Transocean Ltd (RIG) 2005 Q1 法說會逐字稿

Good morning ladies and gentlemen and welcome to the Transocean Incorporated first quarter 2005 results conference call. Following today's presentation instructions will be given for the question-and-answer session. [OPERATOR INSTRUCTIONS] As a reminder this call is being recorded Tuesday, May 3, 2005. I'd like to turn the call over to Mr. Jeffrey Chastain, Vice President of Investor Relations. Please go ahead sir.

Good morning and welcome to the review of Transocean's first quarter 2005 results. A copy of the press release covering the first 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 fleet update report covering the contract status of the Transocean mobile offshore drilling fleet at May 3. The report is posted in the Investor Relations segment of the Website under Financial Reports. Beginning with the May 3 report and to further assist those of you who maintain detailed financial models on the Company, you'll find information identifying in our fleet with fixed price options. This fleet report is issued twice a month.

Participating on this morning's call are the following Transocean senior managers: Bob Long, President and Chief Executive Officer, John Cahuzac, Executive Vice President Chief Operating Officer and Greg Cauthen Senior Vice President, and Chief Financial Officer, Rob Saltiel, Vice President of Marketing and Corporate Planning and David Tonnel, Vice President and Controller. Bob Long will provide opening comments. Greg Cauthen will discuss some of the financial details pertaining to the quarter and Rob Saltiel will provide comments on market outlooks. 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 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 risks. Which are described in the Company's most recent form 10-K and other filings with the U.S. Securities and Exchange Commission. Should one or more of these risks and uncertainties materialize or underlying assumptions prove incorrect, actual results may vary materially from those indicated. Also please note that we will use various new numerical measures in the call today which are or may be considered non-GAAP financial measures under Regulation G. You will find a required supplemental financial disclosure for these measures including the most directly comparable GAAP measure and an associated reconciliation on our Website. And for your convenience non-GAAP financial measures and reconciliation tables are included with today's press release.

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

Thanks, Jeff. Good morning, everyone. As you saw from our press release, we had a pretty good quarter and are off to a good start for the year. Demand for all major categories of offshore rigs has continue to increase and dayrates that are currently being discussed are frankly, higher than I ever would have anticipated. As I said in the press release, we're negotiating with customers on seven of our high high-specification floaters for dayrates in the 260 to $350,000 a day range. Some of those opportunities are for at least two years in duration and don't start until next year. So we should see some very good rates at a number of rigs going out until 2008. Of course, there's no good guarantee that we will be successful in including all of those negotiations but we are certainly pretty optimistic at this time. In our other floater category, we've continued to see improvements. During our last earnings call, I told you that rates on these rigs, basically our second and third generation floaters, had moved from around $50,000 a day to over $100,000. But that I didn't expect to see rates to go back to the $145,000 range that we had seen in the 90's. Obviously I didn't know what I was talking about at the time as rates broke that $145,000 level within a week or so of our last call.

We always get questions from investors about how high dayrates can go. As you can tell from my comments last time, predicting the capital in second and third generation rigs, I really don't know. I encourage all of you to focus more on the question of how long the cycle can last than on high rates can go. If dayrates for second and third generation rigs didn't go much over $150,000 and for high-spec floaters stayed in the 250 to $350,000 day range long enough to get most of our fleet to roll the new contracts at those levels, our earnings capacity would really be remarkable. For those of you try to model the Company, I'd caution to you take into account options outstanding on a number of our rigs. Some of them at rates significantly below current market as Jeff referred to. And again those are now being published in our fleet update.

My thoughts on the possible length of the cycle remain unchanged from our last call. We seem to have very good visibility for demand for two to three years in the high specification floater segment and the industry has very limited ability to add capacity in that time. Going past the 2008 time frame, the outlook depends primarily on exploratory success over the next couple years. But with all the different prospective deepwater plays around the world; we think there's a very good chance that the supply/demand remains favorable even out past 2008. Right now there are no new builds on order for floaters and only a couple of announced upgrades for deepwater rigs. However, at this point most of the fifth fifth generation rigs in the world remain available in 2008 and beyond. That's one reason why we are so pleased with the recent signing of the horizon for five firm years. The rates that will apply for years three through five are subject to market conditions in the Gulf of Mexico at this at the time. Specifically what rates we get for our other fifth Fifth Generation dynamically positioned units in the Gulf.

Since those rates are likely to be all three of our enterprise class rigs and a few path pathfinder class rigs, we expect the rates to be good and we have eliminated any risk of downtime between contracts for the horizon. We continue to seek opportunities for additional backlog into 2008 and beyond. But right now we see it limited interest from our customers for any contracts of that length. While I think the current activity levels for the high specification floaters would probably be the same even if all prices were much lower, I think the current demand for the second and third generation floaters is being driven to a large extent by high oil prices. My guess is, that we will continue to see high demand for the next couple of years for the second and third generation rigs. But beyond that I'm not sure that either the prospectivity in the mid-water areas or oil prices will be good enough to sustain the high level of activity.

Our international jackups are doing fine and again demand for the next few years looks very strong. At our last call three months ago, I think there was something like 20 new jackups on order on speculation. Today I believe that number is more like 35. While the optimists think that demand growth and attrition of older rigs will allow the industry to absorb those new rigs without negatively impacting dayrates, I'm frankly not so sure. And if additional jackups continue to be ordered I fear that we'll see a softening in jackup rates by 2007. Before I ask Rob to give you some more color of what's going on in the markets, I'm going to have Greg expand a little bit on some of the numbers. You should note that our expectation for costs are up significantly from where we came in last quarter. And we continue to see increasing pressure on cost as activity picks up. But I think Greg is going to give you a little more on that. Greg?

Thank you, Bob and good morning to everyone. In the first quarter of 2005 we had adjusted net income of $79.7 million or $0.24 per share. This excludes the impact of a $19 million gain from the sale of the Sedco 600 and a $7 million loss on debt retirement. The $0.24 per share was higher than expected primarily due to the impact of a delay of various shipyard and maintenance projects as well as a lower than expected effective tax rate.

Now, note that first quarter 2004 results included in our press release include TODCO as the consolidated subsidiary, With the deconsolidation with TODCO in December we began reporting our share of the earnings from TODCO all on one line as equity and earnings of affiliate. Our first quarter 2005 revenues operating and maintenance costs and depreciation are thus not comparable to the first quarter 2004 as they no longer include TODCO's results. For a better comparison to 2004, you should look to the Transocean drilling segment results, which even in 2004 did not include TODCO.

Now because of the TODCO deconsolidation last quarter' I'm going to limit my first quarter versus fourth quarter comments to the Transocean drilling segment. First revenue. An increase in dayrates activity in the transaction drilling segment led to a net $40 million increase in revenue quarter-over-quarter. This increase includes the impact of the Trident 20 and the Jim Cunningham returning to work, however, these improvements for net has been partially offset by lower integrated services revenue as scheduled shipyard on the Henry Goodrich, which as of May is now back on day rate and idle time on the M.G. Hulme.

Operating and maintenance costs in the quarter went down by almost $25 million despite an increase in cost of roughly $4 million related to increase in activity described above. Approximately 18 million of the decrease in costs were related to the completion of repairs and the subsequent return to work of the Trident 20 and the Cunningham. As well as the completion of the scheduled shipyard of the polar pioneer. The Trident 20 and Polar Pioneer were both back to work by end of the fourth quarter and the Cunningham by the middle of the first quarter.

The remaining $11 million of the decrease was related to the impact of the Sedco Press beginning contract preparation as well as a general decrease in the level of maintenance project s across the rig fleet. Much of this $11 million decrease in maintenance projects related to projects that were originally planned for the first quarter but that will now occur in either the second or the third quarter. Changes in maintenance occur all the time and can be caused by a variety of factors such as the impact of a well in progress or changes in estimated equipment availability.

Now the impact of this change in timing of various scheduled maintenance projects, as well as additional projects already scheduled, should lead to an increase of maintenance costs of almost $20 million in the second quarter versus the first quarter. In addition, the general increase in activity should add another roughly $20 million to operating maintenance costs with another few million dollars added by a year-over-year 10% increase in labor costs due to pay raises and the decline of the U.S. dollars. Because of all these factors we currently expect operating and maintenance costs in the second and third quarter to trend between 415 million and 435 million versus the 387 million in the first quarter. Currently, we believe that we will experience less shipyard days in the last quarter of the year. Thus fourth quarter operating maintenance costs should be somewhat lower than the levels expected in the second and third quarters. However, I would caution you that the predictability of the costs and timing of shipyards and other major maintenance projects is very uncertain and depends among other things on the occurrence of major downtime events, contract preparations and rig reactivations during the year.

Now despite this cost guidance, it should be clear from Bob's comments and Rob's clients; revenue increases will more than offset these cost trends and should continue to improve each quarter for the remainder of 2005, subject to the absence of any major downtime events. Depreciation decreased from 106 million in the fourth quarter to $101 million in the first quarter. Each quarter, as events such as shipyard indicate are existing useful life of the rig may no longer be appropriate we re-evaluate such life. The decrease this quarter was due to our change of estimated useful life of four rigs following such a re-evaluation. Taking into account life extending work upgrades and inspections that we have performed on those four rigs. General and administration expenses decreased to $18 million for the first quarter from $23 million in the fourth quarter. This decrease was primarily due to the cost to comply with Sarbanes-Oxley incurred in the fourth quarter. We expect the continued cost of Sarbanes-Oxley to result in G&A costs of approximately $17 to $18 million a quarter throughout the rest of 2005.

Net debt decreased to approximately 1.8 billion as we continued our focus on debt reduction. Our reduction in debt is less the net interest expense to decline around $30 million a quarter. Our adjusted expected tax rate for the year decreased approximately 16% from the almost 50% we saw in the fourth quarter. As we have previously discussed,d a high percentage of our taxes are related to revenue but at a relatively low marginal tax rate. Thus, the increase in profitability that has occurred in 2005 will generally lead to a lower effective tax rate. For the remainder of 2005 we estimate the effective tax rate will continue to be approximately 16%. However, even at similar levels of income our effective tax rate can be volatile but due to discrete items such as changes in estimates as well as due to changes in the geographic mix of our income. So, our actual tax rate in 2005 is likely to vary from this estimate and to vary from quarter to quarter as well.

With that I'll turn it over to Rob who will discuss the market outlook.

Thank you, Greg, and good morning to all of you on the call. As reported in our press release today and reiterated by Bob's comments, we continue to see strong demand worldwide for our offshore drilling services. This growing demand, coupled with limited rig supplies, is driving leading edge day rates in our floater segments to levels that are significantly above year levels and into new record territories for our high specification rigs. I will now provide updates and outlooks on each of our major assets segments.

Transocean's other floater segment, which includes rigs capable of operating in water depths up to 4500 feet, continues to benefit from strong demand that is driven in large part by the healthy commodity price levels we've been seeing. We currently have 16 our 24 rigs in this segment working up two from our last call. The Transocean Legend will be our seventeenth rig in this segment to go to work. As it now has a signed contract for two plus years that we'll see it commence drilling in the third quarter of this year. The North Sea region, where half of our working other floaters operate, continues to show significant demand pick up. Currently, in the market there are a total of 34 mid-water rigs operating in the North Sea with only eight of these rigs idle. And of these three have contracts for a return to work. Transocean still has four idle rigs in the North Sea which represent nearly all of the uncontracted capacity in the region.

This market is fast approaching sold out status which has led to higher day rates and a desire by operators to secure rigs beyond 2005 to insure their programs will be drilled. Since our last call, we have seen a new high day rate of $145,000 in the North Sea for a short program of Sedco 714 and a one year fixture of $100,000 for the John Shaw. However, reiterating Bob's comments, we expect rates in the $140,000 range and higher to become more more the norm than the exception as rigs are secured for the remainder of 2005 and into 2006. The remainder of the mid-water markets where we operate are also seeing general increasing activity in dayrates. In Australia, we recently secured an eight-month fixture for the Sedco 703 at 150,000 a day, which will start in midsummer. We will also return, as I mentioned before the Transocean Legend to service starting this summer on a three-season drilling program with BP and Sakalin, after it under goes shipyard work in Singapore. and Transocean will have the right to market the rig for further work during the off-seasons of that drilling program.

Turning now to jackups, our international jackup segment continues to experience soldout levels of utilization and dayrates that are trending higher. The Trident 6 has moved from India to Vietnam, where it has begin drilling for PetroVietnam under an 11 month firm deal, just north of $70,000 per day. An increase of 15,000 per day over its previous dayrate in India. We also inked a long term deal in Nigeria that will keep the Trident 8 working there through the first quarter of 2008, inclusive of a four-month mid program shipyard. We have only ten working jackups with uncontracted capacity in 2005 and we expect those to stay busy with similar or improving rate structures.

In the high specification segment, which includes our deepwater and harsh environment assets, we continue to see strong demand and potential for future record setting fixtures. As a result of operator interest in our most capable rigs we are currently contracted for roughly 84% of our high specification capacity for 2005 and 46% contracted capacity for 2006. Our backlog for this segment averages nearly 18 months per working rig excluding, options and contracts that are under discussion. So we are rapidly filling up rig slots for 2006 and beyond. We continue to see evidence that higher dayrates for our top rigs are helping rates for our less capable deepwater rigs as well. Our outlook continues to be very bullish and we see no signs of a slowdown in fixtures or rate increases for this segment. Currently we have 29 of our 32 high-specification rigs working. Of the other three; the Sedco Express is in a shipyard preparing for a contract, the M.G. Hulme is idle and the Peregrine 1 remains cold-stacked in Brazil.

In the Gulf of Mexico, we continue to see very strong demand for deepwater rigs as evidenced by the two deals we announced with BP. By signing the deepwater Horizon to a five-year contract, with the last three years of market related rates, we've assured a continuous work string and allowed for participation and further upside in the deepwater markets over the next three years. Our signing of the Marianas for a nearly one year program at $250,000 a day, up from a previous fixture of $180,000 per day illustrates the effect that a shortage of deepwater capacity is having on rates for the fourth generation set. We are currently in discussion with a number of other operators for either extensions of existing firm contracts or for new term programs that portend a sustained imbalance of demand over supply for the Gulf of Mexico deepwater market well into 2006.

Our South America high-spec rig activity remains largely unchanged with the exception of a five to six month program with Shell for the Deepwater Navigator that will start in August 2005 after concluding its program with Petronas in a required shipyard survey. We are currently in discussions with Petronas to determine whether there is an opportunity to extend our existing rigs into longer term programs but we have nothing firm to report at this time. In the North Sea strong demand for our high-spec rigs is continuing to fuel optimism for our fleet there. Currently all five of our high-spec rigs in the North Sea are fully booked for 2005. Specifically, we are seeing greater interest in what the Shetlands work, it could bode well for the Transocean Rather, which is currently under contract in this area for 2006.

In Norway, we finalized our agreement with [StatOil] for a nearly one year extension Transocean leader at $245,000 per day. And we are seeing strong interest by Norwegian operators in further turning up rigs that can operate in harsh environments and which conform to Norwegian standards. So, we would not be surprised to see further upward momentum in dayrates and demand activity there. In Africa, the deepwater discovery continues to stay busy on a multi-client program in Nigeria that will likely last into early 2006. And this rig has reached the first $300,000 plus fixture for Transocean in a one-well job previously announced. The Sedco Energy is assured of staying in Liberia for Chevron Texaco until late in 2007 as it was recently awarded the [AGBAMI] development work program. And the deepwater path Pathfinder continues to drill on a multi client program now expected to extend also into early 2006.

Turning lastly to Asia, we firmed up work for the Discoverer 534 that will likely keep it busy through the end of 2005 and at $175,000 rate on its last two wells, that is 75% higher than it's current rate. The Jack Bates will stay busy through 2005 on the woodside development at [Infil]. And we are currently in discussions for firming up follow on work to that program. That concludes the market roundup. So Bob, I'll turn it back to you. Thanks Rob. That concludes all of our prepared remarks so at this point we'd be happy to open up to questions.

[ OPERATOR INSTRUCTIONS ]. Our first question comes from Robert Mackenzie with Friedman, Billings, Ramsey. Please go ahead.

Good morning. My question I guess is for Bob or Rob and it relates to your comments about the jackup markets. I wonder if you could give us any color as to why you don't think, Bob, or why you're feeling that there's not enough demand to soak up some of the new supply 35 or some odd rigs coming on in the next three years?

Well, I think you need to be careful in interpreting my remarks. I think that there is a good chance we see a lot of increasing demand in various places around the world and potential for significant increase in demand for jackups in the Middle East area. I think that you could easily see 20 additional jackups required in the Middle East area in the next year or so. My concern is; that while I think the industry could absorb 20 or 25 or maybe if demand picks up like that in the Middle East and a few other places and demand stays strong in Mexico and every place else and the deep gas play in the Shelf and the U.S. Gulf gets a little bit more active, maybe the industry can absorb 30 more jackups without a significant impact on rates. But with 35 on order and 17 options, if 50 come out or if demand isn't quite as robust in any of those areas as it could be, then I think we've reached the point where there's a significant risk that we're going to have more capacity addition than the industry can absorb. I wouldn't rule out the possibility that they could absorb up to 35 more rigs. But if we keep announcing another two jackups every other week then we're going to shoot ourselves in the foot like we always do as drilling contractors.

Well, given that viewpoint then and apparent strong demand for jackups right now is it a consideration at Transocean to divest the international jackups?

Well, we've always took the position that while any one jackup, international jackup, that we have is not a strategic asset and if somebody offered a price we couldn't refuse, we'd certainly consider selling that jackup. As a whole, our jackup fleet is strategic to us in that it gives us significant infrastructure, particularly in the Far East and with some of the national oil companies that we think could be significant future customers for deepwater activity. So with that basis, we haven't really considered actively trying to divest our jackups fleet as a whole.

Great. Thank you.

And our next question comes from Kurt Hallead with RBC capital Markets. Please go ahead with your question.

A good question on the prior one there on the jackup market. Let me ask you this in terms of the cash flow generation that's been very focused on paying down debt. And obviously there have been some commentary with respect to the prospect of share repurchase and/or potential for a special dividend. Any interest out there in buying the assets that are currently being built by those who may or may not be long-temple operators in the business?

Well, I guess the issue at that that raises is primarily one of value, Kurt. We had early on when some of these jackups initially were announced, we had some interest in determining whether or not the builders, particularly the speculators who aren't going contractors might be willing sellers at a reasonable price. However, two things have happened which dampened our enthusiasm for that. One is the price expectations for the speculators has risen to the point where we really question whether or not it would make sense to consider purchasing or acquiring jackups at those type of prices. And second, there's now so much additional capacity slated to come in that we really have significant questions about what the jackup market is going to look like two years from now. Which makes it tough to justify paying very much for one of these rigs. So I think you'd have to say it's unlikely that we would be a serious buyer for anything that is out there in terms of what people are expecting to get for their assets.

All right. And then just in terms of the follow-up, once again, kind of come the full circle here with new capacity coming on and I know you're look at in terms of a footprint being very important and a customer interface as it could leverage your deepwater stuff. But how much of the risk factor of the jackup market - - at what point does the risk factor jackup market outweigh the benefits of just keeping it there for customer interface and geographic purpose?

Well, I guess that depends on how successful we are in managing our contract portfolio. We have focused to some extent earlier on in trying to lock up term contracts that would carry us through any potential downturn. I think we've got another year or more where the jackup market should be - - continue to be very good and it may go beyond that. It may go on a couple of years. So to the extent that we can find opportunities to contract our rigs longer term, then I don't think that it's going to represent a significant risk to us. Also, right now the jackups only represent about 20% of our revenue and 20% of our operating profit. Probably going forward that number will go down somewhat, given the robust nature of the floater market today. So right now we're concentrating on trying to term up our contracts for the jackups.

All right. And the comment you made about the other floaters, the non-ultra deepwater stuff a lot of that being dependent on the high oil price environment, you feel pretty confident, I guess it sounds like, over the next two or three years and then the question mark is after that. At what price point on oil do some of these prospects that these rigs are drilling not become economically feasible?

Well, I can't give you a definitive answer to that. But my sense is a lot of the activity that is taking part today is a result of operator interest. In talking to a number of operators in the North Sea, there is something like 300 discovered but undeveloped reservoirs in the UK sector and maybe 150 in Norway. And at oil prices in the low 20's that just weren't economic to develop. At oil prices in the 50's they are clearly economic. The question I guess is how quickly are those going to be developed and put on-stream reducing future prospectivity and at what price do they become uneconomic? My sense is that if the price of oil gets back down near $30, a number of them are going to become uneconomic. And with the way the cost in the business are going, both the cost of getting drilling rigs and the cost of all the equipment; we're seeing pretty significant cost escalations which would also impact the cost for the operator. Which may push that break even price up for oil a even a little bit higher. So my guess is if it starts to go down near $30, we're going to see a risk of softening.

And just, if I may one more just on the prospect for consolidation within the offshore drilling sector, what kind of probability would you place on something happening in the sector this year?

For consolidation ?

Consolidation within the offshore drilling sector probability this year.

I couldn't even give you a guess. Right now there are not a lot of significant drivers for any single company in terms of a compelling reason for consolidation. So it would just be a flip of the coin. I really don't have any basis for giving you a number there.

All right, Bob, thanks, I appreciate it.

Okay.

Our next question comes from Scott Gill with Simmons and Company.

I guess maybe for you Rob or even you, Bob you just got through talking about the North Sea. You've got four stacked semis I believe. What's the outlook over the next 18 months to unstack any one of those units? What's it going to cost and what type of day rate are you talking about to begin unstacking the idle capacity in the North Sea?

Right now, Scott, we don't have any plans to unstack any of the units in the North Sea. Some of them would take a significant amount of money to reactivate. And we're not anxious to bring additional capacity into the market, which might have an impact on the market. To the extent that we see our existing fleets termed up and I would admit that we are seeing some opportunities for some term contracts with some of those rigs. But right now they tend to be one year. We're looking at an opportunity which is closer to a year and a half on one of the rigs. If we're successful in getting some of those terms contracts and terming out the fleet and then there is - - continues to be significant demand and an operator is willing to pay us for the reactivation cost and give us a long enough contract, we'll clearly consider it. But at this point, nothing is being considered.

Bob, what does it cost now to unstack the least cost costly rig now in the North Sea?

Well, it's a difficult number to pin down here, but something probably around $15 million.

Okay. Very good. And I guess, Greg, for you the tax rate, 16% is your guidance for the rest of year. Is there a rule of thumb that we can follow to kind of guestimate the direction of tax rate change with respect to U.S. revenue mix or other geographic revenue mix in this number? And can you kind of can I have give us a range of expectations for '05 is it 12% to 20% or is just right around 16?

Really it's so complicated there's no rule of thumb that works. So I'd say in a somewhere within a few percentage points of 16 is the best guidance I can give.

What about looking into '06 and beyond? Where do you think the rate goes there?

It should at similar or slightly higher earnings levels, should stay in this 15% to 20% range I wouldn't expect it to go much lower than that.

Great. Thank you, gentlemen.

Our next question comes from Roger Read with Natexis Bleichroeder. Please good go ahead.

Just a couple questions. Given what your competitors are doing in terms of spending money on their fleets and new builds and so forth, and you've been very aggressive on paying down your debt. As you get to the latter part of this year or early '06 you're going to have your debt down around the 1 billion or a little over 1 billion that you've talked about before. At that point what do you plan to do with the free cash you have?

Well, we're starting to think a lot about that. But right now we we haven't eliminated any possibilities. Obviously, our first choice would be to find attractive opportunities to reinvest the capital in the business. At this point I'd have to say that the likelihood of that seems to be fairly small. So absent those opportunities, we will start thinking hard about what level of cash should we build? And then what would be the best method to return some capital to our shareholders? We haven't really ruled out anything, although I would say the likelihood of a normal quarterly dividend is probably small. Whether or not we decide on a special dividend or a stock repurchase program at this point I couldn't say. Really all options are being considered.

Okay. And in terms of your contracting philosophy and obviously tightness in the - - pretty much any rig class that you have. Is there anything you're doing at this point in terms of - - or have you already done it in terms of changing the contract terms to put the risk of down time on your customers as opposed to on yourselves? Not just mobilization, but any other issues that arise in the drilling process? Has that happening or already happened?

Well, contract negotiations are always a very interesting process. We have a little bit more negotiating power on our side in the present market than we had a couple years ago. But when you are dealing with customers like we have, you don't always have a lot of negotiating power. We have managed to improve the contract terms on some of the contracts in minor ways. But I don't think that you should think that we are dramatically changing the risk sharing that is traditional in the drilling contract.

Is there any difference across whether it's the high spec fleet or the standard floaters on that end?

Not really.

Okay. Thank you.

And our next question comes from Mike Urban with Deutsche Banc. Please go ahead.

Wanted to talk about the fifth gen fleet a little bit. In the release and in your comments you mentioned range of 260 to 350 for contract coming up. And I'm assuming the high end of that is for the one well type of contract. But what I want is to get a sense for is within that range what levels of term are you talking about kind of at either end or at various levels within that range?

The terms on those contracts range from one well to two to three years. I don't think that you should make the assumption that the lower rates apply to the longer term and the higher rates to shorter term. We actually have a mix. So you need to be careful about that assumption.

Okay. Well, that's actually good. Is there any - - I mean, just to get a sense of it, say at; pick like a $300,000 a day level. which had been kind of a psychological barrier for any kind of term. Are you in discussions or do do you see any kind of meaningful term on a 300,000 plus rate?

Well, I don't actually want to get into a lot of discussion on the specific rates and terms because somebody might misinterpret what I say. I think we'd be better to just leave it until we make the announcements of the contract awards. Which I hope will be coming in the not too distant future. And then at that point you'll see some interesting markers come out, I think.

But the point is don't necessarily assume that you're only going to get term at the bottom end, did I hear that right?

You heard that right.

Okay. Great. And the Brazilian market you mentioned you're going to be entering into some discussions there. Are you giving any sense that Petrogas has kind of come to their senses in realizing what the global rate markets have done day rate wise? Or are there other things you can do to keep those rigs there in terms of terms and conditions?

Well, I think I would say that Petrogas has done a outstanding job of negotiating for rig capacity in this market. I believe that they have or are pretty close to agreements with a number of drilling contractors to lock in capacity down there for a number of years. I don't want to comment very much on our negotiations at the present time since we are in the middle of the negotiation with Petrogas. I think it is true to say that Petrogas for the highest spec rigs is still resisting the current market rates. But they are offering term that extends beyond what's available anyplace else. And the question is, what's the right trade-off between rate and term? And that's basically what a lot of the negotiation is revolving around.

Okay. Great. That's all for me. Thanks.

And our next question comes from Dan Pickering with Pickering Energy Partners. Please go ahead.

I was interested in your comment talking about rates moving a lot higher than expected. And clearly the market's moved quickly but I guess when I think about high-spec deepwater, I think of you guys as the market leader. So obviously you guys are out there pushing every day. I wondered if you could walk us through in general are you - - is the transition strategy to continue to look at higher prices until someone finally says no, or is the thought now more focused on term?

I think in general, Dan, we have been aggressively trying to push price and we will continue to do so. Obviously until we reach the point where operators say no. At the same time I think that we are interested in terming out, particularly past 2008 and into 2009, when a significant portion of the fifth generation gleet fleet is still available. I suspect that over the next year or so, a lot of the contracts are going to be entered into that will push that back from 2008 to 2009 and maybe push it a little bit past that. But with half of the fifth generation rigs in the world, we think it's reasonable to take a portfolio approach. And if we could lock up a couple of rigs for contracts that assure good rates and a very good return on capital well past 2008, then we would be interested in doing it. How much we give up in terms of the existing market rate in order to get the term is a question we have to deal with during any negotiation. At the present time frankly, we don't see any operators who are interested in very long-term contracts going out to 2010 and beyond except Petrogas. And Petrogas does not have a lot of need for the fifth generation rigs. They have a limited need. And we are very far apart in terms of the expectations for Petrogas for a long-term rate in the current market rate. So that's kind of where we are on that.

Okay. And just out of curiosity, trying to gauge do you think Transocean is the marginal supplier right now of 2007 deepwater rig? Or are there still a number of other players? How many bids are there for every '07 job right now? Just you guys or are there three or four bids?

I'll let Rob try and answer that because I don't think that I can.

If you're talking about jobs that are starting in 2007, I would say to be fair, we probably see a limited number of those at this point in time. Most of what we've been focusing on are mid to late 2006 starts. I think to reiterate Bob's comments, though, when you get out into 2007, you're certainly going to be seeing more availability of fifth generation rigs. Certainly much more than you would see in 2006. And obviously as you get further out into that period, we will see more competition. But in the closer in period between where we are today and let's say early to mid 2006, there is certainly limited capacity.

Okay. And, Rob, while I've got you, the Hulme, I guess I keep waiting for that rig to go back to work. What's the status?

Well, we are hopeful that we can put that rig back to work. It's one of only two of our high-specification rigs that is not working or under contract. And we are hopeful that we can get that back to work here before the end of the quarter.

Okay. And so you've got a number of bids out there at this point?

We are currently in discussions and as I said, we're hopeful that they'll come to fruition.

And the P1 I guess is the other high spec asset that is currently cold-stacked. What's the viewpoint there strategically?

Well, the P1 is a rig that's probably best suited for Brazil due to its stack and riser configuration. It's certainly spent a lot of time working in Brazil for Petrogas. And we would be hopeful that that rig could at some point return to service likely in Brazil. But again at this point, we don't have anything that we can say that's definitive on that.

Okay. Is it - - given the reactivation costs, would it be a competitive rig in the current round of discussions for the longer-term work?

I think that's something that we'll have to play out. There's no question that we'll be some reactivation costs involved with that and they could be significant. And depending on the appetite for that rig and our appetite for further investment in it - - will determine whether and when that goes back to work.

Okay. Last question, second and third gen fleet, Bob, you mentioned some uncertainty out two to three years, maybe a little bit longer out. How is that influencing the amount of upgrades in capital you're willing to spend there? How are you approaching that fleet going forward?

Well, I think, Dan, at this point we haven't had to really face that question because most of the opportunities that we're seeing do not require upgrades to the rigs. The only question that we have had is reactivation costs. So with the reactivation costs it's relatively simple. If we get a contract that's long enough or that has a provision for the operator to provide enough upfront money to justify the reactivation, then we're doing it. We're not seeing a lot of instances where operators are asking us to significantly change the capabilities of those mid-water floaters. They are contracting them for jobs within their capability. So it's not really been an issue.

That's very helpful. Thank you.

And our next question comes from Geoff Kieburtz with Smith Barney. Please go ahead.

Good morning. Bob, maybe I'm making this up but it sounded like you said two things that were not entirely consistent. Earlier you had warned against assuming that the range of bids was inversely proportional to the length of term. But then I thought you said later on that some of the discussion was how much rate or how much off the current rate to give up in order to get longer-term contracts.

I think that it's not really inconsistent. It's just a question of a length of the term. The discussions that we are in now where we have a range of day rates and a range of terms from one well to a couple of years and from 260 to 350, the rate is relative - - is not a function necessarily of the term. We have seen a tremendous amount of demand in that kind of one well to two-plus year range. What I was referring to on the trade-off for rate versus term was in trying to get operators to firm up for something like five years. There's just not very many operators willing to talk about a five year contract at this point.

Okay. And to be clear, Transocean is interested in getting these five -plus year contracts if they can be achieved at rates somewhere within the vicinity of the current market?

Well, we think that rates - - these rates would provide a terrific return on capital, and if we could lock them in for five years. Then it would be a very good thing for us. Particularly if we could do it on a few of our rigs, given how many that we've got still left to play the market. So we're certainly interested in that.

Okay. And I think you've just clarified for me an understanding of kind of where the customer mindset is right now. I'll assuming if we went back three or six months ago, the idea of five year contracts wasn't really on the table at all? Or could you help me understand how has the customer sentiment changed over, say, the last six months?

I don't think it's changed very much at all frankly. Six months ago there was not very much interest in the part of the customers. We were trying very hard to interest customers particularly for the big rigs in five year type contracts. And at the time we had two or three who were willing to talk about it. But all but one of them kind of eventually said no, it's not something that we can do. And I think today we're in about the same situation. With the exception of maybe one customer out there who's kicking around the possibility of it. There just isn't very much interest. The operators have a difficult time seeing what they are going to do out past a two or three year time period. Petrogas is the sole exception because in Petrogas's case they are running 30 floaters in one area of the world. And they know they are going to have a significant base load of demand for a long time. But most of the other international operators don't have that luxury.

Okay. We've seen a couple of instances in which the oil companies have formed rig sharing agreements. Is that significant in your mind? Is this kind of fairly common for this stage in the cycle?

I think it's significant and I wouldn't say that it was common. We saw the advent of these consortiums coming together with about four different operators to contract a rig on term to make sure they had access to it, despite the fact that each one only had two or three or four wells to drill. And I think that that's been good for us. We are able to get good rates and get something like a year term. We have several of those currently. Some of our rigs are currently on contracts like that with consortiums. I think it's an indication of this change that occurred here, I guess in probably six or nine months ago now, from a spot market in the deepwater business to a capacity constrained market.

So you do see these as positives for Transocean, the rig sharing?

Absolutely.

Next question, you had mentioned cost inflation. I just wondered if you could elaborate a little bit on that? Are there areas, labor or otherwise, where you're concerned about your own capacity as well as the cost?

Well, labor is certainly an issue for the industry right now with the expanding activity. And as new rigs come into the market, that's going to put even more pressure on. It's causing two problems. First problem is just cost because there's competition for good people. And a second problem is just being able to man your rigs with competent, well-trained people. The pool of labor is being diluted. I think we're also starting to see and my sense is; the potential run up in costs for supplies and equipment and material is potentially going to be pretty significant. We're seeing some suggestions from a lot of suppliers that their cost of materials is going up very dramatically. And ultimately that's going to flow through to the finished product. So I'm not sure how much cost escalation we can really anticipate there. But I think it's going to be greater than what I originally thought at the beginning of the year.

Okay. Thanks very much.

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

Bob, a question on capacity of shipyards to bring on new supply; do you see that in the jackup arena that '06 is representative of a maximum run rate we could see? Or do you see that capacity actually growing or - - potentially? I suppose depends on the interest levels.

I don't think I can give you a very good answer to that question because we haven't actually been in the market and talking to shipyards. So anything that I told you would really just be kind of what I'm hearing in term of rumors on the street. So you've probably got better information than I do.

Okay. What about on the semi side? Is there a capacity constraint of a very limited number? Now again talking three years out.

Well, we we haven't - - again, we haven't talked to shipyards specifically because we're not interested in building any new capacity. But in some casual conversations I had with shipyards, and this is probably three or four months old, at the time I was told that capacity - - shipyard capacity to build a big floating rig was going to be tough to get. And they might have to wait six months to get it. And then it would take at least three years to build a rig at that time. And I suspect that it hasn't got any better, given the activity with tankers. So I don't think that there's a big threat that a lot of new capacity can get built for the floaters. And anything that does get built you're probably looking at an '09 type of delivery at the earliest. That's if somebody does something soon. And as far as I'm aware there's not too much being considered right now.

Okay. I appreciate it. And then Rob for you, on this range that the high specification fleet is being considered as Bob mentioned the 260 to 350: My first assumption would be is that geographically that the equipment is fairly fungible. So that's not the biggest driver in differences of that nearly 90,000 a day. Besides term, is this something that you're just - - it's individual negotiation and just depends on where it lands? Or can you tell us are there some other drivers, dual activity, not, type of DP et cetera that drives the differences across that range?

Yes. I think it's - - I think it really is a number of factors that go into that setting that range of prices. Some of these are jobs that we've been bidding on. Some are negotiated. In other cases there's a specific need for activity, offline, for example, that makes a particular program more efficient. DP versus non-DP is usually a factor. Especially when you're in areas where logistic and anchor handling support is limited. So we - - it really spans the gamut and it's really hard to generalize. But I would say that the specification to the rigs as against the requirements of the drilling program definitely does play into the equation.

And you say that's a big piece of it is the term balancing?

I would say so, yes. Again, as Bob said, there isn't any direct correlation between what we're negotiating now and longer term equating to lower day rate.

Got it. That's good stuff, guys. Thanks very much. I'll turn it back.

Our next question comes from Andrew O'Connor with Wells Capital. Please go ahead.

Morning, guys. Congratulations on your quarter. Bob, most of my questions have been asked. But how would you compare and contrast the current cycle for Transocean with other cycles you've seen in the past say, two or three decades? Thanks very much.

That's a tough one. I think one thing I'd say is that in past up cycles, we've tended to see when day rates approach what would be considered to be a new build rate. We started to see a lot of interest among operators to term up contracts as they go to longer term contracts and ultimately new building. The difference in this cycle, so far in the floater business, has been that the operators are almost price insensitive, I'd say. They've driven rates well past what would be considered a new build rate. And there's tremendous amount of demand and interest for capacity in that zero or one well to two, two and a half year-time frame. But nobody is willing to commit for longer term. Which I think is good for our business because you're not seeing the typical trend towards new building at this stage of the cycle that we would have seen in past cycles. So that's one reason I think that it's important to think hard about how long you think this cycle can last. Because right now my sense is it can last longer than previous cycles in the floater part of the business.

And then specific to your discussions for the 7 high-spec floaters, I may have missed this, where would this work be located?

It's really - - those 7 are spread all around the map.

Those are worldwide opportunities.

Okay. That's all we have. Thanks, guys.

Our next question comes from Tom Rinaldi with Rencourt Advisors. Please go ahead.

Good morning. You mentioned - - and I've been on and off so I apologize but basically new jackups are expensive you consider parting with some of the ones you have on a one-off basis. You just mentioned replacement cost day rates on the high-spec side. What sort of construction costs are you basing that on? And if new builds aren't attractive, what's sort of your thinking as you get towards the target debt-to-cap that the use of cash would be?

Not sure from your question whether you're talking about new builds on the jackup side or the floater side.

Oh, I'm talking about floaters.

On the floater side I guess in terms of what a new build rate would be, you need two things in our mind to justify a new build. One is rate and the other is term. And again, we have not been to a shipyard to get any real cost estimates on what it would cost to build a new rig. And we've been guessing that it would be in the $450 million range. Recent announcements about a Norwegian company that was trying to place an order had the price of that rig I think at 515 million. We understand that that's now probably not going to take place.

So you're saying the low 3's might justify that, but maybe the term isn't there quite yet for your?

If you could get a five year contract at something like $325,000 a day and you could build it for 450 or somewhere in that range, I think that would probably justify a new build.

Okay. But right now that's probably a little high on the term from a customer side and a little low on the cost?

Certainly high on the term. Nobody is willing to commit. Because basically they'd be committing to take a rig out to about 2014. Because it wouldn't get delivered until 2009 and then you'd have a five year contract.

That's understandable. So where - - if you were - - if I were to guess that towards the end of this year you'd be where you would like to be on the debt to cap, what are you looking towards with the cash?

Well we'll --

If you were 65% contracted out for 2006 by that point in time and 35% for '07, sort of a year out from where we are now?

We'll give some thought to how much cash we think we ought to have on the balance sheet coupled with our access to the capital markets to insure that we could take advantage of any opportunities that might develop. And then we'll be thinking about how best to return the cash to shareholders. And I mentioned before, you may have been off, that we really haven't ruled out anything. Although I'd but a low probability on the likelihood of us deciding for a normal quarterly dividend. And more likely that we'll come down somewhere between a special dividend and a stock repurchase program.

Okay. That answers my question. Thanks a lot.

Our next question comes from Darren Horowitz with Raymond James. Please go ahead.

Good morning, guys. Just had a quick question for you regarding the Gulf of Mexico floater market. Specifically I was curious as to where leading edge day rates are for like between a 2000 and 3,000 foot water depth unit on average? And my second question was in terms of the Peregrine 3 and the Kirk Rhein Jr., kind of your thought process there in terms of when they can go back to active duty and what your outlook was?

Rob?

I'm happy to take it. On the mid-water market in the Gulf of Mexico, that market has clearly reached $100,000 a day. We've got fixtures of that nature. And I think we'll have to watch and see if it gets to the levels we're seeing in the North Sea. But it is definitely trending upward. And to your second question about reactivation of potential rigs, as you know, we've reactivated two of our other other floater rigs this year already, the Falcon 100 and the Amirante. I think our primary focus, right now, is keeping those busy and building backlog. So at this point we don't have any intention to reactivate the C. Kirk Rhein or the Peregrine 3. Similar to Bob's comments on the North Sea to the extent that this market were sold out with a long degree or long length of contract backlog and we had customers who were willing to pay for reactivation and sign up for longer term; obviously we we would take a look at that, but we think that's out in the future from where we sit today.

Thanks, guys. Very helpful.

And our next question comes from Arvin Sanger with SAC Capital Management. Please go ahead. Mr. Sanger, your line is open. Please go ahead with your question. Our next question comes from Jud Bailey with Jefferies & Company. Please go ahead.

Thank you, good morning. Bob I was wonder finding you could elaborate on something you said earlier and that was maybe the deepwater potential of Southeast Asia from some of your customers there? And maybe if you could expand on that to include some markets like India and even China and I'm talking over the next two to three or five years even.

My comments were; really longer term I'm not sure how quickly the markets will develop. But clearly we're seeing a lot developing in India and there's a potential for very significant deepwater activity there. Both in the near term and in the long term. There's a lot going on in Australia. There's a little bit in in Indonesia. Malaysia and Brunei have some tremendous potential, particularly if we can gets the disputed between Malaysia and Brunei resolved. And then China is really a kind of a brand new potential problem. We understand that there's a potential for one or two wells to be drilled in deepwater in China this year. How big that could ultimately turn out to be, we don't know. But that's why we are interested in maintaining a significant presence out there. That's a big area and to keep relationships and develop the relationships that we think are important to take advantage of those developing markets is key for us.

Okay. That's all I've got. Thanks.

I think at this point we'd take one more question and then we're going to probably have to call it a day.

We have no additional questions at this time. Please continue.

Oh, well, okay. Well, we thank everybody for your interest. And as I said, it looks like we're off to a start for a very good year. And we'll look forward to talking to you again at our next quarterly call. Thank you.

Ladies and gentlemen, this concludes the Transocean Inc. first quarter 2005 conference call. If you'd like to listen to a replay of today's call please dial in at 303-590-3000 and enter the passcode of 11028333. Those numbers again 303-590-3000 and enter the passcode of 11028333. You may now disconnect and thank you for using AT &T teleconferencing.