracts. The Frontier another 5th generation rig in Brazil was down about 10 days to survey work in July; that's down in Brazil. And the Expedition, also in Brazil, was down about 4 weeks in July due to a dynamic positioning problem and several other technical issues. All in all, despite the near term issues we're certainly more optimistic today than we were at the beginning of the year or even at the end of the first quarter. With that I'm going to ask Rob to come in a little bit more in detail on the markets and then we'll answer your questions.

Thanks, Bob. And good morning to all of you who are on the call this morning. I'll stick to my standard format of providing an update on our other floater and international jackup segments first, and then direct the bulk of my comments to our high specification fleet. The other floater segment continues to show signs of gradual improvement, albeit from relatively low levels historically. Of the Transocean fleet of 25 rigs, currently 12 are working, one is in route to a contracted job, and the rest remain cold stacked. So our utilization is roughly similar to where it was during our last conference call.

On the contracting front we are receiving some good news that came through in the last quarter. We're currently in the process of renewing the Transocean Driller with Petronas for an additional 700 days. As Bob mentioned we're mobilizing the Actinia from the Mediterranean to India where it will begin a 7 month contract with Reliance. In addition, the Sedco 706 which has been cold stacked in the North Sea for nearly 2 years has received a letter of reward to return to service early next year in tender assist mode. Looking into the future we expect a better year for the other floater sector in 2005 than 2004 and this year is expected to be better than last. Customers in the North Sea, both majors and independents, are consistently telling us that they expect to increase their drilling activity next year. And in summary, we believe that the bottom for this market has come and gone and that both pricing and utilization will likely improve in the months ahead.

Our International Jackup segment as Bob intimated, continues to be a good story for Transocean. Currently 22 of our 26 jackups are working. Two of these, the Trident 20 and Trident 4 are in the shipyard, but currently under contract once the work is completed. We are taking the opportunity to move 3 of our jackups to Southeast Asia to take advantage of the continued relative strength of that region. The first 2 moves are from West Africa with the Trident 6 loading for dry-tow in late August, and the Shelf Explorer leaving in early October. While the Trident 6 move is being done speculatively the Shelf Explorer is expected to have a contract in place and its mobilization cost recovered upon arrival. We're also moving the J.T. Angel in late September from India to Indonesia where it will start work with BP in Indonesia, and once these moves are complete we will have 2 jackups remaining in West Africa, 3 in the Med., 3 in Egypt, 1 in the Caspian, and the rest of our fleet in either India or Southeast Asia. We expect the jackup segment to remain generally strong for the foreseeable future as demand continues to be high in the markets in which we operate. We look for utilization levels to remain high and the possibility of further rate increases in the months ahead.

Turning now to the High Specification segment which includes our deepwater and harsh environment assets, we continue to remain positive on the medium and long-term fundamentals. And we're sticking with our view that this segment will improve in the latter stages of this year and into 2005. Currently 31 of our 32 high-spec rigs are under contract or are preparing for a contract with only the Peregrin 1 idled. In general, I would characterize this segment as showing definite signs of strengthening, but it may still be a little early to declare a definite market-up cycle.

Starting with the Gulf of Mexico we've seen relatively consistent utilization of our Deepwater fleet for the past quarter and a couple of fixtures that indicate an improving price environment. The Marianas sinked a 100-day deal at $90,000 a day, which was a $5,000 increase and in direct continuation with its current job. As Bob mentioned the Cajun Express will be returning to dominion after its current job with Chevron/Texaco for a roughly 8-month job at $140,000 a day over the bulk of that term. Previously the rig had worked at $90,000 a day and we see that as a nice uptick in revenue performance for that particular rig.

In addition, the Deepwater Millennium is currently working on its last slot under its long-term legacy contract with the Kerr-McGee Burlington consortium after incurring approximately 2 weeks of idle time earlier this month. Both the Millennium and the Pathfinder, the latter of which is working for Marathon in Canada through October, have some available time in the fourth quarter, but we are confident that the visible opportunities in the Gulf of Mexico and overseas give us a good chance of not incurring any downtime as we go forward for those 2 rigs. Based on current visibility we envision further deepwater exploratory opportunities to and ultra deepwater opportunities to materialize in the Gulf of Mexico for 2005 and in the months ahead. In the North Sea, our Press Release has already commented on the strike situation in Norway, so I won't repeat the uncertain outlook there.

Elsewhere in the West of Shetlands, we've signed a 2 year extension on the Paul Loyd, one of our harsh environment rigs, at $144,000 dollars a day, and as Bob mentioned, this is about a 15% increase over its current rate. We now understand there may be additional West of Shetlands rig programs later this year or early next. The Jack Bates which has just concluded its short program in the same area with [Toetal,] will load in late August for its previously announced move to Australia further increasing the tightness of that supply market. Our South America high-spec activity has changed little from our last report with one exception, we secured a 320-day contract with Statoil in Venezuela and BG in Trinidad, to allow reactivation of the Sovereign Explorer which had been cold stacked since the June of last year. The rig will be towed shortly from its stacked position to begin work by late September and the move provides us with an additional act of deepwater asset that will be well-position in the year's time for further work and hopefully improve deepwater environment.

West Africa has seen one significant fixture that we can report and that's a 2-well plus 4 option contract for the Deepwater Discovery with Chevron/Texaco. It should keep the rig busy through the remainder of this year. This work has recently begun and talking about the other rigs in the region, they've stayed consistently busy, although there is possibility that -- that there is some -- that we may see some intermittent downtime going forward for the lower spec rigs that do not have longer-term commitments in place. Speaking of the West African story we continue to participate in the many tenders for that region that are in various stages of the bid process. Toetal's [Acpo] project, Chevron/Texaco [Egbaumi], Shell's Bonga project in Nigeria, and BP's Greater Plutonio project in Angola. The market has also seen the preliminary inquiry of a 1-year program for an ultradeep exploratory rig by Chevron/Texaco in Nigeria and there's an expectation that a block-31 multi-year development tender for Angola is forthcoming. While all of West Africa projects have the possibility of incurring delays in their award and start dates, the number of programs and the term nature of these commitments suggest to us a tighter market, especially for the bigger rigs as we go forward.

Closing now with Asia the deepwater market there has remained relatively stable with the near-term outlook not remarkably different from today. Of not however, is the recent call for tender by Indian company, Reliance for a minimum of 1 year plus 1 year option exploratory program in India and water depths up to 10,000 feet. This would represent the first to form a buy alliance into these water depths which continues the general trend that we like, which is seeing more non-supermajors migrating into the ultradeep arena. Bob, those are the highlights from the market. With that, I'll turn it back to you.

Thanks, Rob. That's all of our prepared comments so we'll open it up for questions.

Dustin, we're ready for questions now.

Thank you, sir. Ladies and gentlemen, at this time we'll begin the question-and-answer session. If you have a question please 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 pulled 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 our first question. Our first question comes from Robert Mckenzie with Freedman, Billings, and Ramsey. Please go ahead with your question.

Good morning all. You painted a pretty positive picture of increasing demand in the deepwater market. I was wondering if you'd give us a feeling for how much upcoming backlog you're bidding on in terms of total rig months or rig years of work.

Rob, do you want to handle that?

Sure. I can't give you an exact number about how many rig months that we're bidding on, but if I talk a bit about what's going on in West Africa everyone of the projects that I mentioned in my marketing section is a multi-year project, and in some cases 3 to 5 years in duration. Acpo is actually a 2-rig project, so on its own it's probably equivalent to 5-rig years. So the thing that I think gives us the most confidence that this market is going to tighten is that once these projects are awarded and the rigs go to work they're going to be locked away for long periods of time, and as such, that will effectively remove them from the supply in the market for over the next 2 to 4 years.

Great. And given that you're locking them up for 3 to 5 years, can you comment on what kind of day rates you're talking about vis-a-vis the current spot rate?

Yeah. It really depends on the project and given that we're bidding on these projects and in negotiations in some cases I'm really not at liberty to tell you what sort of day-rates to expect. But a lot of these projects are going to be looking for the highest spec rigs and on that basis you'd expect to see rates on the higher-end of the deepwater market.

Great. Fair enough. On the mobe costs you've got a lot of moving parts here. Can you give us some color on what the expense might be in the third, and I guess the fourth quarter?

Well, this is Greg. Under our accounting method, we have a contract, typically the bulk of the mobilization cost, as well as any revenues we receive for the mobilization is deferred and then starts amortising once we spud. So what you see on those rigs with contracts, you don't see much cost; you don't see much revenue. So you don't see any profit, but you don't see an increase in cost. Now, for the rigs that we're mobilizing on spec, you would see some costs, but the costs will depend on how we're mobilizing those rigs.

Okay. My last question. You had another good quarter here in integrated services. Can you give us some color on why it was so strong and what you expect going forward?

Not - I'm surprised by your comment that we had a good quarter in integrated services. As we didn't have the same level of activity that we did in the first quarter. The activity -- right now we have 2 different integrated services areas in the company. One is the North Sea, where we had a very successful first quarter, and the other is in India where the -- with the Seven Seas we're providing a tremendous amount of integrated services to ONGC in conjunction with the rig. We anticipate having some additional integrated service work in the North Sea and that is a little bit different than what we're doing in India. In the North Sea we're actually structuring the contracts so that we have a significant upside incentive and get paid for performance. It's not quite like turnkey, because we have protected ourselves with caps and whatnot, but it allows us the opportunity to make a significant amount of money. We expect to see a little bit more of that activity in the third quarter, but not as much as we had in the first quarter. In India, the Seven Seas contract is fairly steady. The amount of integrated services revenue that we actually realize will just be a function of the requirements for any given well at any given time that the Seven Seas is drilling.

Great. Thanks. I'll turn it back.

Thank you. Our next question comes from Dan Pickering from Pickering Energy Partners. Please go ahead with your question.

Good morning, guys. I was hoping that you could walk us through in a little bit more detail the issues in Norway. You talk about the rigs that are affected. Can you tell us where we're at in terms of -- are we still receiving day-rate at this point, what any force majeure rates might be and that as a negotiation?

Dan, I need to be careful in exactly what I tell you here since we are in the middle of negotiations, but at the present time all of the rigs are still working. We anticipate 2 of them to be completed in getting to the safe mode by tomorrow, in which case we'll downsize the crew and the other one by the end of the week. So by the end of this week, we should have the 3 rigs that are effectively shutdown, and in a safety standby mode with reduced crews. We will get a force majeure rate on all of the rigs which will give us a cash flow that we think will just about offset the reduced cash cost that will incur on the rigs.

Okay.

And the status of the negotiations, this week or early next week, they should be a mandatory arbitration. We're not particularly optimistic that that's going to result in anything at the present time. So right now, the prognosis for how long the strike will last or how it progresses in terms of whether or not it's limited to the 4 rigs involved, which are 3 of ours plus 1 of -- I think it's [Hodgefeld's] rig -- or whether it expands is something that's all part of the dynamics that's going on in Norway. And I couldn't really tell you where that's going to go.

Okay. And I want to make sure that the indications you had for a softer third quarter versus second were from the 8 cents reported number; is that correct?

That's correct.

Okay. And Bob, if we took Norway out of the picture and we took the rig fire repair cost out of the picture, how would that have -- how would your guidance have -- I'm just trying to quantify in aggregate, what I would consider to be sort of these one-time or at least transient events?

I don't have a number to give you on that, Dan. I haven't actually worked up -- I don't have in front of me a detail of the specific elements of any kind of a forecast.

Okay. Last question. Your contracted high spec floaters 48% for next year, would you be comfortable with that number being 100% or do you always want to have some rigs exposed to spot jobs? Talk to us a little bit about what your target would be for long-term contracted 2005.

Well, I think that's a dynamic target, Dan. As the market improves, as day-rates get to a good enough level I wouldn't mind having all of the rigs contracted. Right now, I'd say we see the day-rate environment steadily improving. I think that how we see the market developing here, we anticipate a number of rigs being locked up on term contract, hopefully in the very near future. The work won't start until next year, but the rewards will be made and those will be the bids that were outstanding for some time, but we know the operators are very close to making an award. That could indicate what the future of 3 or 4 different rigs are going to be fairly soon. And now we have additional tenders coming out and we know that there are additional tenders that will come out later on. We are sensing that some of the operators are starting to get concerned about the availability of ultradeep capacity. So we will lockup rigs and kind of monitor the day-rate environment as each one of those contract awards are made and as each bid opportunity is looked at. I couldn't tell you that we have a target that says we want 70% or 80% or any particular amount of capacity locked up and the rest on the spot market. That's just going to change with the dynamics of the demand changes.

Okay. Thank you.

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

Good morning, Bob

Good morning.

Bob, just a quick follow-up on the strike in Norway. Are the issues surrounding the strike, are they different this time than what we've seen in the past, and if so, could it actually mean that this strike gets carried out for a period of several months as opposed to a few weeks?

Well, I think that they're different to the extent that the issues on the table are not directly compensation issues. The issues are more in terms of the Union's ability to affect the way we run our business. Issues like whether or not we can bring non-Norwegian crews into Norway. That's a pretty significant consideration when you've got short-term jobs bringing rigs into Norway and then back out. Issues like whether or not you have to keep Norwegian crews on the rigs when it leaves Norway. And I'm not sure how many of you are aware of the cost structure in Norway, but where they work 2 weeks on and 4 weeks off with some fairly high tariff schedules. The actual cost in Norway run, what, about 30,000 a day higher than outside of Norway? So that's a very significant issue. They're also trying to extend the tariff agreement to cover rigs that are not working on location, but are just in Norway, and that could be in the shipyard. You could imagine the difficulties that that might make for people who are in the shipyard with a contract with the shipyard and force majeure clauses and delays with the shipyard, and if you get into an issue with the Union. So there are some pretty fundamental issues there that I think mean that this strike could last for a fair amount of time.

Okay. Thanks. That's helpful. Bob, Transocean paints a pretty robust picture of the deepwater in 2005. How close do you think the industry is to seeing new construction for, kind of 5th generation rigs?

I couldn't really answer that question. I hope it's a ways off, but you know, you just never can tell in this business. Right now I don't know of anybody who's even thinking about that, and I don't sense that any of the operators are anxious to go out and sign up a 5-year contract at a rate that would justify a new bill.

Right.

So I'm hopeful that's not on the horizon here for the next couple of years.

Okay. And my last question, Rob, for you, you didn't talk much about the Brazilian Market or if you did I didn't catch. Just tell us a little bit what's happening in Brazil, the outlook for the Peregrin 1, and I think it's the Sedco Express is going to be finishing up its contract in Brazil soon. What's the outlook for that rig?

Sure, Scott. In general I think we're saying that the Brazilian Market is relatively steady. So we don't see the number of rigs working down there changing significantly over the foreseeable future from where it is today. Just commenting on a couple of things you alluded to. The Peregrin 1 has been idle since April and we continue to evaluate opportunities for that rig going forward. In terms of the Sedco Express, in fact, the Navigator as well, both of those rigs have contracts that will be expiring later this summer and hopefully over the next 30 to 60 days we'll have something to announce on both of those rigs

Would you expect them to continue working in that similar rates?

I think, yes. The general question -- answer to that would be to the extent that they stay in Brazil they would work at similar rates. The opportunity going forward for Brazil, I think is two-fold. One, when you talk about the IOCs, we would certainly like to see an increase in activity down there. By the outside independent oil companies, international oil companies, and we're hoping that we'll see an increase in by 1 rig in the mid-water fleet. Now, this would be the [morgued] rigs up to 1,000 meters. We are seeing a number of inquiries and programs being discussed by the likes of [inaudible], [Vintershal], [Incana BG], Chevron, and others, and we're hopeful that the legend, which is currently idle can find some work hopefully later this year or early part of next year. In addition, we do know that there's some work out there by some of the supermajors, Chevron and Shell that's on the horizon that we hope will come to fruition for DP rigs in deeper water depth more in the 1500 to 1700 meter range. Turning to Petrobras, I think one of our competitors announced on their call about a 1200 meter tender. We expect that sometime this Fall and that's something we'll be taking a look at that. In addition, we think that by early part of next year we may see 1 or 2 tenders for rigs in let's say the 1500 to 2,000 meter range in the Espirit Santo area and in the gas fields offshore Santos. So we are seeing some expectation of activity by Petrobras, but whether that is actually net, incremental rigs or if that's in replacement of existing contracts. At this point depending on the timing that's a hard call to make. The last thing I'll say on the area is that we are watching pretty closely the 6th licensing round, which is coming up in mid to late August. And this time we understand, as it's been publicized, that Petrobras is putting -- some of the Petrobras blocks formerly explored by them are in the licensing round. So we're hoping that will attract more international interest and we'll see growth in the IOC sector there based on that realm. But we'll have to watch how that develops over the next month.

Thank you.

Thank you. Our next question comes from Roger Read with the Natexis Bleichroeder. Please go ahead with your question.

Natexis Bleichroeder. Good morning, gentlemen.

Good morning.

Looking at your comments earlier about the positive tone from your customers, any idea when that can actually translate into real awards? I mean, you also made a further comment about some of your customers look like they might be getting a bit more concerned about availability of rigs I'm sure as we progress into 2005. Can you comment on kind of what exactly a positive tone is?

I'm happy to comment on that. I think the positive tone is, as Bob alluded, is an expectation that the -- if you just do the count of the number of long-term and high specification, and by that I mean, 5th generation type rigs that are being looked at for jobs in West Africa and elsewhere, that people are realizing that this issue of available supply may be something that is coming to an end. And what I think we'll see over the next quarter is we will see a number of these opportunities come to fruition either by us and/or our competitors on the basis of that customer concern. Obviously I think the market needs to be shown that in fact this optimism will materialize and I think that's really our challenge for the next quarter is to bring a couple of these longer-term opportunities in.

So is it a possibility that we could see one or 2 awards and then that could shake loose a few more as the companies get a bit more concerned?

I think that there is certainly a likelihood that you'll see a bit of a cascade or domino effect that as the number of rigs termed up for long-term work increases, as I said before, these are for long-term jobs, and the available supply will contract, and you may see a bit more of an active award timing from our customers. But our hope would be that over the next 30 to 60 days we could actually demonstrate that.

Okay. Thanks. And then just a couple of follow-ups on the North Sea. First with the Norwegian strike, who is actually in the lead in terms of negotiating with the Unions and what influence do you have there? And then secondly, if you could just quickly comment on your outlook for the UK sector in the North Sea during this upcoming Winter season.

Well, as regards to the strike, the negotiation's actually conducted between the Union and the Shipowners' Association, which represents all of the rig owners. We have a representative on the Shipowners' Association Board, and the Shipowners' Association, as a group collectively, will decide on the negotiating strategy and how we proceed. As far as the UK sector of the North Sea, I'll let Rob handle that.

Yeah, I mean, as I said in my comments, the mid water part of that market, what we call the other floater segment, we think that that market will continue to strengthen throughout this year and into next. Most of our rigs, we basically got 3 of these other floaters operating in the North Sea and with the exception of a little bit of time in December based on options that we expect to be exercised, we're pretty much fully booked on those 6 rigs through the end of this year. Looking toward next year, as I mentioned we've had a number of discussions with customers and this would be both majors and independents, and they're consistently telling us that they're increasing their drilling activity going forward versus certainly where it was last year, in a lot of cases versus this year. So there is definitely a newfound optimism in that market. Now, again, we have to temper that by saying that we're at low levels historically. But given where we are today, I think a year from now we'll see a stronger market and again, you know, evidence in part by what we saw with our West of Shetlands fixture on the Lloyd. I think that you'll see a likelihood of increased rates next summer versus where we are today.

Thank you.

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

Yes. Thanks. I wanted to ask on the Transocean Arctic which was intended, you say, to start on August 15th. Does that also come under the same contract issues as if you're still on strike on August 15th? That the rig would still commence the contract, but would be on some kind of a standby rate?

That's correct. Whenever the rig is finally -- the preparations for contract are done and the customer accepts the rig, then it should go on contract at a standby or reduced rate until the strike is settled.

Okay. And is -- on these reduced standby rate, is there a fixed period of time in which you would be on that? It sounds like you anticipate possibility of a long strike. Is there any term limit to that standby rate?

Well, there's no specified limit, I don't believe, in any of the contracts that says the rate ceases after a certain time. I would say that after a certain amount of time, the operator would probably have the right to terminate the contract. Although, we don't anticipate that that will be a factor in any of these issues.

Okay. And just finally then, if the strike is resolved, what length of -- what would be the lapse of time before you would be back on your full day rate most likely?

Well, it would just be a matter of days to crew up the rig and go back to work.

Right. Okay. Thanks very much.

Thank you. Our next question comes from Thomas Rinaldi with Deutsche Bank. Please go ahead with your question.

Good morning. On the investment in TODCO what's the latest thinking on the timing of any kind of reduction of that investment?

Well, we are still committed to ultimately divesting 100% of TODCO. Right now, the market seems to be improving for TODCO's business. I'm not sure how many listened to TODCO's call this morning. So we're hopeful that we might be in a position that we could do something sooner rather than later, but that's a little bit of an art and not a science. So we can't really tell you exactly when we'll decide is the right time.

I see. Okay. It seems like this quarter the tax rate came in a little high at least in terms of what we were looking for. Going forward with the strike and everything else, and I know it's a moving target. Can you give us a sense of second-half tax rate directionally what we should be thinking, and maybe next year if you use consensus as a rough proxy?

I'll let Greg comment on that.

Our second-half tax rate right now we would expect to be around 35%. However, as we cautioned in the past, that tax rate is very sensitive to a number of factors, changing mix. One of the drivers that set the tax rate up was the rig repositionings in the third quarter. So we've had a big mix change in where our earnings -- our revenues are being earned and so that changes our tax rate. We have in '04, we have this TODCO valuation allowance on our deferred tax asset that is really unique to '04. We're not going to see that in '05. But that's going to impact the rate for the rest of '04 and we will always have impacts on rates from developments in various International and U.S. tax litigation, tax disputes, audits, however you want to describe that. And those cause your rate to be lumpy. So although we right now expect it to be 35%, I would caution you that could significantly change up or down, depending on a number of those factors. We haven't really looked at 2005. Certainly some of the things that are in that 35%, the increase in the tax valuation will allow some of the tax disputes, won't be there in 2005. So we'd expect a rate lower than that. If consensus is higher than what we're currently expecting for 2004, that would, in general, tend to drive the rate down, depending on the mix of where those earnings are. So it's a pretty complicated answer to your question, but 35% for this year lower somewhere under 30% next year depending on earnings level.

I see. And one sort of detailed question on the Arctic. Bringing it out of cold stack, but yet going into a strike situation, Netnet, do you -- what's change in cash flow to you? In other words, would you have to spend money on it even at the standby rate that would exceed just what it was in Q2 while it was cold stacked?

Not sure I fully understand the question, but in Q2, while -- well you say it's cold stacked. We've actually been now for some time preparing the rigs for this new contract, which involved a fair amount of modifications to the rig. So there's a fair amount of cost that is being first capitalized because there are some actual significant upgrades to the rig being done. Other costs are being deferred when you flip forward to completion of the preparations and the rig goes on contract as a standby rate. We'd anticipate right now that if things go the way we expect, we would be getting a rate from the operator that would essentially cover our cash cost. So we'd be cash neutral. If you look back at the second quarter you're not going to see a lot of cost expense, but we actually spent a lot of cash on the rig during the second quarter.

I guess it's more of an accounting thing I'm asking. If the clock starts ticking on what you've done to modify the rig, but you're still only at a standby rate. Do you quarter-to-quarter, Q2 to Q3, does it go negative until you get a contract rate?

I guess you're asking whether the contract rate would cover the amortization of the deferred cost in addition to the cash cost, and I guess maybe it would not. But I couldn't tell you exactly how much the short fall would be.

I see. Okay. That's all I have. Thanks.

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

Good morning, guys. Two things; at least two things. The first is, by our calculations, the strike in Norway before the fourth rig would have come on line should cost you about a penny a share per week. Would you guys acknowledge that or disagree with that view? That's my first question.

I don't think that we've calculated it. But it sounds -- that would be 4 cents a month. It sounds too high, but we haven't actually done a detailed calculation of that.

Okay. And secondly, I just wanted to clarify something. Dan asked earlier about the cost related to these jackup rig repair and I might have misunderstood. Are you going to be expensing the cost to repair that rig during the quarter? And is that part of the downward revision or is that just the less utilization, that the fact the rig's not working during the quarter is --?

Well, there are actually two impacts of it. One, is the lost revenue or earnings, if you will.

Right.

The other is we will be spending a significant amount to repair the rig and we have a fairly high deductible, so it's probably not going to be covered by insurance.

Okay. So it's the non-insurable portion?

Correct.

Do you have a sense as to how much that cost will be?

We haven't really got the rig into the shipyard in [Bacou] yet, but my guess is that it's going to range between 10 to $15 million.

Can you just remind us again what is your standard deductible on your policies?

Greg, you want to --

Our standard deductible is $10 million, but we also have a -- on top of that a $25 million aggregate that we would have to burn through before we get any insurance proceeds. So we don't expect any insurance recovery on this incident.

Okay. That's very helpful. Thank you.

Thank you our next question comes from Jason Gilbert with Goldman Sachs. Please go ahead with your question.

Good morning. It appears to me that your pace at which you're mobilizing rigs increased lightly Q2 over Q1. And I was wondering if we should expect this level of movement into Q4 of this year?

I don't think so. I think a couple of things have happened that have accelerated the mobilization and movement of rigs. One is with the pick up in activity for jackups in the Far East and the kind of lull in West Africa, we've moved a lot of rigs, a lot of jackups out of West Africa. As Rob said, I think we only had 2 left there that are contracted once these moves are done. So I don't anticipate that we'll be moving much of anything else out of Africa from the jackup standpoint. To pick up inactivity in a little bit in the mid water business where we're able to move the Actinia to the Far East and pick up inactivity in the Far East with the Bates going out there. I don't right now see any additional -- there is a little bit of additional potential opportunities for a mid water floater in the Far East. But right now, we don't contemplate moving another rig there. I wouldn't rule it out. But I think that you're not going to see the same level of activity in terms of mobilizations going forward.

And have you experienced any difficulty getting capacity on heavy lift vessels from dock wise or others and has that been a constraint at all?

Yes, that's been a significant issue for us to deal with with all drilling contractors. One of the reasons that the Shelf Explorer won't be moving until October is an ability to get an appropriate vessel to move it. So that is something that we continually deal with these days because of the limitation in capacity.

Uh-huh. Uh-huh. Okay. Second question. I was wondering if you could maybe go into some more specifics related to incremental rigs needed by project in West Africa, and the timing of contracts and the expected length?

Okay.

Rob, you want to try this one?

On the deepwater side.

Sure. I'd be happy to do that. You know in Nigeria, as I mentioned there are really 3 projects that are in, let's say clear view. The first is, let's say Toetal's Acpo project. This is a 2-rig project with schedules startup of the 2 rigs in the latter part of next year, 2005. Each of which is for -- 1 is for 2 years and 1 is for, let's say 2 1/2 years. Chevron's Egbaumi also in Nigeria is really a continuation of the work that the energy is currently doing for Chevron in Nigeria. We expect a call for commercial tenders shortly, and an award of the rig before year-end, and a start of that rig in, let's say the second quarter of next year, and that's likely to endure for, let's say 2 to 4 years. And then Shell's Bonga project the tender docks have not been received yet. As you may know, that project was delayed, but we expect those shortly, and for an award of what will now be a bigger rig than what they originally envisioned. Probably something closer to a 5th generation rig to start drilling on the Bonga project in mid 2005, for again a minimum term of 2 years. Greater Plutonio in Angola is a project that has been around for a while. That's still envisioned to be a 3 to 5 year term starting in the second quarter of 2005. There are also other projects that I alluded to in my discussions which are, let's say maybe a little bit less certain in terms of their exact timing, but I'll mention them. Chevron/Texaco has come out with a preliminary inquiry for a 1-year ultradeep exploratory program for Nigeria. We expect that that could start in early '05 and in addition, we expect that we will hear shortly about a Block 31 development. This is a block that the BP also operates in Angola. We understand that there may be a startup of a rig as early as, let's say mid year, next year, and that project could be for up to 3 to 4 years of duration. But in that particular project's case, we haven't seen specifics on that.

Okay. So it sounds like in aggregate maybe we're talking about 4 to 7 incremental rigs? 5 to 7?

That's correct.

Okay.

And that's again, that's just for the stuff that we can see now and for West Africa.

Great. And I guess my last question is, as I understand the Norwegian Government has stepped in on occasion to force oil workers back on the job. Is there any indication that this may occur or at what strike duration has this occurred historically?

Generally the government steps in if production shuts down and then they come in pretty quickly. In this case, the strike is targeted strictly at the drilling rigs and they've limited it to a few number of rigs which won't impact production. So whether or not the government actually gets involved is an open question at this stage. If the strike expands to include more assets, then it could impact production and bring the government in. But whether or not that will happen, we don't know.

Right. That's all I have. Thank you.

Thank you. Our next question comes from Kurt Hallead with RBC Capital Markets. Please go ahead with your question.

Hey, good morning.

Good morning.

I just had a couple of follow-up questions. First on North Sea demand we begin to see some varying viewpoints with respect to the [inaudible] last year. You know, [Witherford] has been very positive. [Slummer Jay] is kind of less enthusiastic. You guys are enthusiastic. Can you kind of help us map things out in the North Sea a little bit so we can get a better understanding of what's exactly going on over there; specifically for 2005.

Yeah, I think I may have already given you most of what we have to offer here and that is the customer expectations are that drilling activity will increase next year. At this point I think the plans are still being developed in terms of definitive calls for tender or commitments to rigs. But let's say that there's -- all of the data is consistent and suggestive that the market is going to pick up. Now, could that change? It could, but at this point I think we've got enough data points to draw a trend line that says that we'll be stronger.

I'll tell you one thing that's made us a little bit more optimistic here recently is, we've been seeing the increased activity planned by independents for some time now, and that's continuing to slowly build. But we're now starting to see indications that several of the majors are going to be a lot more active in the North Sea than we had originally anticipated. That's both West of Shetlands and the North Sea. So the combination of the factors seems pretty positive, but we can't point to any big backlog or outstanding bids and tenders because you don't tend to have very long-term contracts there like you do in the deepwater West Africa.

And it appears to me that the prospects here for the third quarter appears to be a lot of noise, for lack of a better term. The fundamentals of business seem to be improving and I guess it's safe to say we could start to see some inflection point in the deepwater market come fourth quarter based on your commentary. Is that safe to say?

That's what we hope for.

Yes, it is.

Okay and then lastly. If you've already mentioned this I apologize. But can you just go over one more time what your plans are in terms of the use of cash as it continues to generate some substantial free cash flow?

Well, we haven't commented on it, but we'll be happy to. Our plans for the use of cash remain pretty much the same. We're committed to paying down debt. That's what we'll do if we do -- if we succeed in divesting anymore with TODCO we'll use the cash to pay down debt. And until we're down to -- we've traditionally said we want to get our debt down to the 1 to $2 billion range. And preferably closer to the 1 billion range. Until we get down somewhere in that range that's pretty much going to be our focus.

Thanks a lot.

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

Yeah, hi. Could you tell us when Actinia is going to start its contract in India and what kind of day rate do you expect for that?

Yeah. That's expected to start in -- sometime in October and the rate will be in the mid 50s.

Mid 50s. Okay. And just in modeling, any guidance on DD&A? And if you could take a stab on the operating costs as well, I know there are a number of moving parts on that. But any range you could provide in operating costs?

On depreciation we expect it to trend up just a little bit the rest of this year to, you know, somewhere over 135, a little bit over 135. Driven mainly by cap customer required CapEx and so it's being depreciated more quickly, so, and driving the depreciation up. We really don't comment anymore on our operating maintenance expense. It driven by a lot of complex factors, especially during this period of rig repositionings with activity changes, rig repositionings or accounting methods. So we're not going to comment on operating maintenance expense.

All right. Thank you very much.

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

Good morning, everybody. First a question, Bob, you mentioned in your comments about the thought that some rigs might get contracted here on under direct negotiations. And so I wanted to ask you if that was a bit of a change here recently to see some of these high specification floaters on a direct negotiation versus a straight up competitive bid? Or would you see that the amount of rigs contracted that way has been pretty steady?

I'll let Rob comment on that.

Oh, thanks Rob.

Yeah. Just as an example the contract that we've got on the Cajun Express with Dominion, that was a direct negotiation. And I think there are other areas of the world and certainly in the Gulf of Mexico where we have that opportunity. Most of the very long-term projects the ones that are most visible in West Africa are of course by tender. But where we have relationships in place or frankly where we've got the best or the only rigs that can do the work we'll have a better opportunity for negotiations.

Any change in that level over the last quarter, Rob, of a more or less direct negotiation opportunities?

I mean, I don't think it's a -- I don't think it's anything remarkable. You know, again, I mentioned the Cajun Express was negotiated. We did negotiate our agreement with BP ultimately, which was an extension on the Paul B. Loyd, so it does occur. I think as we go forward and as we continue to predict the market tightening, there may be more opportunities for direct negotiation. Especially as we have a pretty good position with regard to the 5th generation fleet. But at this point, that would just be speculative.

Sure. In these discussions or in bidding for some of these '05 potential starts, could you tell us if any of these contracted rates are being discussed or considered, you know, at or near some of the initial post construction rates on these 5th gen? Are we getting back to those kind of rates at least in conceptually?

Well, I think on certainly the early fixtures that you'll see we're not going to be at that level. Those are certainly levels we would aspire to but as we said or as I said mentioned earlier an answer to a question. I think this market, if it continues its upward motion, we'll see gradually increasing rates. But we're probably a couple of quarters out before we would look for those kinds of rates.

Okay. Great. Yeah good question. Then my next question is I wondered if you were going to forego a day or so revenue on a semi and purchase a study that's apparently out there by Wood Mckenzie. If you've done that and if you have, you know, that would be a global look, independent or subsidizing what y'all have done. Have y'all looked at that study? Are you aware of it?

I'm certainly aware of Wood Mckenzie and the work that they do. We typically don't comment on conference calls about specific information we use for our marketing intelligence. But they're a great outfit and we'll certainly take a look.

I got you. And thanks Rob. One quick one Greg. So still you'd confirm CapEx plans for '05 at the current time would be looking at this $100 million?

Right now that would be a good guess. The rest of this year of '04 will trend a little higher than that, probably $80 million for the second half of the year, driven -- the increase driven by contractual customer. Driven requirements that typically we're being reimbursed for up either up front or through the day rate. Without that, depending on activity levels, we would expect it in that $100 million a year range.

Good stuff. I'm sorry one last Rob -- I wanted to check with you, though, I'm sorry, on -- any discussions about incentives -- performance incentives on contracts or are those pretty much gone by the wayside these days?

Yeah, I think the -- there's a couple things going on in the market. I think a lot of our customers are getting very focused on performance and in some of the -- and certainly we internally are spending a lot of time emphasizing the performance of our rigs. Especially our higher spec rigs. We are seeing in some of the tenders, in fact, in clauses and the compensation section that link day rates and overall compensation to downtime safety and performance of the rigs. So it's certainly out there. But there's not let's say uniform acceptance among the operators that incentive contracts are where they want to go.

Right

We're certainly comfortable at looking at those structures and we continue to do so. But at this point I wouldn't say that -- let's say outside of Brazil where it's become fairly standard to have some incentive in the contracts, that we would uniformly see a more incentive contract, let's say over the next couple of quarters than what we're seeing now.

Okay. Yeah, that's exactly what I am checking on. Thank you very much. So I'll turn it back. Thanks guys.

Thanks you. Our next question comes from Bill Sanchez with Howard Weil. Please go ahead with your question.

Yes, morning. Rob, question for you. A bit of a follow-on from an earlier question. When you look at the outstanding ultra deepwater tenders and the upcoming tenders and you talked a little bit about it in the West African markets. But I know you have also had an opportunity in ultra deepwater as well. Do you have the right rigs and the rig time available in each of those markets currently to fulfill the contracts you're hoping to get? Or should we expect to see as we enter '05 additional rig mobes from certain markets? And the reason I ask that is because my understanding was the Cajun Express was one of the units, I guess, that you were targeting for West African-type work. And it sounds like now its got a contract, at least it will take it through May with Dominion. So if you'll just talk a little bit about that please?

Well, sure. I mean, if you just look at where our rigs are located right now. I mean, the bulk of our rigs in the, let's say in the high specification segment or in the Gulf of Mexico and in Brazil. So to the extent that there's a lot of projects that we would be successful on in West Africa. We -- if you just do the math we would have to move some rigs into the region.

Okay.

So I definitely think depending on how those contracts are awarded and our success in getting those awards, the timing of the award, as well as our success may determine whether or not there are any further mobilizations required.

Is the Cajun Express still a candidate for West African mobe at some point?

Yeah. The whole Express class, I think is a class of rig that we think is well-suited for West African development. So whether it's the Cajun or the other two rigs in the Express class we think they could certainly find a home there.

Thanks, Rob.

Thank you our next question comes from Geoff Kieburtz with Smith Barney. Please go ahead with your question.

Good morning. Just a question on the Norway strike again. What is the longest period of time that you've been shut down because of the strike in Norway in the past?

You're testing my memory there. I think the last strike we had when we had any significant downtime was '97 and '98, and I'm being told here in the last 10 years the longest we had was 55 days.

55 days. Okay. And just a clarification on your comment regarding the force majeure rate. When you flip over to the force majeure rate taking into account the cost reductions you planned, you expect to be cash break even from that point?

Yeah. We hope that we'll get the cost down on the rig sufficiently such that the reduced rate that we get will just about cover our cash costs.

Okay. Great. Thanks very much.

Thank you. Ladies and gentlemen, if there are any additional questions please press the star, followed by the 1 at this time. If you're using speaker equipment you'll need to lift the handset before pressing the numbers. Gentlemen, it appears that there are no further questions at this time. Please continue.

Okay. Well, that concludes our conference call then. We thank everyone for participating and we'll talk to you next quarter.

Ladies and gentlemen, this concludes the Transocean's second quarter 2004 conference call. If you would like to listen to a replay of today's conference call please dial 303-590-3000, followed by the pass code 11002859. Once again, if you'd like to listen to a replay of today's conference call please dial 303-590-3000, followed by the pass code 11002859. You may now disconnect and thank you for using ATT teleconferencing.