Transocean Ltd (RIG) 2004 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Transocean third-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. (OPERATOR INSTRUCTIONS) As a reminder this conference is being recorded today, Tuesday, October 26 of 2004. I would now like to turn the conference over to Mr. Jeffrey Chastain. Please go ahead, Sir.

Good morning and welcome to this review of Transocean's third-quarter 2004 results. A copy of the press release covering third-quarter results along with supporting statements and schedules is posted on the Company's website at Deepwater.com. You will also find on the company's website the Monthly Fleet Update covering the current contract status of the Transocean mobile offshore drilling fleet as of October the 26th. The Monthly Fleet Update is posted in the investor relations segment of the website under financial reports.

Participants on this morning's call are the following, 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, Rob Saltiel, Vice President of Marketing, and Bill Henderson, Vice President and Controller. Bob Long will provide opening comments followed by a review of regional business conditions and marketing efforts by Rob Saltiel. And then we will take your questions.

Before I turn the call over to Bob I will 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 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 risk which are described in the Company's most recent form 10-K and other filings with the Securities and Exchange Commission.

Should one or more of these risks and uncertainties materialize or 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 website and for your convenience; non-GAAP financial measures and reconciliations tables are included with today's press release.

That concludes the preliminary details of this call and I'll turn the call over to Bob Long.

Thanks, Jeff. Good morning everyone and thanks for joining us. I am guessing that what most of you are interested in is what is going on in the market given the environment that we are in today. With that in mind I am going to comment briefly on some of the factors affecting results in the third quarter and then ask Rob to give you our view of what's happening in the various markets around the world.

First, if you exclude the gain we recognized from the sale of an additional 30 percent or so of TODCO, we earned 8 cents per share which is a little higher than expectations. However, we did benefit from a tax rate in the quarter that was a little lower that what we had previously anticipated. All of our markets continue to show signs of improvement in the quarter, but we did suffer from the impact of the strike in Norway which kept 3 rigs idle and for the impact of the fire on the Trident 20 which occurred in July and a blowout on the Cunningham. Both of those rigs are now in the yard undergoing repairs.

We spent a little over $7 million on the Trident 20 in the quarter and estimate another $10 million will be spent in the fourth quarter with the rig not returning to service until late in the quarter. We have not completed the estimates for the repair of the Cunningham but preliminary survey suggests it will be in the 10 to $15 million range to be spent in the fourth quarter with the rig not returning to work until around the first of the year.

We do continue to generate a lot of cash and remain focused on paying down our debt. With the redemption of $342 million of face value senior notes which were completed yesterday and approximately $270 million of proceeds from the TODCO secondary, our net debt is now under $2.3 billion, down from almost 3.2 at the beginning of the year. In regards to TODCO we remain committed to our strategic decision to divest 100 percent of the Company. After the recent secondary we now own approximately 47 percent of TODCO, but with the dual class stock we still have over 80 percent voting control, hence we will continue to consolidate TODCO until we are below the 50 percent voting control.

With that I will ask Rob to give you our view on what's happening in the various markets around the world.

Thanks, Bob and good morning to all of you on the call. Despite recent hurricanes, fires and labor strikes I am happy to report that the market outlook for our business is decidedly upbeat. As before, I will provide a brief update on our other floater in international jack-up segments first. And then direct the majority of my comments to the outlook for our high specification rigs. The other floater segment which includes rigs capable of operating in water debts up to 4500 feet, continues to show signs of improvement. And these past quarters saw the establishment of significant fixture signaling its comeback. After the impending sale of the Sedco 600, Transocean will have 24 rigs in this segment, of which 12 are currently working. This puts our current utilization higher by one rig versus the time of our last conference call.

The North Sea where roughly half of our other floaters fleet resides has seen an increase in bidding activity and rates that signals this region's resurgence. We recently signed a Sedco 704 with Venture, a UK based independent, for one year at $91,000 per day, starting in March 2005. The rig had been working at 55,000 per day at the time of our last call. In addition, we just signed the John Shaw within Canada at $85,000 per day and will keep that rig busy through the winter season.

Subject to successful conclusion of ongoing discussions we anticipate the possible reactivation of 2 additional units that are currently cold-stacked, by the first quarter of 2005 which would increase our active North Sea fleet from 6 to 8 units. In the shorter term and in keeping with improving market conditions, we expect all of the currently active North Sea rigs in this segment to stay busy through next summer.

Outside the North Sea we are still experiencing some weakness in the other floater segment in west Africa and Brazil. The southeast Asia market is holding its own and will be helped by the reduction of one rig with our impending sale of the Sedco 600. And as indicated in our press release we continue to evaluate the possibility of rig reactivations in the Gulf of Mexico subject to adequate term lengths and day rates. Our international jack-up segment continues to experience high levels of utilization and consistent day rates. 21 of our 26 jack-ups are on the payroll today and with the exception of the cold-stacked Jupiter, the other 4 idle jack-ups have lined up follow on work opportunities.

As we have indicated previously the outlook for our jack-up business continues to be favorable and we continue to project a tight supply demand balance in the major markets where we operate. Our focus remains on the India and southeast Asia markets where we have 13 of our 21 working rigs. As we announced on our last call we have moved 4 of our jack-ups to capture better market opportunities. The Trident 6 was moved speculatively from West Africa but is now expected to begin work in India in the next few weeks. The Shelf Explorer is moving from Equatorial Guinea for a 7-month job in Indonesia to begin in December. And the J.T. Angel formally in India, is preparing for a term program also in Indonesia.

Having completed these moves we believe our jack-up fleet is better positioned to maintain consistently high utilization going forward. Additionally, we will investigate opportunities to increase rates in the months ahead. Our analysis indicates possible rig shortages in the southeast Asia and India markets in 2005. And as we will only have a limited number of our jack-up rigs rolling off contract in the next 6 months, we will be in a good position to test higher rate levels.

In the high specification segment which includes our Deepwater and harsh environment assets we are trading in our cautious optimism for a more bullish outlook, especially for our ultra Deepwater rigs. This past quarter has seen the turning point for the ultra Deepwater segment and day rate fixtures as the expected tight supply demand balance finally became apparent to operators and contractors alike. We continue to project the supply shortage in the highest specification 5th generation rigs; it is likely to persist throughout 2005. Driven by the many term fixtures which are being announced or are pending announcement.

Ultimately tightness for the top rigs will drive improved rates in utilizations for the lower spec Deepwater rigs as well, and we are just starting to see some evidence of this. Currently we have 28 of our 32 high spec rigs under contract; of the others, the Millennium is idle but awaiting contract commencement. The Transocean Rather is moving, the Jim Cunningham is in the shipyard undergoing repairs and only the Peregrine 1 remains cold-stacked.

In the Gulf of Mexico Transocean was the first contractor to break the $200,000 per day barrier as we inked a six-month deal for the Deepwater millennium for ultra deep drilling work with Anadarko. This watershed deal has already been followed by another 200,000 plus fixture by one of our competitors. With additional bids outstanding for work beginning in 2005 and later, we are hopeful that further 5th generation rig fixtures at or beyond these day rate levels. In the near-term the current Gulf of Mexico fleet is expected to stay busy through at least mid 2005 with two exceptions; the first is that the Deepwater Pathfinder will depart the Gulf of Mexico shortly to begin a one-well program in Nigeria that is likely to extend to a multiwell deal that could last through 2005 and into early 2006.

The second is the Deepwater Millennium is currently idle and pursuing short-term opportunities prior to the commencement of the Anadarko program. Our South America high spec rig activity remains roughly stable; the Sovereign Explorer has been reactivated and has begun its work for British Gas in Trinidad as part of the deal discussed on our last call. In addition, we have received extensions from Petronas for the Deepwater navigator for 240 days and a Sedco Express for 90 days, both at current rates. On a more positive note we are anticipating additional Deepwater opportunities materializing with both international oil companies and Petronas for drilling work to begin in 2005.

In the North Sea we will be adding a high spec rig as the Transocean Rather is current mobilizing from west Africa where it had been idle. In Norway, despite the labor union strike continuing to affect operations on 3 of our floaters, we did successfully reactivate the Transocean Arctic after a 30-month stacking period and the rig is currently drilling for stat (ph) oil under a term agreement.

In West Africa Transocean will be increasing its Deepwater presence by 2 5th generation rigs. As previously announced we were ultimately successful in securing a minimum of 3 years of work for the Sedco Express with BP for the greater Plutonio development in Angola. This rig will undergo shipyard work in Brazil after its current program with Petronas before mobilizing to Angola and commencing drilling in the second quarter of 2005. Also as previously mentioned, we will move the Deepwater Pathfinder to Nigeria once it completes its current job in the Gulf of Mexico.

We expect that the Deepwater Discovery will stay busy throughout most of 2005 as part of a multiclient program in Nigeria headed by Chevron Texaco, Petronas and Exxon. Additionally, we expect the Sedco Energy to continue drilling for Chevron Texaco in Nigeria until their Agbami development work begins in mid 2005. We remain active in a number of tenders in West Africa for deepwater term work, including Chevron Texaco's Agbami, Totel Vacpo (ph) and Shell's Bonga development projects in Nigeria, and BP's Block 31 development in Angola, among others, and we expect further tenders to come out in the coming weeks. However, due to market tightness of 5th generation rigs, some operators are having to recalibrate both their drilling budgets and their rig capability expectations to reflect this new market reality.

Closing with Asia, the near-term outlook for high spec rigs remains relatively stable. Our Discover 534 is in India on a well-to-well contract with Reliance that will conclude before year end and we are attempting to secure a firmer work stream for 2005. Our Deepwater rig Jack Bates has arrived in Southern Australia and has begun drilling its first of 2 wells for Santos. Having recently returned from a trip to the (indiscernible) Australia region, can say that the potential for future work to materialize in India, Malaysia and Australia continues to look promising, although many of these drilling programs will not be converted into new rig fixtures until sometime in 2005.

That concludes the market highlights so with that I will turn it back to you, Bob.

Thanks, Rob. You can tell from Rob's comments that we see a lot of good things happening in the market and I am pretty optimistic about 2005 and beyond. However, before I open it up to questions I want to caution you about near-term expectations. We will still have a significant impact from the Norwegian strike in the fourth quarter. You have probably all seen the articles in the press announcing that the government has ordered an end to the strike. However, we are likely to have another 10 days or so at least before we are back to work.

Also we will probably now take the Polar Pioneer directly into the shipyard for work required before the next contract and (indiscernible) may now be about 30 days in the shipyard. We also have the cost to repair and the out of service time for the Cunningham and the Trident 20 that I mentioned earlier, and in addition we have the Millennium, a 5th generation drill ship idle in the Gulf of Mexico probably until December first. The Rather mobilizing for the North Sea and hence not earning any revenue in the quarter, and several jack-ups in the Far East which will experience 30 to 60 days of idle time between contracts in the quarter.

In addition to that we expect our effective tax rate for the year and for the fourth quarter to be substantially higher at about 44 percent than the rate we realized in the third quarter. Also, as Rob mentioned, the Sedco 600 (indiscernible) quarter will be sold in the fourth quarter and won't contribute any revenue. With that, I think we are ready to open up the lines and will be happy to answer any questions that you have.

(OPERATOR INSTRUCTIONS) Justin Pinter (ph) with Heimans (ph) and Company.

Can you provide us an update on the Tahiti project, we are anticipating a successful work with Transocean, are there any issues with that project?

There are no issues we know with the project; we have bid on the project and we are hopeful and maybe even a little optimistic that we are going to be awarded the job but until we actually get the award, there's not much more we can say about it.

You mentioned 2 rigs to be activated in the North Sea next year. Can you provide us with any timing or costs associated with those reactivations?

I think the opportunities we are looking at will probably start in the first quarter. And in terms of the cost of reactivation we have a range of costs but on the most likely rigs that we'd reactivate, John what does it look like for reactivation?

Reactivation costs would be in the range of 5 to 9 (ph) million dollars. (inaudible) 712 and maybe there will be some CapEx on top of that. That's due to the fact that we have to reman the rig. There is SPS required (inaudible) 2 rigs and compliance with the UK regulations.

And do you currently have some contracts that you are bidding on for those contracts, for those rigs?

We are looking at a couple of specific opportunities but again until something is firm, we can't say much more about that.

Last question can you provide us an outlook on India? I believe there is some outstanding Deepwater contract there?

You may be referring to the Reliance bid for their D-6 (ph) development. We understand that project has been delayed probably to late 2005, early 2006. It's obviously a job that we are looking at closely but until the time it becomes more definitive we can't be more specific about when that opportunity might materialize.

Jeff Tillery with Pickering Energy Partners.

Given the tightness we've seen in the market and a pretty increase (indiscernible) philosophically what are you guys thinking in terms of maintaining spot exposure for the 4th and 5th generation rig versus locking up under term?

Spot exposure for the 4th and 5th generation rigs?

Yes, general, would you like to maintain some portion of spot exposure? Has that changed over the last few months, just how you guys are thinking spot versus term for those rigs.

I think in terms of the 5th generation rigs there are a, as Rob indicated, a tremendous number of opportunities and we already have bids outstanding for quite a few different term programs. Most of those programs are in the two to three-year type range. And we have shifted our focus, we came into the year here being focused on trying to make sure we increased our backlog and utilization on the 5th generation rigs. With the market we see now we are focused on trying to push the day rates significantly higher and I think that we are succeeding in doing that.

On the 4th generation rigs we are starting to see a bit of an improvement there but it's not nearly as strong a market. I don't think we are going to be able to push the rates as strongly there although we are seeing some pretty nice increases in rates on the fourth generation rigs. In terms of whether or not we go spot or term, you have to remember that for the most part we are bid takers here, we don't determine, we don't get to select generally how long these contracts are. The customers have specific requirements and we don't get to tell them how long we want the contract for.

We do have a lot of rigs, we can take a portfolio approach in terms of how aggressively we want to be on the different day rates as we bid these things, but we don't really get to pick the terms.

That is helpful. On the repair costs for the Trident 20 and Jim Cunningham, is that 20 to 25 million dollar number, is that all to be expensed?

Yes.

I just wanted to clarify the comments in the press release where it says -- events in the fourth quarter that could reduce profitability over the final three months of the year. Is that speaking towards the potential for down sequential quarter or is that speaking for just serving as a drag on our earnings in the fourth quarter?

I'm not sure we are trying to give any sequential guidance here, we just wanted to caution you that while things are very optimistic long-term, there are some items that are going to impact the fourth quarter. And you just need to factor those into your modeling.

Roger Read with Natexis Bleichroeder.

Good morning, gentlemen. Looking at the sort of getting to that out cost question. What exactly was included in the third quarter numbers? We saw operating costs have been around 400, 405 million last several quarters and we do 433 this quarter. What unusual is in this one or should I take this as sort of a run rate adjusted for the cost to repair the two rigs in the fourth quarter and forward?

That is more or less right, Roger, the increase absent some of the repair costs we have identified in the quarter was really mostly activity driven. As we're activating more rigs that is driving up our operating cost.

Of the 20 to 25 million repairing the two rigs, how much of that would be additional to what you would normally see versus, or incremental to what you would normally see and how much of it -- I guess that's really kind of the question, what is the incremental part versus the standard op cost for crews and so forth?

It's probably 15, 15 to 18 is incremental, 5 or 7 is standard crew costs and other operating costs.

As you look at the Deepwater opportunities in India, Asia, Australia, can you give us any sort of a quantification there in terms of the numbers? I understand the timing is always subject to changes as we are well aware from the last several years, but is it 5 opportunities, 10 opportunities, can give us sine clarity there, please?

I think at this point, as said most of those opportunities are a little bit further out. If you look at Malaysia we see one or two opportunities there, I think it’s well-known that Murphy and Shell are having some success which will keep rigs busy there and maybe an additional rig. Brunei once it works out its border issues, is a good deepwater opportunity. In Australia we've mobilized the Jack Bates, it's going to do work, as you well know, for Santos and Woodside and we think it's been well positioned to pick up on some of the other developments that are being planned by BHP, Chevron and others.

To answer your question directly, I think it's probably closer to 5 than it is to 10. If you excluded India, and you might roll one or two more from India to increase that count.

Jason Gilbert with Goldman Sachs.

You mentioned in the press release there are 5th generation rigs there are risks for limited periods of downtime and you mentioned the Millenium, are there any other specific rigs that come to mind there?

I think the Millenium is the only one that right now specifically has idle time between contracts although you do have to remember that the Pathfinder will be mobilizing, as Rob said, to West Africa. So that's probably around 30 days or so where the rig will not be booking revenue or costs because of our accounting requirements to defer anything while it's moving.

Okay, but nothing beyond those two?

In the first quarter of next year, of course, the Sedco Express will be undergoing shipyard work and mobilization to Angola.

That is helpful. The next question is if I look at your upcoming deepwater rollovers, a number of these are in west Africa. It sounds like you are pretty bullish in this market (ph) How aggressively are you going to be able to push day rates here? And the second part of the question is (indiscernible) on the (indiscernible) the 15 incremental rigs in demand in West Africa over the next eighteen months, and I just wanted to know if that number and how that corroborated with what you are seeing?

I heard Jim's comment, I tried to count to 15, I didn't quite get all the way to 15 additional rigs. I think there is well more than that in terms of total rig years that are available because a lot of these programs are multiyear opportunities. That said, I think the opportunity to push day rates is really going to be a function of the timing of when these projects actually get awarded, as well as the continuing need and desire of the operators to target 5th generation rigs for their developments.

As I mentioned in my prepared text, I think some of the operators are having to recalibrate what kind of rigs are actually going to be available for their programs. And ultimately we think that's going to give some strength to the fourth generation and other lower spec rigs that are on the market. As far as the 5th generation rigs are concerned if the projects that are in the planning stages and in the tender process already, if they all come to fruition with 5th generation needs we will see a nice opportunity to bid into those and see day rate increases over current levels.

Last question. Back to North Sea, it sounds like you got plans to bring two rigs back there. I think (indiscernible) I think you have 7 stacked there right now. How many of those would you expect to bring back over the next 12 to 18 months?

We actually have 5 rigs stacked in the North Sea. At this point we've got plans to reactivate two of those, I think opportunities to reactivate further rigs is really going to be a function of the market. As you know, other competitors are moving rigs back to the North Sea so those will be competing for that additional work. We want to be selective as we reactivate our rigs that we don't oversupply the market and incur greater costs of unstacking and reactivating the rigs if we don't see term work ahead. We will be cautious on further reactivations depending on what the market provides.

Waqar Sayed with Petrie Parkman.

A couple of questions. First you gave decent guidance on shipyard stays for a number of rigs for '05. Do you think you have a very good handle on the shipyard stays for next year or do you think there could be some additional rigs as well that you may consider later on?

I think the fleet update provided a pretty good summary of what we see for shipyard and out of service time next year. I think there is a reasonably good possibility that we would have some additional time connected with some of the rigs that might win some of these significant tenders for deepwater work that we have outstanding. It's not unusual for these multiyear deepwater projects to require some modifications to the rig. So to the extent we are successful on some of the outstanding bids might result in some shipyard time for some of the big rigs in preparation for those contracts. We won't know that until we see the results of the awards and finish any negotiations that might take place with an operator.

On DDNA any guidance for next year? You have a couple, some deactivations going on for rigs -- where do you see DDNA for '05?

It's going to run in the range of probably $50 million a quarter, with perhaps higher in the fourth quarter as we anticipate buying out the operating lease of the N.G. Hume. So somewhere for the year between 200, 225 million of CapEx. I'm sorry, depreciation with TODCO should run around $135 million a quarter.

What was that CapEx?

CapEx was 200, 225 million for the year, including the buyout, the N.G. Hume. DDNA including TODCO about 135 million a quarter, 111 million of that is, 110 million of that (indiscernible) is Transocean drilling and the rest is TODCO.

Just to clarify there, Greg mentioned the buyout of N.G. Hume, we have a lease on that rig right now. We have the opportunity to buy it next year when the lease expires for I think it's around $36 million. We are going to exercise that option and buy the rig at that time.

Great. Any guidance on wage costs and insurance costs for next year?

I will let Greg comment on the insurance costs which I don't think we see too much movement in. on wage costs we are seeing a significant amount of pressure on the cost side as the industry gets more and more active. We haven't had very significant pay increases in the industry for a couple of years but now with the activity picking up in the North Sea and the Gulf of Mexico in the midwater business, the jack-up market already tight, and the deepwater market getting more and more active including the impact of some of these production facilities that the operators bringing on-stream which require a lot of the same type of people that we need to run our rigs, we are seeing quite a bit of pressure on the wage side. And I think we are going to see industry wide some escalation in the wage costs next year.

On Nigeria, getting a project approval has always been a problem there. Any change that you are seeing from the government? We've seen some pickup in activity on the jack-up side there, but on large-scale float deepwater projects any indications, early indications that things could be changing in the positive there?

I don't think that we can say that. The Nigerian government is very anxious to increase production and they are very interested in increasing the activity particularly in the deepwater. They have specific processes in place and getting those processes changed, very frankly I don't think is going to happen. Actually I think that the government has been fairly proactive in terms of approving the projects and things take longer than some of us think it should. They are making progress.

Thank you very much. Thank you for your answers.

Andrew O'Conner (ph) with Strong Capital.

Good morning, congratulations on your quarter. I wanted to know do you see any strategic actions by other players which would further improve the end market for other floaters.

No, I don't think I can say that I do.

Just wanted to clarify the opportunities to reactivate one or two semis in the Gulf, I assume these potential opportunities are also in the Gulf?

Yes, we see opportunities in the Gulf but I'd say we also see some opportunities in other areas in the world where we have considered activating the rig that's in the Gulf and mobilizing it out.

For the other floaters, Bob?

Yes.

And then lastly, I may have missed this regarding the Norwegian labor strike, is there a date on which you guys intend to reactivate the 3 rigs there? Thanks so much.

It is a little bit uncertain on the exact date -- what is happened (indiscernible) know is the government has told the unions to go back to work -- the unions have refused to do that until the government goes through a legal process involving Parliament which we understand can take up to 10 days. And then we will have a few days to re-crew the rigs and get them back out so depending on whether discussion goes between the government and the unions, it could be 10 to 12 days before we actually start back up again. If something happens in the meantime it could be a little bit quicker.

Elliott Glazier (ph) with (indiscernible) and Company.

I wonder if you could give us a little color on your tax rate of 44 percent. Why is it higher than the statutory rate?

I will let Greg try to answer that question.

One, Transocean is not, is a Cayman company, we are not a U.S. company, so there is really -- and we operate all over the world in 30, 40 odd tax jurisdictions, so we don't have a statutory rate, there is no one statutory rate that applies to Transocean. And our tax is very complicated, a significant portion of our taxes around the world are paid in countries that have what are referred to as deemed profit regimes where the tax is effectively based on revenues and with our rig moves our taxation is constantly changing as our rigs change from one tax jurisdiction to the other. So, with all that there is literally hundreds of factors that go into how we build up the tax rates. But because of the high proportion of these effectively ready-based tax, our tax rate is very sensitive to the absolute level of earnings.

So as our earnings this year most recently have dropped because of events like the Cunningham and the Trident 20 and the Norway strike, that has driven up our effective tax rate because our profits are going down but the taxes aren't actually dropping in proportion to the profits dropping. There is not really a clean answer. Going forward in the fourth quarter we do expect, as Bob said, a 44 percent effective tax rate although if you wanted the clean portion of that, we describe that as closer to 37 percent because about 7 percent of that 44 percent relates to the disposition of TODCO and the valuation allowances related to that. Next year we are looking at, in 2005, we are looking at an effective tax rate that is closer to 25 percent. But again very sensitive to changing factors, where our rigs are working around the world, the absolute level of earnings but right now 25 percent would be good guidance for 2005.

Great answer but my follow-up is is there much of a difference between your reported tax rates and your actual tax rates?

I don't know what you mean by actual tax rates. (multiple speakers) calculated in accordance with U.S. GAAP, so (multiple speakers) actual tax rate, if you mean cash tax, current taxes versus deferred taxes, it changes every quarter. But of the $6 million of tax expense this quarter about 13 million is current, offset by $6 million of various deferred benefits. I don't know what you mean by actual.

That is exactly what I meant, current versus preferred.

Doug Becker (ph) with Bank of America Securities.

I am just trying to get a gauge on the quality of the Deepwater demand we are seeing, are most of your 5th generation floaters working on projects that are more or less in line with their capabilities?

I would say yes, we have to define capabilities as being more than water depth. A lot of the work that we do of course in the Gulf of Mexico involves deep wells and therefore you need heavy hook loads and large variable deck loads and racking capacities and that sort of thing. When you look at West Africa a lot of the desire there for bigger rigs isn't so much because we've got deepwater or deep wells, the wells a lot of times are 10 to 15,000 feet and the water depth are typically in the development range, typically no more than 5000 feet. But there you see a driver for logistics, in other words because logistics is challenged in West Africa, operators especially for development programs like rigs with large deck space for handling equipment and trees, Christmas trees that are associated with those developments.

The other thing that helps specifically again in West Africa is the need for dynamic positioning for a lot of these developments. You can avoid the incumbrance of having to get anchor handling vessels. And again the logistics and costs that that entails. When we say working at their capabilities there is really a number of ways to measure that but for the most part given the regions we are in we think that these rigs are working at close to their capability.

Clearly in West Africa they can go deeper in terms of water depth and in terms of wells, but right now I think what's driving the need for 5th gens, has to do with more the redundancy, needs and the flexibility needs that our operators have for these very important development programs.

I think that I would also add to that a lot of operators have seen the efficiencies of these 5th generation rigs and are willing to pay more and actually prefer to get the 5th generation rig in addition to the logistics savings, they actually are able to drill wells a lot faster with these rigs and therefore they want them.

If you can take a look at the (indiscernible) day rates there does seem to be a premium there. Are you seeing more contract awards through direct negotiation or is it still primarily being through tenders?

Most of the work that we're involved with on the 5th generation rigs is through tenders. However, we are having a number of inquiries on our 5th generation rigs that are still under contract through most of 2005. We anticipate that if these discussions were to lead to contract closures we would have an opportunity to more directly negotiate these deals. But for the most part what you have seen placed in the market and what we've announced in terms of where we are going with West Africa and the Gulf of Mexico, bid activity, it has been bid based.

Has there been any change in your thought of new builds? It looks like you will be able to reach your debt reduction targets at some point in 2005, at least the higher end of your debt reduction targets?

No. There hasn't been any change in our thinking about new builds. I know there has been some discussion in the industry now particularly in terms of the deepwater business because it's so good and the projected potential for a shortage of these rigs over the next couple of years. But we continue to think that it only makes sense to commit capital on that magnitude if you do it with a firm contract. At this point no operators out there are willing to give a five-year contract to the very high day rate, at least one that we justified in our minds for building a new rig.

One housekeeping item, interest expense was pretty flat sequentially. I would've expected it to be down a little bit just given the debt reduction, is there anything special there or just the timing of the debt reduction?

I think just the timing of the debt reduction -- you should start seeing interest expense in the fourth quarter, net of interest income come down to the $35 million range. And then next year average around 30 million a quarter depending on whether there are any additional asset sales.

Joe Agular with Johnson Rice.

I think you mentioned the Pathfinder had some options beyond its first contract in Nigeria. Has the rate on the option wells been set?

They are not really options at this stage. We are just in discussions with some operators about extending the rigs. I would not say that the rate has necessarily been set since we don't have a deal.

Okay, so it isn't necessarily with the same customer?

The discussions are with the same customer group, there is a number of different operators involved there potentially.

Just a general question. Obviously the most recent fixtures that have been published on your 5th generation rigs have I guess reached the level of, what the 5,7 year ago rates were in terms of new build rates. What do you see out there in terms of any ceiling, if you will, in terms of where rates could go? Is it truly a situation where it's just the demand side bidding up the price? Just if you could give us maybe some of the issues that you see that may be out there in terms of keeping a ceiling on rates.

It's fairly difficult to say what would put a ceiling on rates because I think you have to keep in mind that there are factors in the economics here, one is the rate and the other is the term. A lot of the operators have difficulty seeing requirements in 2008, new build isn't going to be available in 2008. In the meantime if (technical difficulty) they have work and its short-term, short term being one year or two years, they need to get it done I'm not sure what necessarily puts a cap on the rates unless it's the economics of the project. And these projects in the deepwater tend to be big, it is hard to convince yourself that 10 or 20 or 30,000 dollar difference in day rate is going to have a significant impact on the economics.

At some point they'll take a look at new builds or upgrades although I think the penalty to upgrade the rigs are fairly limited and there I think you are still looking at a couple of years. So (technical difficulty) too many different pieces there to give you a crisp answer in terms of what could be an absolute ceiling on rates.

It sounds obviously like as long as the demand is there it’s very encouraging for future potential in terms of rate increases. One last question I had. The North Sea, could you maybe just give a little bit of flavor behind what you think is driving the return of some of the business there?

I will give you my opinion for what it's worth. I can't represent that I know what is going on there. My guess is the North Sea is one of the areas where activity is being driven by the high oil prices. Obviously there are a lot of different reserves, smaller reserves left in the North Sea and the majors had been abandoning the North Sea. And we been seeing a pickup in activity from the independents and what has surprised us in the North Sea right now is that the majors are back and much more active then we thought. My guess is it’s driven by the fact that they know where reserves are, they can drill them quickly, get them online quickly and take advantage of the high oil prices. Whether this will continue if oil prices drop back down to 30 dollars or so, I just don't know. I'm pretty, my opinion is its being driven by the high oil prices.

You have to have some confidence that they are going to remain active if you're discussing bringing out rigs. What would you take a year contract to bring out a rig or is it a ?

When we look at bringing out the rigs, we want to make sure, first I would say we are fairly confident or hopeful that this is at least a couple of year phenomenon. Second, we will not bring out a rig unless we get all of our costs (indiscernible) covered and all of the cost of restacking it covered in case the market doesn't continue to develop the way we think, plus make some cash on the job. Generally those things tend to be 4 to 6 months as a minimum depending on the day rates, so you seen, I think the day rates have gone up pretty dramatically. And they may go up even more in order to entice some of these rigs to come out.

(indiscernible) Credit Swiss First Boston.

Bob, I wanted to ask you about replacement cost for your 5th generation fleet that we generally at least on our numbers think of replacement costs being somewhere in the 300 to 350 million dollar range before the increase in steel costs and shipyard costs. I was just wondering if you had thought about that and what you thought if you were to do a new build today, what that cost could approach? Because we have heard different estimates from different contractors in the 400 to 450 million dollar range and I was just wondering if that is consistent with your thoughts?

I would say the 400 to 450 is fairly consistent with our thoughts although I would caveat that with I think only if you took an existing rig and built it exactly like you built it last time, which none of us contractors ever seem to be able to do. We always want something a little bit bigger or something a little bit different. The reason I say that is if you look at the cost of the enterprise priced rigs, the first one cost us only 400 million but that was a lot of teething (ph) problems; the other two cost around I think around 340 million. And with the cost of steel prices and the cost of drilling equipment these days, I just can't believe that you could build an enterprise class even without changes for less than something in the middle of that 400 to 450 range and it may even be higher than that.

And today if you want to build a rig my guess is you would want to put 1000 ton top drive on it, not a 750 ton top drive and you could go on and on. That would just push that cost of the rig up even higher.

Just the second question, I was wondering if you could just talk about maybe a range of where you are bidding some of the 5th gen units today at? We have heard some speculation of somewhere in the $240,000 range, I was wondering if you could maybe comment in general where the market is today?

I am not sure that we can really comment in a manner that is going to be very helpful to you. Clearly, we are bidding rates in excess of 200,000 a day, and I'd say that you need to, when you think about this, remember there is a difference between the dual activity rig and a normal fifth generation rig. So I think that you should expect to see a premium for 2 dual activity rigs versus the other units. But I'm not sure I can give you any more guidance than that.

That is helpful. Appreciate it.

Jud Bailey with Jefferies & Co.

Thank you. Most of my questions have been answered, but I just wanted to follow up on the question on rig reactivations. The criteria you outlined for rig reactivation in the North Sea, does the same apply for the 1 or 2 rigs you talked about in the Gulf of Mexico?

Generally, yes.

Just out of curiosity, I know most of your rigs in the Gulf of Mexico are going to be fifth generation, but have you noticed any type of shift in your mix of customers as far as bid activity or inquiries to some of your rigs in the Gulf?

I'll take that one. It's a similar mix, I think, to what we would have seen 6 months ago. We've got a healthy mix of independents like Anadarko who's picked up the Millennium to major oil companies like BP, Shell, and Chevron Texaco that are working our rigs now and may have interest in the future. So I wouldn't suggest there has been any major shift there.

Great, thank you.

Rune Juliussen with Carnegie.

Good morning, gentlemen. First a few questions on the North Sea which has been mentioned a lot on this conference call. Again, do you see day rates improve further from this point you have a strong fixture on the 704, a strong (indiscernible) on 712 and most recently you have seen a (indiscernible) rate in Norway (inaudible) growth rate portfolio actually 170 per day for (indiscernible) drilling. Secondly, on the North Sea. What rigs do you consider most likely to be reactivated? Is sit the prospect and the winner? And thirdly on (indiscernible) you mentioned initially unless or at least my feeling is that you are a little bit more optimistic about (indiscernible) for 2005, is true?

Let me try and answer those questions and Rob may help me here on the Brazil question on (indiscernible). In terms of where rates can go in the North Sea, I think that I'm not overly optimistic that rates are going to go a lot higher and I am not talking in the Norwegian sector right now mostly because you can see that a lot of people, in addition to us, are reactivating rigs. So we are bringing supply back on and there are some rigs moving back into the North Sea that had moved out last year. So, I am just not sure how robust the demand is going to be because clearly the rates have reached the point now where it seems like it is high enough to bring additional capacity into the market.

I suspect we are going to reach a point where the rates will have to go a little bit higher because the rates with the most activation costs are coming back in. And in terms of your second question about which rigs are for us are more likely to go to work. If you look at the Winner and the Prospect, probably it costs less to reactivate the Winner; the Prospect needs a big special survey before it can be reactivated so we would probably need a longer job or a higher day rate to reactivate the Prospect than the Winner. Now having said that, the Prospect has a lot of capabilities so I'm not sure whether or not the right job would come along which would make the Prospect come out before the Winner. But all in all I guess it would be the Winner before the Prospect. In terms of Brazil, I'll let Rob answer that question.

As you know we are moving a rig out of Brazil a Sedco Express, and I think our anticipation for the future is that Petronas is likely to issue one tender for a 1500 meter rig, possibly more and maybe a second one of a similar nature, both of those to start drilling in early to mid 2005. The other thing to note is that we are seeing some more interest from international oil companies to do some drilling in Brazil in deepwater. We will be hopeful to compete for some of that work. I don't think you're going to see in 2005, at least from our view today, a dramatic move one way or the other in terms of overall activity in Brazil.

Thank you. Could I have a short follow up question? You mentioned initially in the conference call that the oil companies have to get used to a higher rate level than (indiscernible) and perhaps even further. Do you think oil companies are sensitive to the increased day rate levels or do you think they will just move on with the bidding (indiscernible) going forward?

I think as Bob alluded to in one of the earlier questions the deepwater developments that the majority of our rigs are involved with tend to be for a large numbers of barrels of reserves and production. With a large denominator the additional costs I think get spread out fairly nicely. That's not to say there isn't sensitivity to rates; I think there is always sensitivity to rates. But given the very clear lack of supply at the higher end of the rig market operators are no longer questioning why rates are going up, I think they've accepted that and are starting to build that into their planning process. The challenge for some of the operators will be to get the right specification on the rigs for the job that they have planned, and I think that will be a more important issue for the operators than actually the rates.

Pierre Conner with Hibernia Southwest.

Greg, a question about Norway, you mentioned in the press release that you negatively impacted on the revenue side by approximately 13 million. Anything on the cost side associated with those rigs being idle?

In the third quarter we were able to reduce cost by about 5 or $6 million.

And so within the first month or so we can try to get a handle are the rigs currently at a reduced operating cost to you with the crews demand, etc.?

Yes.

Rob for you, you mentioned the course that the West Africa market in terms of incremental demand counted a number between yours and say Jim Days (ph) but could you give us that number for the Gulf in terms of deepwater, do you have a feel for over the next 12 months what the increment is in absolute rig count?

It depends on whether you count the rigs that are under tender and awarded or not. Let me just name a few of the programs that we certainly are aware of. The BHP Neptune job we know that's going to consume a rig, the BP Atlantis work will consume a rig into August of 2005, again that is already been awarded. Chevron Tahiti will consume at least one or two high spec rigs. We see additional opportunities going forward with BHP in their Shenzi (ph) development and Chevron's Blind Faith (ph) development both of those probably in the 2006 timeframe. And then of course you have Anadarko's eastern Gulf of Mexico development which we will start to do some drilling in early part of 2005. If we want to just cover the 2005, 2006 timeframe, hopefully that gives you a good sense of the kind of activity we expect to see.

It does. Rob, one last, could you give us some rig specific (indiscernible) if you can outlook on East Canada with the Goodrich? I understand planned to go in the shipyard but what's the outlook after that?

The Goodrich has got a contract with Petro-Canada that actually still has a little bit over two years to run if you look at the options that could be exercised. Pending successful drilling for Petro-Canada in eastern Canada we expect that rig to continue to stay there.

With the options?

Yes.

Robert MacKenzie with Friedman Billings Ramsey.

I was wondering if you could give us a comment about where you see leading edge day rates for your 4th generation rigs apart from where we are seeing the placements in the Gulf of Mexico right now? Specifically in Brazil, Australia, etc., West Africa where you have some recent or near term contract expirations?

I am not sure, it tends to be a little bit location specific, but I think that we anticipate that we think the 4th generation rigs are going up and right now they could be in the 150 to 165,$175,000 range.

I think one of our competitors gave a similar range and as I said in my prepared notes, I think it is still on the early end of seeing the rise in 4th generation rates. Hopefully over the next three to six months we will get more evidence of rates in that range that Bob quoted but we are comfortable with the 5th generation tightness that is going to definitely have a knockdown (ph) effect on 4th generation rigs.

Is that going to be the same across most markets around the world, I mean I am pretty comfortable with that in the Gulf of Mexico but I am not certain for example about Brazil given demand there being flattish in other markets? Can you go around the world for us?

I will try to do that. Clearly the work of the rates and the opportunity for work is region specific. I think the Brazilian market at this point we don't have any, we don't have a lot of rigs that are actually coming due anytime soon. The Navigator comes off in the first quarter of next year which is a 4th generation rig, we will have to say what the opportunities look like for renewal. We are certainly comfortable with that range for that rig in Brazil. We have some West Africa rigs of course that are deepwater that don't have firm work strings like the 709, the N.G. Hume, and I think the next three months will really tell where the rates go for those rigs. At this point we are comfortable that for the most part we can keep those rigs busy although there may be some intermittent idle time. And as firmer work strings come into view we will certainly shoot for the kind of rate that we have highlighted in the call.

Another follow-up question. You prefaced your comments on second and third generation rates in the North Sea to exclude Norway. We seen some very impressive rates there in Norway recently with some of the Dolphin rigs. Can you comment on your outlook for Norwegian rig demand and where you see rates going there?

First I would caution you, the cost in Norway is so much higher than the UK I think you have to take something like 30 or $40,000 a day differential. And then there are a lot of modifications generally required to a rig, I suspect you would find that the Dolphin rigs are requiring a lot of upfront costs that they are getting recovered through additional day rate in order to get those jobs in Norway. It's tough to have very much of a comparison because of the technical requirements and regulation requirements on the rates and a contract in today's market obviously are going to require payback of those upfront costs which tend to then inflate the day rate. I think the Norwegian market, our sense is pretty good. The demand seems to be increasing. And I would not be surprised if you saw a requirement for an additional rig or two in Norway over the course of 2005. As to where the rates could go I am just not sure because it depends on what the requirements are going to be from the operator.

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That will conclude our call. We thank everyone and appreciate your interest in the company. We look forward to talking to you again in the future.

Ladies and gentlemen this concludes the Transocean third-quarter 2004 results conference call. If you would like to listen to a replay of today's conference call you may dial 303-590-3000 followed by the pass code 11011131. (OPERATOR INSTRUCTIONS) You may now disconnect and thank you for using AT&T teleconferencing.