Transocean Ltd (RIG) 2004 Q4 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the Transocean Fourth Quarter 2004 Results Teleconference.

At this time all participants are in a listen-only mode. Following today's presentation, instructions will be given for the question and answer session. If anyone needs assistance at any time during today's conference, please press the "star" followed by the "zero."

As a reminder, today's conference is being recorded. Tuesday, February 15, 2005.

We'd now like to turn the conference over to Mr. Jeffrey Chastain, Vice President of Investors Relations. Please go ahead, sir.

Thank you Jeff, and good morning and welcome to the review of Transocean's fourth quarter and full year 2004 results.

A copy of the press release covering the fourth quarter results along with the 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 at February 15th.

The monthly fleet update is posted in the "Investor Relations" segment of the website under "Financial Reports." Effective immediately, the Company will begin providing this report twice per month on or around the 15th and on the last business day of the month.

Participating on this morning's call are the following Transocean's senior managers. Bob Long, President and Chief Executive Officer, Greg Cauthen, Senior Vice President and Chief Financial Officer, Rob Saltiel, Vice President of Marketing and Planning and Bill Henderson, Vice President and Controller.

Bob Long will provide opening comments. Greg Cauthen will walk you through some of the financial details pertaining to the quarter and Rob Saltiel will provide comments on our markets.

We will then take your questions.

Before I turn the call over to Bob, remember that during the course of this conference call participants may make certain forward-looking statements regarding various matters relating 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 this difficult 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 US 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 disclosures for these measures, including the most directly comparable GAAP measure and an associated reconciliation on our website 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.

Bob Long will continue with opening remarks.

Thanks Jeff. Good morning, everyone. As Jeff said, I'm going to comment briefly on the quarter and on the outlook for 2005. And then I'll ask Greg to address some of the details behind the numbers, before Rob gives you a feel for what we see happening in the various markets.

We had a challenging time in the fourth quarter, despite improving markets in all asset classes. We identified most of the issues that we had to face when we talked to you in our third quarter call.

The Trident 20 and Cunningham repairs, the Polar Pioneer shipyard, the Norwegian strike and a number of rigs, which would not earn revenue in the fourth quarter due to mobilizations; or in the case of the Millennium, idle time between contracts. All of that came true and we had an -- and that had an impact on both costs and revenues.

In addition, we started to see some significant pressure on cost as the pickup in activity made it more difficult to attract and retain people, and the weakening dollar increased our cost in dollar terms for everything we pay for in foreign currency.

On a positive note, the increases we're seeing in day rates are far outpacing the increases in cost. Everyone's probably aware of the very high rates that have been announced recently for fifth generation floaters.

While this is very positive for us, the best part is that we see room for rates to continue to increase, and there are five fifth generation rigs which should commence new contracts or have options exercised in 2005. In fact, we're in discussions with operators on all five of those units.

We also see a lot of potential upside in the midwater floater market, where we had 24 rigs. Only 16 of which have announced contracts. Rates have moved rapidly in this segment from the low to mid 50's to over $100,000 a day for current market rates. I don't know if we'll get to the $145,000 a day level that we saw in some second generation rigs in the second half of the 90's, but I do think we have some nice upside from the current market rates.

We also are seeing some steady improvement in international jack-up rates, and I think I should leave that for Rob, after Greg talks to you about the quarter.

Greg, why don't you give us a rundown on the quarter?

Thanks Bob and good morning to everyone. In the fourth quarter of 2004 we had adjusted net income of $2.1 million or 1 cent per share. Now this excludes the impact of $140 million gain from the TODCO offering, a $48 million loss on debt retirement and $167 million non-cash charge from the deconsolidation of TODCO relating to the tax share agreement between TODCO and Transocean.

The 1 cent per share was lower than expectations due to the impact on revenue and cost of repair and maintenance projects, as well as an unusually high tax rate for the quarter.

The TODCO gain related to our third disposition transaction this year and leaves us with a 22% interest in TODCO. This led to the deconsolidation of TODCO on December 17. Prior to that, we consolidated TODCO's results and reported the proportion of earnings related to its public ownership of the minority interest.

After deconsolidation, we will report our share of the earnings of TODCO all on one line as equity and earnings of subsidiary.

The fourth quarter represents a transition quarter where both -- where we both consolidate and report equity and earnings. In 2005 revenues, operating maintenance cost and depreciation will be significantly different as they will no longer include TODCO's results. In comparison to 2004, you should look to the Transocean drilling segment results which exclude TODCO.

The deconsolidation of TODCO also led to a non-cash charge of $167 million related to the tax sharing agreement between TODCO and Transocean. The tax sharing agreement provides the TODCO's pre-IPO net operating losses and other tax assets will be paid to Transocean as they are utilized. Prior to the deconsolidation, these tax assets were reflected as a deferred tax asset calculated under FAS 109.

Amounts under the tax sharing agreement are continued on TODCO having positive taxable income in the future and this beyond our control. But after the deconsolidation, we can only recognize the utilization of the tax assets as other income, not as income taxes, in the quarter that TODCO actually files its tax returns. The change in treatment before and after the deconsolidation results in the non-cash charge.

It also effectively puts us on a one-year lag with TODCO i.e., amounts which TODCO accrues as current tax expense in 2004 will not be recognized by us as other income until TODCO actually files its 2004 tax return, which we currently expect will be done in the third quarter of 2005.

Now to operations. Bob's already mentioned the tough quarter we had because of the TODCO deconsolidation, I'm going to limit my comments to the Transocean drilling segment. The increase in day rates and activity in the Transocean drilling segment led to a $32 million increase in revenue, but this was lower than expected due to idle time between contracts on the Millennium, the mobilization of the Pathfinder and the Rather and the warm stack into M G Hulme. Costs in this segment increased by almost $50 million, of which $20 million related to increase in activity.

Additionally, during the quarter we incurred $14 million repair costs on the Trident 20 and the Cunningham, $9 million more than we expended in the third quarter. Maintenance costs were also $17 million higher than the third quarter, primarily due to the shipyards and Polar Pioneer and JT Angel. The remainder of the increase was related to the increases in personnel cost and the impact on costs of the declining dollar.

The Trident 20, the Polar Pioneer and JT Angel all returned to work at the end of the fourth quarter and the Cunningham returned to work in the middle of February. This decrease in repair and maintenance activity will be somewhat offset by planned shipyards and four rig reactivations in the first and second quarters. In addition, normal operating and maintenance cost will increase as activity is expected to continue to increase.

For the first and second quarter we expect these trends to result in operating and maintenance costs of between 400 million and 420 million versus 413 million incurred in the fourth quarter.

Presently, we would expect costs to start to trend downward after the second quarter but this depends on the level of contract preparation and rig reactivation later in the year. Of course, as Bob has mentioned revenue increases will more than offset these cost trends and should continue to improve each quarter, as will be evident from Rob's marketing comments later.

General and administrative expenses increased to 22.7 million for the fourth quarter from 15.2 million in the third quarter. This increase was primarily due to costs to comply with Sarbanes-Oxley, professional fees related to internal rig organization and increased stock compensation and executive retirement expense as we fully transition to FAS 123. We expect the continued cost of Sarbanes-Oxley in stock compensation expense to result in G&A cost of approximately $17 million a quarter in 2005.

Finally, I would like to talk about our tax rate. Our adjusted effective tax rate for the year increased almost 50% from the 44% we expected in the third quarter. As we have previously discussed, a high percentage of the taxes are related to revenue but at a relatively low marginal rate. Thus a decrease in profitability occurred in the fourth quarter will generally lead to a higher effective tax rate. Inversely, as income increases the same effect will lead to a lower effective tax rate.

For 2005 we currently estimate the effective tax rate will be plus or minus 20%. However, even at similar levels of income our effective tax rate can be very volatile both due to discreet items such as changes in estimates as well as due to changes in the geographic mix of our income. Our actual tax rate for 2005 is likely to vary from this estimate and it varies from quarter-to-quarter as well.

With that, I will turn it over to Rob to discuss the market outlook.

Thanks Greg, and good morning to all of you on the call. I'm happy to report that the bullish market outlook expressed in our last conference call has been confirmed through excellent fixtures in each of our major business segment. We reiterate our bullish outlook and believe that based on current levels of bid activity 2006 will be a strong year as well.

I will now provide a brief update about our other floater and international jack-up segments first, and then direct most of my comments to our high specifications rigs. Our other floater segment, which includes rigs capable of operating in water depths up to 4500 feet, has continued its very strong recovery from the low activity levels of 2004.

On the last conference call 12 of our 24 rigs in this segment were working. Today, we have 14 rigs on the payroll, two more which are reactivating under contract and one more en route for a long-term opportunity that is being finalized. In total, we will have 17 of the 24 rigs in the segment working before midyear. I should also note that we closed on our sale of the Sedco 600 in January.

The North Sea is our key activity area for the mid water fleet and the news on fixtures continues to be extremely positive. We successfully concluded negotiation for reactivation of the Sedco 712 and Sedco 706 at rates of $103,000 a day and $78,000 a day respectively. We closed the short-term job on the John Shaw at $115,000 a day, which is our highest dayrate so far during this rally. We fully expect the dayrates will continue to move higher and demand will remain high as we are already fielding numerous inquiries for 2006 fixtures. Given the strong demand, I would not be surprised to see dayrates eclipse the levels that Bob referred to in his comments.

The Gulf of Mexico, we elected to reactivate the Falcon 100 and Amirante in response to rising demands in dayrates in that region. Both rigs received fixtures of six months in rates of at least $85,000. The Falcon 100 started up over in this month and the Amirante is slated to join by before March. We've already extended both rigs from their original contracts at rates that exceed $100,000 per day.

In West Africa we received a one-year extension on the Sedco 700, and we expect the Sedco 701 will continue to stay busy. We are starting to see evidence of a tightening market in Southeast Asia and Australia as well based on current bidding activity and expect the future fixtures for rates in our other floater there will trend higher from current levels.

Turning now to jack-ups, our international jack-ups segment continues to experience sold-out levels of utilization and dayrates that are trending higher. All of the rigs we moved in the last six months are on the payroll and working at their new locations. Currently, 24 of the 26 jack-ups are working with one, the Trident 8, on location under a signed contract and ready to drill. Only the cold-stacked Jupiter is idle.

We continue to see dayrates higher for jack-ups as the markets where we operate continue to be tight. In India, we signed the Nordic at $74,000 a day for two years with ONGC, which had previously been working at less than $60,000. We also secured a one-year extension of the Trident 9 in Vietnam for $77,000 a day that, coupled with its current contract, will keep it busy until the end of the third quarter 2007.

Our outlook is for continued tight supply of jack-ups in the areas where we operate, and we have seven rigs that are expected to be re-bid in 2005, all of which appear to have excellent prospects. We are, however, a bit wary of the expensive new building activity that is developing, but these effects will likely not be felt until mid 2006 at the earliest.

In the high specification segment, which includes our deepwater and harsh environment assets, we continue to see robust demand across all regions. Especially in the ultra-deep sector, dayrates seem to move higher with each fixture and there's increasing competition among operators to secure the most capable rigs. We see evidence of this with the signing of rigs nearly a year in advance of contract expirations. Higher dayrates in the ultra-deep water sector are now trickling down to the other deepwater rigs, as evidenced by recent fixtures for some of our fourth generation rigs.

Our outlook continues bullish for 2005, and as I said at the outset, we expect the market strength to continue into 2006. Currently, of our 32 high specification rigs, 29 are working. Of the other three, the Sedco Express is in a shipyard preparing for a contract, the MG Hulme is idle and only the Peregrine I remain cold-stack.

In the Gulf of Mexico, we continue to see very strong demand for the deepwater rigs. As you have already seen, we have signed a two year -- sorry, two rig deal with Shell for the Spirit and the Nautilus for 18 months and 12 months respectively. Both of these rigs garnered rates higher than their original new build rates, which is the sign that we look for of operators' willingness to pay premium rates for fifth generation rigs. We recently extended the Millennium for another six months with Anadarko at $230,000 a day, which was a ceiling rate agreed to in our original contract. We also signed the Marianas for eight months at $180,000 per day, 20% higher than its previous rates.

As US Gulf of Mexico deepwater rig demand has heated up, some competitors' rigs are coming back into the region. However, we believe that there may still be an excess of demand over supply for deepwater rigs in the Gulf, and we would not be surprised to see further rigs of the high spec fleet move back to the Gulf in the months ahead.

Our South American high spec rig activity remains stable with the exception of the Sedco Express, which, I mentioned, has entered a Brazilian shipyard for upgrade to prepare for a BP's greater Plutonio project in Angola. Petrobras has recently issued tenders for three rigs that signal a need on their part to support future deepwater drilling. As has been noted by some of our competitors, rates in Brazil continue to lack the broader market. So we may take the opportunity to relocate some of our rigs rolling off contracts to capture higher rates in other regions.

Turning to the North Sea, the Transocean Rather has recently begun working for BP in the West of Shetlands area. This chart will now be for full years work. In Norway while we've not finalized the agreement previously announced by Statoil for expansion of the Leader, we are hopeful that we will be able to conclude a contract extension shortly. Our three other high spec rigs in the North Sea are fully booked through 2005.

In Africa the Deepwater Pathfinder has begun drilling in Nigeria for a Consortium led by Devon Energy on an 11 well 16-month program. The Deepwater discovery continues to stay busy on its program in Nigeria, while the Sedco Energy continues to drill for Chevron Texaco on a pre (inaudible) bounty program after which we expect it will continue on the longer-term development program. The Sedco 709 is been busy and they are because the NG Hume remains idle but its bid on a number of jobs in the region starting in the second quarter of 2005.

Turning lastly to Asia and Australia, there are a few changes to report from our last call. With the announced departure from one rig from the region and a long-term fixture of another our deepwater rigs will be better positioned to catch future work at higher rates. The discovery of 534 continues work in India for Reliance that is likely to last in the third quarter and the Jack Bates is mobilized in North west Australia and is begun drilling for Woodside and it sees your prospects in the region also look promising.

That concludes my comments on the marketing section.

So I will turn it back to Bob.

Thanks, Rob. Before I open up for questions, let me comment on a couple of things that we are frequently asked about in the current environment. One is, how long is this up cycle likely to last and is it different from previous cycles. Unfortunately, the only answer there is that I don't know. I will give you my guess. In the Deepwater particularly also deep in the fifth generation markets my sense is that we are in for a long up cycle. The fundamentals both from a supply and demand side are very strong. On the supply side, other than a couple of possible upgrades, is unlikely to be any significant increase in this capacity over the next three years.

From a demand side, prospectivity appears to be very high with interest developing in new areas in Africa, the Mediterranean and Far East -- at the same time is the traditional areas in Africa, Brazil and the Gulf of Mexico are showing increased activity. In the other Florida markets I think we shall see several years of high activity, as long as, oil prices stay high. I don't see a lot of price activity in the areas where these rigs compete. So if you go beyond a few years either with the high oil prices, I think there is down side risk.

Jack-up market looks solid for the next couple of years. The risk is offset is on the supply side as a lot of new capacity is being ordered that will come in the market in late 2006 and 2007. Some people are counting on attrition of the existing fleet due to age to take capacity out of the market but historically that hasn't happened in a big way.

The other question, we get asked frequently is what we are going with all our cash. Our CapEx is going to be well below our depreciation and with the market continuing to improve, we should be generating a significant amount of free cash. The near term answer for that is that we are going to continue to pay down debt, at least until we get towards the middle of the $1 billion to $2 billion range that we have consistently talked about for some time.

Assuming we are successful in divesting the last 22% of TODCO in the near future, which we fully intend to do. We should be in that range very soon. At that point we'll start thinking about the timing and the method of returning cash to the shareholders.

But I don't know when we will actually make some decisions on that.

With that I'll open it up for any questions if anybody might have.

Thank you, sir. Ladies and gentlemen, at this time we will begin the question and answer session. If you have a question, please press the "star" followed by the "one" on your push button phone. If you would like to decline from the polling process, please press the "star" followed by the "two".

We will hear a three-tone prompt acknowledging your selection, and your questions will be polled in the order they are received. If you are using speaker equipment, you will need to lift the handset before pressing the numbers.

Your first question comes from Arun Jayaram with Credit Suisse First Boston. Please go ahead.

Good morning. Rob, you talked about moving some capacity potentially out of Brazil, which is a market where you have historically gotten term over day rate. Rob, does this in your opinion indicate a slackening of demand owing to some programs ending or the reality that day rates are just much higher in other markets?

I really think it's more of the latter. As I mentioned in my comments, Petrobras has recently come out for tender for three deepwater rigs, which we'll obviously have some interest in.

However, Petrobras, throughout our work there, has always been a customer where we had an opportunity to trade off higher day rates for longer term. In this market, I think we're seeing a lot of unsatisfied demand in other regions -- which may give us opportunity to secure better rates. That's not to say that we won't still look at the opportunity to get longer term in Brazil but the reality is that the rates in Brazil are lagging certainly what we are seeing in the Gulf of Mexico and West Africa.

And until those day rates get up to the par with those regions, we will continue to look at those other opportunities to see whether they represent better utilization of our fleet.

Okay. And Rob, recently, the Brazilians have been contracting with kind of a two-year term structure. Have they moved away from that?

I think it really depends on each individual tender. For example, the tenders they've got out now range from four years in length to a year and a half and one in between that.

So, I don't think that there's any standard term length that we have seen a change in from Petrobras. It's something that we watch on a case-by-case and tender by tender basis.

Okay. And second question is for Greg. Greg, can you quantify in Q1 and Q2 the operating costs -- associated with reactivations and secondly with some the shipyard work you cited in your comments?

Not really. Reactivation operating cost and shipyard operating costs are difficult to predict because they include capital expenditures. If we're working under a contract some of the costs. If they are direct and incremental to the contract, will be deferred and amortized over the life of the contract and then some of the costs will be expensed and the timing of that depends on how the shipyards falls, the activations fall, whether they fall all in one quarter or across quarters. That is why we gave the overall guidance of the $400 million to $420 million taking the count, where we see all the shipyards and rig reactivations.

Okay. Thanks.

Thank you. Your next question is from Scott Gill with Simmons and Company. Please go ahead.

Yes. Good morning.

Good morning.

Bob, I was wondering, you gave a fairly optimistic view here of Deepwater market. And in the past you've been cautious on constructing new assets for that market. Could you talk to us a little bit about your customers? Are they coming to you, asking for new rigs? And under what kind of day rate and term conditions would you actually consider building a new deepwater rig?

Scott, one interesting thing, if you look at the fleet of the 26 existing fifth generation rigs in the world, 25 out of 26 are available in 2008. So, if any customer came to us talking about potentially being interested in a new build, which couldn't be delivered before the middle of 2008, I don't think so, at the earliest. We'd have to ask them why he would want to do that when we could give him half dozen rigs, any one of half a dozen rigs that could satisfy his need.

And today we have had no indication from any of the operators about having any interest in a new build rig and a long-term contract. In fact, I would say it's the opposite. We have been trying very hard to interest some of the major operators in going for a longer-term contract so that we could tie up some capacity, some backlog past the 2008 period and with a few exceptions where we have seen a little bit of interest but haven't been able to really get to the end point with this, none of them can really commit beyond a couple of year period.

Now, I'd say there's a slight chance that if there's a new build rig coming down the pike to the term contract from operator, my guess it would be come out of Norway where there aren't very many rigs in the world that can satisfy then the their region requirements, particularly if they want to increase activity up in the Barents.

But rather than that right now we are not seeing any indication at all that there's interest on the part of the operators.

Okay. Thanks. And, Rob, I guess for you, where do you see the very top end fifth generation rigs being bid today? You just signed up the spirit for $270,000 a day. Where is kind of the leading edge bid rate for those types of assets?

Well, the bid rate is clearly approaching $300,000 a day. I should remind you, Scott, I'm sure you are aware, we don't set the dayrates, our customers do. And I think that there still appears to be a lot of demand out there for these high-spec rigs. And, frankly, a shrinking supply of them.

So it's probably too early to call $300,000 as a market rate, but we are clearly moving in that direction in our bidding and it's really going to be really up to our customers to decide whether that's the right rate for their programs.

Okay. My last question again for you, Rob, what are your plans for the Peregrine I going forward here?

As you maybe aware that Peregrine I has been stacked since April of 2004 in Brazil. It's a rig that we think is well suited for the Brazilian market. And we'll continue to look at opportunities in Brazil as those opportunities develop. At this point we don't have any thing that we can report.

Are you bidding it in Brazil now?

We will look to bid it on these upcoming tenders, yes.

Okay. Great. Thanks.

You're welcome.

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

Hi. Good morning.

Good morning.

Good morning.

A question I have for you is I saw a chart provided by one of your competitors yesterday that suggested that the ultra deepwater market for '06 is, demand well in excess of supply for the whole year.

So based on your comments early today it looks like that's pretty much lined up. Do you have any kind of a read whatsoever on some of the 5,000-foot class of rigs? Are we seeing an element of demand exceeding supply and any kind of visibility out that '06 as of yet?

I think that the 5,000-foot market is clearly been softer than what we have seen on the ultra-deep end. I think that's pretty obvious. We are seeing some pickup in bid activity for those rigs. I mentioned in my comments that the MGU, which is idle is bid on a number of projects.

And we hope to have that rig back to work before midyear. Some of our other 5,000-foot rigs, again in West Africa, for example, we don't have long-term programs on them as yet, but we are hopeful that we can secure work for them before the year is out. So, I think it's still to be fair a developing story.

But there's no question that as the higher-spec rigs get fully utilized. We will see greater demand for the more generic 5,000-foot rigs. Keep in mind as well that the high-spec rigs at that time are being signed not because of the water depth capability, but because of their efficiency and because of their size that it gives the advantages that those convey to our customers specifically in the West Africa and Gulf of Mexico markets.

So, again, as those rigs get fully utilized our lower spec deepwater rigs will enjoy a better environment.

And then, Bob, for you, you had mentioned in your wrap-up commentary that the prospectivity for the markets in which some of these mid depth rigs are working is all dependent on high oil prices and even with high oil prices after couple years the market is fairly uncertain.

So with that assessment, how do you approach the decision as to what you are going to do with those rigs?

Well, I guess, in the near term, Kurt, we are looking at the tradeoffs between being able to increase dayrates with the demand we are seeing and whether or not we want to bring out any additional supplies since we still have a number of rigs stacked. Right now I'd guess that we are unlikely to bring out very many more rigs. Maybe you'll see us bring out one more of these other floaters some time during the year.

But I don't see us reactivating the majority of those. You might even see us sell a couple of the rigs in the North Sea that have been stacked for a fairly extended period of time. And other than, that I don't think that we could say anything specific about what we are going to do with the rest of them.

Okay. All right. Great. Thank you.

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

Good morning, gentlemen.

Good morning Dan.

I was hoping you could help me bridge the costs a little bit. You did a good job of explaining the fourth quarter cost levels. If I got it right we went from say 360 in the third quarter, we added $20 million for activity in the fourth quarter.

As you look into the first quarter, Greg, you talked about $400 to 420. I'm just wondering from this sort of base of 380 how much of that step-up will be related to higher activity.

Probably $10 million or $15 million is related to continued increase of activity. Then the rest related to shipyard rig reactivation type activities.

Okay. Thanks. And is currency is that doing anything one way or another as you think about those costs in Q1 versus Q4?

Yes. Currency continues to hurt us we have been very successful over the last several years in lowering costs by nationalizing our workforce especially in markets like Brazil and India, however in a weakening dollar environment that hurts us because those costs are not denominated in dollars.

So, we are seeing year-over-year maybe a couple of percent on costs. It's not a huge number. But it starts to add up, as the dollar continues to decline.

Okay. So, there's a year-over-year impact. Is there any additional impact from Q4 to Q1 because of currency down?

There's some impact, a few million dollars.

Okay. Thanks. And then in general, Bob, could you talk a little bit about just your R&M. expense trends here and are you thinking about maybe spending more capital to lower expense and down time, as we go out into '05 and '06?

Dan, I wouldn't say spending more capital. But in terms of spending more on repair and maintenance, we have a focus, we have put together some teams, we have identified pretty obvious that three general areas because most of our down time issues, top drives, PRS and subsea equipment.

We put together some task force, where some we'll be spending about $5 million just on cost of those tasks force that work next year towards trying to solve the reliability issues that we have with those pieces of equipment.

And I'm fairly certain that in the process of doing that we are going to come up with some solutions that will cause us to spend some money, to try and improve some of the reliability of those pieces of equipment. So in those areas, I think that we will be starting to spend some more money than we have in the past. But I'm not sure; I can give you much of a quantification of what that's likely to be.

Okay. And remind us again of your capital budget for '05 and has that changed in the last few months?

It hasn't changed much in the last few months, but our capital budget, we are estimating, we will probably spend on new order of $200 to $230 million in capital next year, maybe 150 million or so that will be out of the maintenance CapEx. That's up from a run rate that was closer to 100 or 110.

Primarily because of the higher activity levels and then, we have a number of -- I won't call them major upgrades but significant upgrades to some of the rigs potentially planned, which maybe on the order of $20 to $30 million. So, if you put all that together we wind up with that $200 to $230 million range.

And Bob that number also includes $38 million for the purchase of the NG Hume, which is the only rig that we currently lease under a operating lease, and we have got a purchase option that we have exercised that will trigger in the fourth quarter of '05.

That's correct.

That's included in the 200 to 230?

That's correct.

Okay. Great. 2006, your high-spec floater fleet, can you help us with roughly what percentage is contracted, and where you would like that to be by -- I don't know, let's say the end of the second quarter? Other words, what's your target utilize -- or target contracted percentage?

Well, I'm not sure about the target, but just to give you -- right now we are just a little under 50% contracted on our 5th generation fleet for '06. And this I'm sorry, around 16% for the other deepwater. And about 45% for the other high-spec. So, if you look at the 32 high spec rigs, that's, under 50% contracted in '06.

Okay. And, Bob, I guess where -- the question I'm asking, you mentioned in your comments that you were actually pushing some operators for terms out beyond 2008, and I'm wondering if that means you would like to have all of your rigs contracted for '06 by a certain period of time.

Well Dan, actually I'm not very concerned about '06 at all because we continue to see a capacity shortage in the near term and that would, I guess, be well into '06, approaching '07. I think that our big decisions are going to be to the extent that we have the choice to make them how much weight we want to trade off in the '06, '07 time period in order to get capacity locked up '08 and beyond. Because right now I don't think we've got any concern at all about utilization in the '06 time period.

We have more demand than we have supply. The issue is going to be whether or not we can actually generate some interest among the customers in that tradeoff. Can we get them to go beyond the 2008 period? It is not the 2006 and 2007 period that we are particularly worried about. So, I don't have any kind of a target portfolio or percentage of utilization I would like to see in 2006 because I'm 99.9% certain it's going to be 100%.

Excellent. Thank you.

Thank you. The next question comes from Roger Read. Please state your company name and followed by the question.

Yes. Natexis Bleichroeder. Good morning.

Good morning.

Good morning.

Quick question about the North Sea. If we look at the day rates for 2nd June inflates as you mentioned with the John Shaw at 115. Given this summer is probably mostly contracted where did do you think that heads in the second half of the year most importantly kind of the fourth quarter and then if somebody were looking for rig in the middle of '06 where do you think the range of day rates might be there now?

Yes. This is Rob. Just to remind where we are with our fleet in the North Sea, the only rig we've got a lot of visibility or availability on in the fourth quarter a couple of rigs I guess the John Shaw and 714.

We, at this point, I think as we look forward we expect that the rates are going to approach the $140,000 to $150,000 range toward the end of this year and into next year. Those are the kinds of rates that we are bidding at this point. And we wouldn't be surprised to see those rates and all manifest themselves. Obviously it depends on the market demand holding up as we are foreseeing it now but we definitely see in the market move upward.

I would caution you that until some operator contracts us at 140,000 a day then bidding it doesn't get us there so.

I appreciate that, Bob.

I think it is safe to say, not many of us try to put those kind of numbers in our models yet. The second question is for the use of cash once you -- let's presume the TODCO thing happens and you continue to generate free cash in the first half of this year.

Do you think you would re-institute to dividend or you are more partial toward share repurchases if you look towards the second half of '05 and in '06?

As I indicated we are just now starting to think a lot about what the best thing to do would be. I would say we have a bias against a regular dividend. I think in a cyclical industry like this it doesn't make sense to have a significant dividend and I don't think anybody buys the stock of a drilling contractor for a token dividend. Probably don't buy the stock of a drilling contractor for the dividend at all.

So, in terms of whether or not we would institute a regular small dividend again I would say that it would probably be low on our list. Other than that we have not really formed any preconceived ideas of what the best use would be.

Would you consider a special dividend there, if you ended up in a situation that called for something like that?

Well, I think if you rule out the regular small dividend then we're really looking at choices between special dividends or stock buybacks or some combination.

Okay. Thank you.

Thank you. Our next question comes from Waqar Syed. Please state your company name, followed by your question.

Waqar Syed with Petrie Parkman Company.

Good morning.

Good morning.

Could you comment on the deepwater market in Egypt? They've been -they've been talked that the expedition may move from Brazil to Egypt. Could you comment on that?

Yes. We certainly have seen a pickup in activity in Egypt, especially in the deepwater BG, BP, Shell and others are very excited about the prospectivity offshore Egypt and that's clearly an area that -- that we are looking at in terms of future rig placements. We have Jim Cunningham there now, and we will continue to look to see if there're opportunities to locate rigs there. At this point in time, we really can't announce any other moves into the region.

Okay. And also for the Norwegian market, any prospects of when you're going back to work this year?

We're taking a look at the Norwegian market as it develops, but as Bob said we don't have any plans at this point to reactivate our four stacked rigs in the North Sea inclusive of the winter.

Okay. And then, just finally, do you have two idle tenders and one idle barge? What are the prospects there?

Not particularly good. I don't think you should anticipate that we will have any change in the contract situations in those units.

Okay. That sounds fine. Well, thank you very much. My questions are answered.

Thank you.

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

Thanks. A couple of modeling questions for Greg. Can you Greg, give us your thoughts on depreciation and interest expense as we move into Q1 and for '05?

Sure. Depreciation should run around $103 million to $105 million a quarter, trending just slightly higher from the beginning of the year to the end of the year. Interest should, net interest, interest expense, net of interest income, probably starts the year right around 30 million and if we continue to retire debt during the year, as we currently expect probably ends the year closer to $20 million a quarter.

Okay. So, coming down a fair bit. And then, if we were to take obviously, you've got some earnings outlook implied in your tax rate guidance. If we were to take the fourth quarter '05 outlook and annualize that, presumably that suggests that tax rate comes down significantly in '06. Can you comment on that?

I'm not sure it would come down significantly, it would certainly come down for the reasons we've talked about. But you get to a certain level and it's very volatile going from the low earnings environment, relatively low earnings we saw in '04 to '05. And so you see that tax rate come down quite a bit. After that, I think it's going to be a more gradual decline. So I would expect it would be below 20. Would it be below 15? I think that's extremely doubtful.

Probably not. Ok. And then lastly, Rob you mentioned the Millennium at 230 a day. When does that new contract kick in?

That's going to kick in mid June.

Okay. Great. That's all I have.

Thanks.

Thank you. Our next question is from Michael Irving with Deutsche Bank. Please go ahead.

My questions have been answered.

Thanks.

Thank you. The next question comes from Rune Juliussen with Carnegie. Please go ahead.

Yes. Good morning. First, a follow-up question on your plans for your floater (inaudible) spec rigs in the North Sea. You're stating that day rates for these units could approach 140, 150 during the course of 2005. At the same time, there is a number of oil companies in the region stating that well at least we could drill more wells but there's not enough lot of our rigs. So, why should you as you mentioned initially be selling those units and not reactivating them?

And then secondly, this time around we have seen rates such for leader etcetera and moving about the previous peak levels of 2000-2001 and 97-98. Do you think there is a ceiling to day rates in those up cycle and secondly -- sorry -- thirdly, you mentioned that you do not see many new builds coming into this market, but you -- do you see room for further industry consolidation where Transocean has historically been in the lead?

I'm not sure that we've answer all of those questions, so if we've miss something just re-ask it. On the reactivation versus sale, there is considerable cost to reactivate some of the rigs that we have stacked. And while there's a lot of demand right now, none of it is very long term.

So we'd like to see some high rates where we see a combination of high rates and long term. I don't know. Some of the rigs that I mentioned that we may consider selling have been stacked a very long time and would cost a fair amount of money to reactivate and frankly, I just don't see us doing that.

And if I don't see us reactivating it, I'd rather sell it and take some capital out of that business while it's good than to let the asset just sit there and do nothing. Your second question, I think, I understood, to be related to the leader day rate and whether not we saw a cap on day rates. Is that right?

Yes, do you feel ceiling on day rates? Do you see a ceiling on, call it the willingness from all companies to pay a certain ceiling or say a cap level on day rates?

There will certainly be a ceiling at some point but I think you have to remember that there is a tradeoff between term and the day rate. There's a lot less sensitivity in a six month or if it's a one-year contract to what that day rate might be, as opposed to what a three-year or five-year contract may be.

And right now you know what oil price is in the $45 to $50 or above range. The operators can afford this spend of fair amount and a lot of things look pretty economic at those rates. So, I frankly don't know what the ceilings are.

And if six months ago people would have told us if $270,000 day rate would never happen but it is there and nobody is talking about $300,000 day rates or day rates over $200,000 on fourth generation rigs. But it has happened. So, I couldn't really tell you exactly, where the cap will be. Obviously, there's a cap at some point.

As far as the consolidation goes, I think that consolidation is one of the real value drivers in this business. I think that the consolidation that has happened to date has been very beneficial. But I can't tell you that there are any significant drivers that will trigger additional consolidation. I think the management in this industry are now all convinced of the benefits of consolidation.

But obviously those are always difficult to occur because of differences in the cycles between jack-ups in deep water and a lot of things have to happen because most of the cost in this business is offshore on the rigs and it doesn't go away in a consolidation.

Therefore, it's difficult to pay very much of a premium, which makes it difficult for anyone party to drive consolidation. So, I can't tell you, whether much is going to happen or not.

Thanks a lot.

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

Thanks. Two questions. On the question on the high spec rigs, you talked a couple of times about sort of the trade-off between rate and term. And I guess, I would like to get your sense, as to whether in the pursuit of term, do you think that you can sustain the current leading edge of day rates and just get those to extend into term? Or do you think you are going to have to give up some rate versus the current leading edge, in order to stimulate term contracts?

I think that we would be naive to think that we wouldn't have to give up some rate to get long term. But if leading edge rates are something over 270, approaching 300, if we could tie up a rig well past 2008 or something a little bit below 270, I think, we'd do it. I don't think, we'd go a lot below 270 because this market is looking pretty good right now. And 2008 and beyond could be very good. It's just that there's not the visibility out there. But with our size fleet taking a portfolio approach seems to make sense to us.

Do you have any sense as to -- I mean -- you're -- just everything you've been talking about reflects an evolving sentiment by your customers, would you be willing to venture a guess, as to how long it's going to take them to come around to that kind of a mind set?

Well, my guess is that what really drives them into that mind set for sure is the project, where they can -- they know that they're going to use the rig on for an extended period going beyond '08. In terms of just tying up capacity for general usage because they're sure, they're going to have deep water drilling past '08. I think that's going to be a tough sell.

The operators still have long memories about tying up capacity that they didn't need with all of the new builds four or five years ago and then winding up having to try and farm it out. So all of them are very cautious about getting into that situation again. And, I think, it's going to be difficult to get them to come around to do that.

Yes. This is Rob and I will add to that. All of our major customers including the super majors go through a budgetary process each year. And with the exception of longer-term programs that are more the exception rather than the rule, a lot of their programs are still subject to those budget discussions and the developments that are planned in each of the years.

So, to Bob's point, I think there's a -- there are certainly opportunities to get long-term fixtures in this market. But again, it's really dependent on the visibility that our customers have that will support those long-term fixtures. But, personally, I think that we will see more opportunities, as we go forward to look at those kinds of deals.

Okay. The second question, in your earlier comments, there was some concern raised looking out maybe a couple of years about the supply side of the jack-up market.

And I think, you've kind of commented that perhaps the view that aging of the fleet is going to force attrition might be a bit exaggerated. Could you maybe walk us through your thought process on what it would take to actually retire older equipment? What would you have to see to justify that decision in your mind?

Well, I think the classic case in this business is if business gets bad enough that you can't work the rigs and it looks like you then have a rig that's very old and would be the last one to come out and the first one to go down in the next cycle, then people start thinking about retiring rigs.

But the option value of continuing to hold on to them is very high, and as long as, you can work them at positive cash flow, there's a tendency to do that, which means that before you see a lot of retirement, I think you have to see a down cycle. Otherwise people are just going to continue to bid the day rates down and work the rig, as long as, they can work it in a positive cash flow environment. And nobody is going to think about scrapping one of these things until it has been stacked for a while.

So, I struggle with the concept that just age is going to take a rig out of the fleet. I don't recall any time in my time in this business, where somebody has taken a rig that's perfectly willing and able to work, and said, "Okay, it's too old, I'm going to scrap it". So, it's strictly driven by the economics.

At the current kind of rate of jack-up construction that you are kind of roughly eight to maybe trending toward 10 a year, is that a level of new building activity that would in your mind oversupply the market?

I think, I'm not sure the 8 to 10 is the right number but 15 or 16 under construction now with I think about a like number of options available. My sense is that if we have some success and the deep gas drilling in the gulf really shows some promise and if activity in Mexico continues that the industry can absorb 15 or 16 new jack-ups between now and late '06. Can it absorb 30 new jack-ups; if we don't have some real success in some new province opens up? I have some questions about that.

So, if you build in this case, 10 new jack-ups a year-every-year for the next five years, I have been worried here in the next three or four years for sure.

All right. Thanks very much.

Okay.

Thank you. And our next question comes from Jud Bailey with Jefferies & Company. Please go ahead.

Thank you. Good morning.

Good morning.

A couple of quick questions. First, it might be for Rob, given the demand we're seeing in the ultra deepwater side in the Gulf of Mexico, we know of one rig is coming back into the Gulf.

Now, and what you're seeing on the demand side into 2006, would you venture a guess, as to how many potential deepwater rigs or ultra-deepwater rigs could comeback into the Gulf over the next 12 to 18 months or how many could be required?

I mean, at this point that would be strictly guesswork. So, I would have to caveat my answer with that. But if demand holds where we think it will, I could see one to two more ultra-deepwater rigs coming back.

Okay. Second question, you moved, I think the rather from West Africa into toward foreseen work in the North Sea. How many more of your, I guess, mid-water floaters are capable of moving into the North Sea? Do you have any others a bit outside the region right now?

Not really. I think the rather was the best candidate for that kind of move.

Okay. And one last quick modeling question, what would be a good run rate for G&A for the first quarter in '05?

About $17 million a quarter.

Great. Thank you.

If I could just amend my answer, the Jack Bates, which is drilling in Northwest Australia under a long-term contract, is a North Sea capable rig would involve a long-term mode but that's probably the other fourth generation rig that could come back to the North Sea.

Thank you. Gentlemen, at this time I show no further questions. I'd like to turn the conference back over for any concluding comments.

Okay. Well, we appreciate all of the interest and we're looking forward to what should be a pretty good year based on what's going on in the market. We look forward to talking to you again at the end of the first quarter. Thank you.

Thank you. And ladies and gentlemen, this concludes the Transocean fourth quarter 2004 results teleconference. If you'd like to listen to the replay of today's conference, please, dial 303-590-3000 and you'll need to enter the access code 11021711 followed by the "pound" sign.

Once again, thank you for participating in today's conference and at this time you may now disconnect.