Transocean Ltd (RIG) 2005 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Transocean third quarter 2005 results conference call. At this time all participants are in a listen-only mode. Following today's presentation instructions will be given for the question-and-answer session. [OPERATOR INSTRUCTIONS]. As a reminder this conference is being recorded today, Tuesday, November 8, 2005. I would now like to turn the conference over to Mr. Jeff Chastain. Please go ahead, sir.

Thank you, Adam. And good morning. Welcome to each of you for this review of Transocean third quarter 2005 results. A copy of the press release covering third quarter results along with the supporting statements and schedules is posted on the Company's website, and that's at www.deepwater.com. I'll notify you today that we did not issue a fleet status report today, which is our normal practice when we report quarterly results. The last report was provided October 31. The next report will be provided one week from today, the 15th of November. Participating on this morning's call are the following Transocean senior managers: Bob Long, President and Chief Executive Officer; Jean Cahuzac, Executive Vice President and Chief Operating Officer; Greg Cauthen, Senior Vice President and Chief Financial Officer; Rob Saltiel, Vice President of Marketing and Corporate Planning; and David Tonnel, Vice President and Controller. Bob Long will provide opening comments. Greg will discuss some of the financial details pertaining to the quarter. And Rob will provide comments on the market outlook. We will then take your questions.

But before I turn the call over to Bob, I'll once again remind you that during the course of this conference call participants may make certain forward-looking statements regarding various matters relating to our business and companies that are not historical facts, including future financial performance, operating results, and the prospects for the contract drilling business. As you know it is inherently difficult to make projections or other forward-looking statements in a cyclical industry since the risks, assumptions, and uncertainties involved in these forward-looking statements include the level of crude oil and natural gas prices, rig demand and operational and other risks which are described in the Company's most recent Form 10-K and other filings with the U.S. Securities and Exchange Commission. Should one or more of these risks and uncertainties materialize or underlying assumptions proved incorrect, actual results may vary materially from those indicated.

Also, please note that we will use various numerical measures in the call today which are or may be considered non-GAAP financial measures under Regulation G. You will find the required supplemental financial disclosure for these measures, including the most directly comparable GAAP measure, and an associated reconciliation on our website for your convenience. Non-GAAP financial measures and reconciliation tables are included with today's press release. Now, that concludes the preliminary details. I'll now turn the call over to Bob Long.

Thanks, Jeff. And good morning, everyone. Before I ask Greg to comment on the numbers and have Rob talk you through the markets, I'm going to say a few words about hurricane issues, our stock repurchase program, and some macrotrends in the markets. First, in regards to the hurricanes, all of our investors should understand the terrific job our people did in responding to the issues, to minimize damage, and as quickly as possible get our rigs back in operation. They did it in a safe manner without getting anyone hurt and they did it in despite of some very challenging personal circumstances, including in some cases personal tragedies like the complete loss of the homes. I think we owe all of them a huge dead of gratitude.

As we previously reported we had two of our big rigs damaged in the storms, the Deepwater Nautilus and the Marianas. Both of them suffered failures of their mooring systems and ended up running aground. The Nautilus is currently back on day rate using a prelaid mooring system. Additional downtime will be incurred later this quarter once we recover part of the BOP that was dropped. Hopefully no more than a couple of weeks, although it could be significantly longer if we're unable to recover the equipment. There will also be some more downtime during the first half of next year when we have everything we need to repair the rig's own mooring system. The Marianas is in Brownsville undergoing repairs. We are hoping to complete those repairs and be back to work in the first quarter of next year. The issue of mooring system designs has been getting a lot of attention both in the industry and the government. At this point there's no simple answer regarding the right way forward. There are a number of things that can be considered that range from new bigger systems to upgrading from an 8 point system to a 12 point system or maybe even a 16 point system. Maybe using stronger wire, use of synthetics, different anchors, and maybe some other factors. The answer could be different for each rig so it's not clear where we're going to come out on this at this point.

In regards to our announced stock repurchase program, as many of you know, we've been considering for some time what alternatives to use to return cash to shareholders when and if we decided it's appropriate to do so. We're in what we hope are the early stages of a very nice upcycle that we think is going to last for years. As I'll tell you in a minute, we're developing some very interesting reinvestment opportunities in the form of reactivation and deepwater upgrades, and maybe a little further out some new build possibilities. But given our current backlog and the outlook for the market, we anticipate generating more cash than we can reasonably reinvest through this cycle. In addition to the reinvestments, we intend to build a significant amount of cash before the next down cycle, so we'll be well-placed to take advantage of opportunities that always present themselves near the bottom of the market. However, we feel it more likely than not that we'll generate more cash than required for both reinvestment and building a reserve, hence, our decision to authorize a share repurchase program. Please understand that we'll not be commenting on when or if we've been in or will be in the market to repurchase shares. The only time you'll see if there has been any activity will be when we file our quarterly and annual reports.

Lastly, before I pass it off to Greg, I'll give you my view of what's going on in the market. Rob will provide a lot more detail when Greg is done, but I think there is some interesting developments. Day rates have continued to improve in all asset classes. The demand both near-term and long-term is very strong. On the jackup side, the lost rigs due to hurricanes has strengthen an already very good market. On the floater side, we're seeing new day rate highs and significant interest in contracts extending out to 2010 or beyond. We have some of our fifth generation rigs coming available in 2008 and are already seeing interest from a number of operators and contracts starting in that timeframe. In addition, as you saw from our press release last night we succeeded in securing a contract for one deepwater upgrade, and discussions are progressing with another operator for the possible upgrade of a second rig. We're also very close to an agreement to reactivate one of our idle semis in the North Sea and I second will not be far behind.

In the Gulf of Mexico, we've had discussions with several operators about reactivating the semisubmersibles Kirk Rhein. I caution you about overreacting to the near-term impact of these potential reactivations and upgrades. If all three reactivations took place and the rigs did not go to work on day rate until the middle of 2006, the cost to reactivate, which we estimate to be in excess of $100 million for all three of them, would likely result in a small negative impact on earnings in 2006, but a big positive impact in 2007. The reason for that is the requirement to expense a good deal of the reactivation cost as incurred in lieu of deferring them and recognizing them over the contract term. Likewise, the upgrades that have started will have no positive impact in 2006. It is interesting, I think, that we are also hearing from customers about potential interest in new build deepwater rigs. This is a relatively new development in the market. For a long time, we were unable to detect any interest in our customers regarding new builds which would not be available to start work until some time around 2009 or maybe later. Since the time of our last conference call we've started to hear some inquiries from one or two operators. Today there are multiple operators who have expressed some degree of interest in the new build. I think this is a very positive signal for our customers view of the long-term outlook for deepwater.

We're going to have a very busy and challenging year in 2006. In addition to the possibility of three reactivations and two very big deepwater upgrades, we have many other projects scheduled to be undertaken. Similar to the reactivations and upgrades, while most of these will result in improved earnings and revenue in future years, a great deal of expense will be incurred in 2006, which will have an impact on our cost line. Some of these projects include an $80 million six-month upgrade of the 534, before it starts a term contract in the Far East; contract modifications and upgrades for the 709, for the DWD; and the Trident 15 prior to commencing new contracts; plus the likelihood of three very long mobilizations on some of our big floaters during the year. We also have to finish the repairs on the Marianas and will have the Nautilus down for around 60 days some time next year to complete repairs to which mooring system. All of this makes it difficult to give any good guidance on cost because of the uncertainties of the timing and the nature of the projects. All of this does, however, represent very good investment in the future of the Company. With that, I'll ask Greg to comment on the numbers.

Thanks, Bob. And good morning to everyone. In the third quarter of 2005, we had net income of 170.4 million or $0.50 per share. This compares to net income of 27.9 million or $0.08 per share in the third quarter of 2004, and net income of 127.7 million or $0.38 per share in the second quarter of 2005, both after excluding the gains from the disposition of TODCO and certain other asset sales. For a relevant comparison between 2004 and 2005, you should continue to look to the Transocean drilling segment results in 2004 as the 2004 total consolidated results include TODCO. Contract drilling revenue for the third quarter increased by 8% to 736 million from 682 million in the second quarter. An increase in day rates was responsible for approximately 22 million of the increase. The remaining 32 million of the increase was primarily attributable to net increase in activity with rigs, such as, the Sedco Express, the M.G. Hulme Jr., the Transocean Legend, and the Sedco 703 seeing a full quarter of activity in the third quarter.

Other revenues increased -- decreased to 27 million from 45 million in the fourth quarter -- in the second quarter. Approximately 13 million of the decrease was related to lower integrated service activity in the North Sea with the remaining 5 million of decrease related to lower recharge revenue. We expect revenues to increase in the fourth quarter with continued day rate and activity improvement, as well as the resumption of the North Sea integrated services work. This improvement, however, will be mostly offset by approximately $20 million or more of lost revenue do to hurricane damage to the Nautilus and the Marianas leading the fourth quarter revenues that are likely to be flat to slightly higher than third quarter revenues. Operating and maintenance costs in the quarter, net of recharge revenues, were 420 million versus 408 million in the second quarter. Compensation increases, incremental costs related to shipyards in the Sovereign Explorer, the Navigator, and the Sedco Energy and approximately $3 million of hurricane-related costs accounted for most of the increased cost, partially offset by a decrease in cost related to the decline in activity of North Sea integrated services.

Going into the fourth quarter, we expect that an anticipated decrease in costs due to lower shipyard activity and decreased mobilization and contract prep amortization will be more than offset by its increase in integrated services costs, as well as almost $25 million of cost related to hurricane damage repairs. We currently expect fourth quarter costs net of recharge revenues to be higher than corresponding costs in the third quarter. Although hurricanes Katrina and Rita caused damage to the Nautilus and Marianas there's very little impact into the third quarter due to the relatively minor repair cost that were actually incurred in the quarter. We do not carry loss-of-hire insurance and our physical damage insurance is subject to a $10 million deductible per occurrence. It is $20 million plus aggregate deductible. So we will essentially be responsible for all of the lost revenue related to these two hurricanes and the first $40 million of repair costs which will all be recorded as incurred. Although we currently expect roughly $2 million of insurance recovery related to the hurricanes, the timing of the recovery is uncertain.

In the fourth quarter we expect lost revenues and repair costs related to hurricane damage to decrease operating income by $45 million or higher. The adverse impact of revenues and costs will carry over into 2006 with the Marianas not anticipated to return to work until the first quarter of 2006 and the Nautilus expected to incur out-of-service time for repairs in the first half of 2006. Our primary hull and liability insurance programs are up for renewal in the second quarter of '06. We clearly expect some pressure on our insurance premiums in those six due both to the reaction of the insurance market to hurricane losses in the Gulf, as well as increases in insured value. We expect a lot of this pressure, however, to be directed towards jackups in the Gulf, which we have none, or towards more floaters in the Gulf, which represent a relatively small proportion of our fleet. In addition, we will continue to look at alternatives to mitigate any increase in premiums by; for example, taking larger deductibles. The combination of increase in insured values and hurricane losses will clearly lead to an increase in premiums for Transoceans, but the amount of the increase can vary significantly depending on the above factors. As a whole in liability insurance, premiums only currently represent roughly 1.5% of our operating and maintenance costs. The impact of any increase should not be significant.

Given the level of project activity we expect next year, it is helpful to focus on how our revenue recognition policy impacts revenues and costs related to mobilizations, contract preparation activities, and rig reactivations. Under our revenue recognition policy we only recognize revenue during an operating period. The various projects and mobilizations that Bob has highlighted above will result in lost revenue in '06. Although economically this is partially offset by mobilization and contract preparation revenues received from our customers, any pre-operating revenues received are deferred and recognized over the term of the firm contract. In 2006, we expect to receive in defer roughly $140 million of pre-operating revenue even though that year we should only recognize through amortization the current and previous years' deferrals, approximately 70 million. Contrast this with 2005, $60 million of pre-operating revenue received in deferred and approximately $65 million recognized through amortization. Similarly, during a pre-operating time, project costs which are directly related to the commencement of a drilling contract will be deferred and amortized of the firm contract period with the exception of repairs, insurance, training, and other expenses that are considered period costs and are expenses incurred.

For a rig reactivation, costs related to repairs, training, and other period costs are expensed. Thus, of the $100 million of rig reactivation costs Bob discussed, roughly 45 million will be expenses incurred, 30 million will be deferred and amortized over the drilling contract period, and $25 million will be capitalized and depreciated over the remaining life of the rig, although, the actual amounts will vary from project to project. The net impact of all this in 2006 will be lost revenue that is partially offset by pre-operating revenue. In addition, 2006 costs related to projects will be higher, especially in the first quarter of 2006 with projects, such as, the rig reactivations and hurricane repairs. However, as Bob has indicated, these are investments in the future, and our level of project activity and lost revenue from out-of-service time is expected to decline in 2007.

We currently expect our capital expenditures to be more than $90 million in the fourth quarter of 2005. For the first through fourth quarters of 2006, the level of capital expenditure should be roughly between 70 million and $80 million per quarter driven by hurricane repairs, rig reactivations and the other major projects, but excluding any impact of any mid water floater upgrades. Of the $300 million estimated to complete the now 700 Series upgrade project, roughly $150 million should be incurred by the end of 2006. Interest expense declined in the quarter to approximately 24.5 million from $30 million in the second quarter following the July retirement of 76% of our 6 5/8 notes due 2011. We expect our interest expense to decline additionally to around $23 million in the fourth quarter of 2005. Interest income in the quarter increased slightly from 4.8 million to 5.2 million with higher returns on our cash investments being partially offset by lower cash balances.

Although we know longer own an interest in TODCO, we still have a tax share agreement with TODCO that requires them to pay us for more than $300 million of tax benefits as they're utilized. These tax benefits relate to net operating losses and similar carryforwards that TODCO retained as part of their separation from Transocean. In the third quarter, we recognized $10.1 million of other income related to TODCO's filing of its 2004 federal tax returns. In future quarters and future years, we will continue to recognize this tax benefit as other income in the quarter that TODCO files its tax returns with the amounts based on the cash that they have paid us related to that year's tax benefits utilized. In effect we are recognizing the tax benefit on a one-year delayed basis due to its contingent nature. However, the utilization and the payment by TODCO of the entire amount of the tax benefit is not [assured,] and the timing of payments is impossible to estimate as it is contingent on many factors, including the amount of taxable income that TODCO generates each year.

Finally our annualized effective tax rate remained around 17% in the third quarter. During the third quarter, various discrete items resulted in an $8.5 million decrease to income tax expense and an actual effective tax rate of approximately 13%. For the fourth quarter of 2005, we estimate the effective tax rate will continue to be approximately 17% before the impact of discrete items. In 2006, we expect our annualized effective tax rate to decline to less than 15% before discrete items. However, even at similar levels of income our effective tax rate can be volatile both due to discrete items, such as, changes in estimates, as well as the changes in the geographic mix of our income. We that I'll turn it over to Rob to discuss the market outlook.

Thanks, Greg. And good morning to all of you on the call. As Bob indicated in his opening remarks, we continue to see a very buoyant market for both floaters and jackups as rig supplies remain tight through our visible horizon. Day rates for all rig classes are still trending upward with the highest specification rigs in our industry now being bid at rates well in excess of $400,000 per day. Premium 300 foot jackups have broken through the $100,000 per day barrier for leading edge fixtures in the South East Asia market where many of our jackups operate. We've increased our firm revenue backlog by over $3 billion since our last conference call's record levels, and we anticipated additional contract signings in the coming days that will likely increase it even further. In short, our business remains excellent and is showing no signs of a slowdown.

Consistent with usual practice, I will now give a more detailed update on each of Transocean's asset classes. Our high-specification fleet, which includes or deepwater and harsh environment assets, continues to be very strong with no sign of letup in demand or the upward progression of rates. Deepwater rig supply will be tight through 2007 as we still see a number of programs across various geographies with unmet rig needs. In the Gulf of Mexico, our two-rig deal with Anadarko that we announced last week, has been the big news for Transocean and perhaps the industry in the past quarter. The three-year extensions of the Spirit/Millennium will keep both rigs under contract well into 2010 at rates of 475,000 and $425,000 per day respectively. Both the high rates and the long-term signify the value of the fifth generation of rigs are commanding in the current market, as well as the strong interest of operators in pursuing exploration and development programs in the deep waters of the Gulf of Mexico. We think it is also suggestive that the upcycle we are currently enjoying will be intact for quite a few more years.

Our South America high-spec rig backlog filled out a little bit with the recent signing of the Navigator for short-term work with Shell in Brazil. Fortunately, we are finally seeing deepwater activity by international operators in Brazil that will support additional demand and an expanded customer base. A welcome development for our future business in this region. In the North Sea, we signed long-term rig contracts in Norway on the Transocean Arctic and the Polar Pioneer, and extended the Transocean Leader by one year. All three fixtures exemplify the resurgence of the Norwegian market and the view by operators that rates will be in short supply until the end of the decade. The Paul B. Lloyd also firmed up another two years of work with BP in the West of Shetland area that will keep it busy until 2009. Collectively, these four high-spec rigs now have nearly 15 years of contracted backlog.

In West Africa, we signed the Pathfinder for $395,000 per day for its 800-day program that will keep that rig in Nigeria through late 2008. Recent exploration successes in the deeper waters offshore West Africa suggest that rigs with 6,000-foot plus water depth capability will likely stay busy as today's discoveries are converted to future appraisal and development programs. In the nearer term, we have visibility on multiyear programs for Nigeria, Angola, and the Congo that will drive additional demand. Turning to Asia, Transocean's high-spec rig activity continues to gain strength in the India market. We recently signed the expedition for two years at $375,000 per day which will keep the rig with reliance until at least 2008. We also signed a three-year extension for the Discoverer Seven Seas with ONGC that will commence at the end of the current contract and keep that rig busy through 2010. This contract will continue our role in providing logistics and other services to ONGC as part of an integrated services package. Growing interest by international operators in offshore India also suggests possible activity increases beyond those that we're seeing today in the years ahead.

Turning now to our other floater segment, demand and day rates are still strengthening in mid water depths worldwide. Leading edge rates for U.K. Central North Sea semis in this category have now eclipsed $200,000 per day as evidenced by our approximately 4.5-month fixture of the Sedco 714 at $250,000 per day. We've also firmed up one-year contract extensions on the Falcon 100 in the Gulf of Mexico and just recently, returning to the North Sea, we firmed up a one-year deal on the Sedco 712 at $225,000 per day. With demand expected to remain strong in the North Sea and our large exposure to 2007 renewals, we see further upside from this segment. Our just-announced agreement with Shell to upgrade the Sedco 702 to deepwater service is consistent with our strategy of enhancing the technical capabilities of our offshore fleet and extending our leadership position in deepwater drilling. This deal is great for Transocean and our customer as it provides a demonstrated solution while helping to alleviate the likely shortage in deepwater rig capacity that will persist into 2007 and 2008. As Bob indicated earlier, we hope to reactivate up to three of our idle mid water rigs before the end of 2006 with the leading candidates being the Transocean Prospect, the Transocean Winner, and the C. Kirk Rhein. We will commence those reactivations once we've secured contracts that fully cover the reactivation costs and provide sufficient profit potential.

Finally, our international jackup segment continues to perform well with 23 of our 25 rigs currently busy. In the past three months, we've seen a rapid rise in leading edge day rates and a lengthening of contract terms in the areas where we operate. Although we've only concluded a couple of fixtures since the last call, including a two-year extension of the Transocean Comet in the Gulf of Suez, we are in the midst of strong bidding activity that we'll likely see a number of attractive fixtures in the quarter ahead. That's the summary for marketing and with that, I'll turn it back to you, Bob.

Okay, thanks, Rob. That concludes our prepared remarks, and we'll open it up for questions at this point.

[OPERATOR INSTRUCTIONS]. Our first question comes from Robin Shoemaker with Bear Stearns. Please go ahead with your question.

Yes, Bob, my question is on the opportunity cost of upgrading a Sedco 700 Series rig. I believe you said that you have selected the 702 will be the rig -- the first rig upgraded; is that right?

Well, we haven't really made a final decision. The 702 is obviously a prime candidate since it's been stacked for a long time and we view the opportunity costs there as negligible. But we're also considering some other rigs and when we make that decision I guess it will be a function of our final determination of where we intend to do the upgrade.

Okay. Well, I guess then my question is if you were to weigh -- you've obviously decided for an upgrade versus new construction. And I just wonder if you could just walk us through the considerations that went into that, the cost of the upgrade versus new built? You're going to get a 6,000-foot water depth rig versus a 10,000-foot on a new built. And if you could just kind of discuss the tradeoffs that led you to believe this was the best option?

I think that there are a host of tradeoffs in that decision, Robin. But one of the key criteria is our ability to do the upgrades in 20 to 24 months where we think a new build would take three to four years to actually get out on location. The demand is clearly there from our customers for any capacity that they can get within something like that 24-month horizon. Demand for a new build that couldn't be delivered until '09 or maybe even '10 by the time we get through the commission and all. While it's starting to percolate and we're starting to see some interest there, it's not clearly there. Given our ability to get a contract that gives us 100% payback on our investment with the upgrade, it seemed like a pretty simple decision.

Okay. And just if you were to upgrade additional Sedco 700 Series rigs, which are working and your rates there are pretty attractive, does that become a more difficult decision versus the 702 which is idle? I mean, obviously it is, but what would be the opportunity cost of taking that rig out of service?

Well, which ever rig we selected we'd have to take an estimate of what we thought we could get with that rig going forward, and then we would roll that into our thinking about what the cost of the upgrade is and consider that in terms of the payback that we're going to get. So it's a little bit difficult to say depending on the timing and which rig we select to do it.

Okay, thank you.

Our next question comes from Geoff Kieburtz with Citigroup. Please go ahead with your question.

Thanks very much. I appreciate the difficulty of making an estimate of the costs in terms of the upgrades and reactivations and so on. But if we took all of the opportunities that you're looking at, could you give us an idea of what's the maximum amount that you might spend on capital expenditures and the maximum amount that might hit the expense line if all the opportunities you're looking at were to come to fruition for 2006?

I think Greg ran through the numbers on the assumption that we got our three reactivations. And he indicated, I think, that for one new build if we got -- or not new build but upgrade. If we get a contract promptly, we'll probably spend something like -- I think it was $150 million next year, but very little of that would be expense. My guess would be --.

Well, that was all CapEx, Bob.

So most of that would be CapEx. And it's probably going to be true for -- if we got a second one. So there would be --.

That's right.

-- very little impact on the expense line from the upgrades.

Now, if there is an impact on the expense line or all the other projects, Bob, you mentioned, the SDSs and things like that, but it's dependent on their timing and everything. But it's a heavy project year, so we would expect higher incremental expenses from all those projects.

Okay, so when you talked about a 70 to 80 million CapEx per quarter, that was excluding the upgrades?

That's correct. With 70 to 80 million does include the three reactivations, includes all the other projects we expect next year, but excludes the upgrades. And in the first 12, 14 months of the upgrades you'll see about $150 million of CapEx. $300 million over the full life cycle.

Second question is you mentioned both in your comments and in the press release about the increasing shortage of personnel. If all of these opportunities came -- developed here, would you have any difficulty in manning all the projects as well as manning the rigs as they went into operation?

Well, people are certainly a big challenge for us and for the industry these days. If we do have three reactivations, one benefit that we have is that one of them would be in the Gulf of Mexico. One of them would be in the U.K. and one of them would be in Norway. Those primarily tap three separate labor markets, so we think that we will be able to crew those up comfortably. Frankly, one of the reasons that the estimated start-up dates are so far out is that we envision spending a fair amount of time recruiting and training the people that we need to make sure that we have an efficient start-up. If you step further out then and look at the upgrades which won't come online until '07, again, given the lead time there, while it's going to be a challenge, we think we'll be able to man those rigs up and perform efficiently.

Is personnel shortage specific to operating personnel or is there an issue similarly in project management for these types of projects?

I think it's across-the-board. Project management is also going to be an issue. But particularly with all the construction and new build that's going on in the industry.

And my last question in regards to your comment about increasing interest in new build. Could you just talk to us a little bit about how you see your customers thinking about the new builds that are being made on speculation and what your thoughts are about the potential to take advantage of those from a Transocean perspective?

Well, I'm not sure that I can comment very well on how our customers view those speculative new builds. We do hear some comments about reluctance on the part of some of the customers to contract with some of the less experienced builders there. But the fact of the matter is that those new rigs will be coming on the market and adding capacity, and ultimately people will figure out how to operate them and they'll get contracts. From our perspective, if you're asking is there an opportunity here for us to potentially acquire some of the presently ordered speculative new builds, I'd say that while we have some interest in that under the right terms, I think it's very difficult for us to get comfortable doing that given the prices that these rigs are going to cost and any premium we'd have to pay to buy them coupled with some real concerns over the capabilities and the technical capabilities of the rigs.

If you remember, all of us, every major drilling contractor that brought a new big rig out in the last building cycle, had tremendous amount of difficulties getting those rigs commissioned and operating efficiently. And all of us had people involved in the design and construction from day one. So someone to go in and buy a rig that's already been designed and specked and equipment ordered for and we haven't been involved in the details, presents a lot of challenges in terms of the ability to have a successful start-up. So I wouldn't be optimistic that we would find a lot of opportunity there, but we keep our ears open.

Thanks very much.

Our next question comes from Waqar Syed with Petrie Parkman & Co. Please go ahead with your question.

Hi, I have two questions. First on the fifth generation, you recently contracted it at 475. Most of your fleet is already contracted beyond 2007, 2008. Do you see the top rate moving further out from where it is right now at 475? Or do you think 475 is probably as high as it will go?

Well, I wish I could answer that question, but I frankly don't know. My guess is that there's still some upside here because every time I said I can't see them [going] much higher, I've been wrong. But I don't think that anybody really knows. This market is moving so fast that any rate that we see out there doesn't surprise me these days.

Secondly, on your upgrade for 700 [Searex] rigs, if I look at the size of the 702, it's a relatively smaller size, 3400 visible deck load. You have some of the bigger rigs, 712, 711. They are bigger rigs but contracted into '07. Do you think this 702 would be a competitive rig long-term as a deepwater rig because of its small size?

I'll let Jean Cahuzac take a stab at answering that.

Our total upgrades of 702 our variable loads will be close to 5,000 [pounds,] and that would make it a very competitive rate in 2,000-meter water there. One of the reasons why we are very confident on this project is we already upgraded a similar rig late '90s -- in the late '90s a 707, and our next upgrade will be based on our experience with this project.

Okay, great. Well, thank you very much.

Our next question comes from Arun Jayaram with Credit Suisse First Boston. Please go ahead with your question.

Good morning.

Good morning.

Bob, the planned or possible reactivations and upgrades would take care of four of your seven idle semis. I was wondering if you could talk about prospects in '06 and '07 for the Peregrine III, the Wildcat, and the Explorer? And what do you think the odds are that you could have all seven of these currently idle rigs activated by some time in '07?

Well, again, that's a difficult question to answer. This market is improving so rapidly, I think that right now our current thinking is that the Wildcat is a likely candidate for reactivation after we reactivate the three that we've already talked about. We haven't really thought much longer term past the Wildcat at this point. I think that we've seen some interest in the [Pete III] from a lot of people who are interested in buying it. We could potentially end up selling it if we don't reactivate it. And we'll look at the text once we get the other rigs that are stacked in the North Sea out and consider what we think the prospects for that are.

And would you view the Wildcat as being an '07 timing?

Well, I guess I'd say that the way the market is moving now there's a possibility it could be '06, but I wouldn't count on it in '06.

Okay. The second question is for Greg. Greg, I was wondering if you could maybe elaborate a little bit more on the mechanics of the tax sharing agreement with TODCO? Because in 2004, TODCO reported a pretty meaningful loss, yet you reported over $10 million in income. So I'm just trying to understand the mechanics a little bit better.

Yes. TODCO's reported loss was their book loss. The tax share agreement is based on taxable income and the primary difference for TODCO is depreciation. If you look at their balance sheet, they have a large amount of deferred taxes set up for depreciation because the tax basis of their assets is a lot lower than the book value that got stepped up after the R.B. Falcon acquisition that we did. So for taxable purposes, they actually had a taxable profit because of that depreciation difference before net operating losses, and then that taxable profit was sheltered by the net operating losses, and that generated the $10 million of benefit that they paid us and that we recorded in the third quarter.

Any rough estimates for 2005?

Based on TODCO's filings where they've actually, if you read their footnotes, gone to great description of the tax share agreement and what they owe us and analyst reports and everything. It could be anywhere from 40 to $60 million. Although, it's a gain contingency, and that's why we don't -- won't record that until the third quarter of '06. So it could vary from that, but that would be a rough estimate.

Okay. That's very helpful. Thanks.

Our next question comes from Mark Urness with Calyon Securities. Please go ahead with your question.

Yes, good morning.

Good morning.

Bob, I guess I was a little surprised to hear that you're getting inquiries on new builds from multiple operators. And my question relates to the fact you still have quite a bit of availability in '07 and '08 on the existing [indiscernible] fleet and I'm wondering if you think you have to build even more backlog before those discussions become more serious?

Well, Mark, I'd say that the inquiries we've got so far are very preliminary, but we've got inquiries from a lot of operators lately. We do have some opportunity to have discussions with them about the possibility of contracting an existing fifth generation rig that might come available in '08 or early '09. Where we'll come out with those discussions versus their desire for a new build I'm not sure.

In some cases, it might be -- as I've indicated before, one of the requirements for new build could be generated by the [out of date] drilling in the Gulf of Mexico where the operator may want a rig that really has capabilities beyond the capability of anything that exists. Although, you could potentially upgrade something like the Enterprise Class rig maybe to do what they want to do. But at this point, the discussions or the inquiries are fairly preliminary, and we're not sure where they'll go, but I think it does indicate some very good interest in terms of where our customers think this deepwater market is going longer term.

Okay, and if you're talking potentially 10,000 feet and greater, I would assume that they're talking about drillships than semis primarily?

Well, that's not necessarily true. You can have some pretty big drilling equipment on the big fifth generation semis. We think that -- we're looking at both a drillship design and one semi design that we think could satisfy a customer depending on what their specs are.

Would you venture to estimate what the cost would be?

Oh, we don't have any clear way to estimate that right now, but based on the prices that have been announced on existing new builds, between 5 and $600 million is probably as good a guess as any.

Okay, and then my last question relates to shipyard availability. I would assume you're going to do the 700 Series upgrade somewhere in the Far East. Shipyards over there are getting booked up quite a bit. Is the shipyard availability a concern of yours?

Well, we have inquiries out to a number of shipyards around the world, so I wouldn't conclude that the Far East is going to be the selected area. Right now, while shipyard availability is a little bit tight, we don't see any problem in getting capacity for both the upgrade we've already announced and at least one more and maybe an additional one beyond that.

Thank you.

Our next question comes from Michael Lamotte with JPMorgan. Please go ahead.

Thank you. My first question is for Rob. Rob, could you talk about the fixture terms on the jackups in various markets both in terms of day rate and term duration?

Sure. As I said in my notes, we really don't have too much to announce at this point. But what we are seeing is a pretty sizeable increase in the leading edge rates that we're bidding and we're seeing fixed by some of our competitors. Particularly in Southeast Asia markets like Indonesia, Vietnam, Malaysia, Thailand, these are markets where we're seeing a lot of activity that extends a year or more in duration. And we're hopeful that we'll be successful on a number of those projects, but expect that going forward these fixtures will be in excess of $100,000 per day.

Anything going beyond two years in that market at this point?

Going beyond two years is not the usual practice, although, we are seeing some evidence of longer term projects. And we would look at those projects favorably to the extent that we were successful. The nice thing about those kinds of projects is you can do more to upgrade older rigs. And to the extent that we were successful on a five-year deal, we might take an opportunity to do that and add additional capability to keep the rigs viable longer term. But I would still say that the sweet spot at this point is probably one to two-year deals.

Okay. And, Rob, while I have you, a competitor put up a mid water floater rate north of 300,000. Do you think that -- in your view, is that sort of a one-off or is that the range, 300 plus, 350 range that that asset class is moving into?

Well, I'd like to think it's not a one-off. By the same token, until we have something to announce along those lines, it's going to remain an isolated case. There's no question the market's moving upward in all -- the rates are moving up in all the markets. The North Sea, we've hit 250. One of our competitors is predicting $300,000 rates in 2007. I think the fixture you're referring to was in West Africa, and clearly there's a lot of programs that don't have rigs in the 2007 timeframe, which will put upward pressure on rates. So I'm certainly not going to say that we won't start seeing $300,000 rates, but at this point that's certainly a leading edge rate for that asset class.

Okay, thank you. Bob, quick question for you. On the floater and the new build design, are the new designs different enough from a fifth gen, that you could really call -- a sixth generation rig is really what we're looking at building? And what are some of the key differences, if that's the case, as you see in the equipment and the size of a sixth generation class should the market ever get there?

I'll let Jean Cahuzac answer that.

All right, as Bob mentioned, we start to see some interest for some drilling in the Gulf of Mexico; deeper drilling, high temperature. Though modifications to the existing design, if any, would relate to the drilling package, mainly mud system during package [foreclose.] We have recently announced the development of a new top drive in partnership with American Hydraulic and that's in-line with the strategy to get ready for the next steps which you could call the sixth generation rigs for deep drilling.

As I understand it, the equipment is definitely moving towards greater efficiency as you all had great success with the duel drilling. Does the size of the hole change dramatically as we move in this direction or is it still pretty much sort of a fifth gen?

I think that the size of the hole will remain very similar to what you've seen with the Enterprise Class rigs. The change in the game would be more on the drilling package basically based on our design for drill activity which has been shown to be very efficient. We're also working on some design enhancements for completion work which we'll announce even further in the couple months of the unit.

Okay. And, Bob, if I look at the supply of equipment in the North Sea, we're down pretty significantly, 30% or so from the highs in the late 1990s. Equipment is tight around the world. You need specs to back in. If demand stays this robust, are we going to have to build, in your view, more floaters to address that demand longer term? I mean, are we going to see North Sea Class our rig designs come back in vogue?

Well, I'm not sure that I can give you a very crisp answer to that. I've seen some people forecasting that there's going to be a significant shortfall of floaters across-the-board. Not just deepwater floaters where there's an obvious shortfall. Whether or not that comes to pass I think is difficult to say. If we reactivate all the rigs that can be reactivated, it depends I think to a large extent on how long the activity level in the North Sea or mid water floaters continues to be this robust, which I suspect is going to be a function of the oil prices. There's a lot of infield drilling and drilling of reserves that were discovered, but haven't been developed in the past because of where the price of oil was. And now obviously it makes a lot of sense.

What the cut-off level is, is the price that oil drops to 40 or 30 or 25, I don't know where it starts to impact that demand. Right now I think that our outlook is that the demand is going to be pretty robust in the area about where it is now for quite a few years. Maybe three, four, five years. Whether or not it will go higher such that you require additional rigs, that's a little bit tougher to say. I think there are already a couple of rigs that have -- new builds, that have been announced targeting that market. They're not really targeting the deepwater market, but they're really fourth generation rigs that are targeted for the North Sea. So they'll be out in about three years, I would guess. Whether or not there will be more capacity needed is just beyond my ability to see at this point.

Okay, thank you.

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

Good morning, gentlemen. My first question is actually as it relates to the mooring requirements. Without trying to quantify exactly what its going to mean to the call sign because I realize that we're very early on. I'm just curious how or what your vision is in regards to domestic shipyard availability should such upgrades need to be made in the '06, '07 timeframe?

Jean you want to answer that?

Well, I think at this stage there is still, as Bob mentioned, shipyard availability. We've been following up closely this market and having discussion about the optimum design to meet their capabilities. So I think in near-term it's something that we need to monitor obviously, but believe that the options are there.

Any preliminary estimates as it relates to exactly or loosely how long it could take for such an upgrade to be made without even factoring in what it would cost?

It's a couple of months and that can be planned adequately when the adequate solution is defined. So it can mean -- it's something that we can -- that that industry would be able to manage. It's obviously a challenge but something which can be managed.

Sure. I appreciate that. My second question is actually shifting gears a bit over to the jackup side. As you look across-the-board and you look at a lot of the tenders expected to be announced for '06 and '07 in such areas as the Middle East, West Africa, et cetera, any initial thoughts on potential rig migration of some of your units over to those areas to capitalize?

Well --.

I can take that one. We certainly keep our eye on the Middle East and the Persian Gulf which is really the one principal jackup market in the Eastern Hemisphere where we don't operate. And, of course, we have a large fleet in India. But the truth is that the markets where we operate, including India and Southeast Asia, as well as the Med. and West Africa, all of those markets are showing strength. So at this point in time, while we're keeping our eyes on the Middle East, we're seeing a lot of unmet demand in our current regions. And certainly our preference would be to stay where we are and not spend time mobilizing. It's inefficient for us and our customers. But it is something that we'll continue to watch.

I appreciate it.

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

Good morning, everybody. Greg, first question for you. I appreciate your thoughts on the '06 TODCO tax share agreement range of impact. What is the total amount of that that remains? Or basically would you point us towards TODCO filings to get that? Is there --?

I think TODCO has some very specific information, but considering what they paid us to date, there's more than $300 million of tax benefit left for them to pay, 300, 350, but you should look to the TODCO filings.

Okay. No, that's helpful then. Bob, on the new building side, not to keep hitting in this thing too much. But the interest you're hearing from customers initially described the ultrahigh -- the ultra deepwater and maybe in the $600 million-type investment required to meet those needs. Are you hearing of any interest for things, equipment between there and, say, Sedco 700 Series upgrade or all in the ultradeep?

Well, I think -- I'm going to say most, but I really think that all of the inquiries or brief discussions that we've had with operators around the world have all been for 10,000-foot capable rigs.

Okay, thanks. Rob, on jackups -- and I realize we're really at an inflection point here, certainly worldwide, too. Do you see any -- and maybe it's a follow-on to that other question, but do you see any disparities developing on these increases that obviously you may or may not want to take advantage of? But do you see some regions that are lagging the increases or greatly ahead of?

I think it's too early to call for disparities because the market is moving so quickly. I mean, we've seen rates in the Gulf of Mexico, on the $130,000 range, similar rates in West Africa, and I don't think that's an inconsistent number for, again, leading edge fixtures, things you bid today and get closed tomorrow for Southeast Asia. So I think it's too early -- certainly in the Mid East we've seen $100,000 rates already. So I think it's too early to call for disparities that it would suggest that movement of assets makes sense.

Okay, great. That's good, guys. Thanks.

Our next question comes from [Wolf Bett] with Enskilda Securities. Please go ahead with your question.

Thank you. Wolf here from Enskilda Securities in Oslo, Norway. First question, you are mentioning that oil and gas companies now are looking for ultra deepwater rigs and we definitely see that there are existing fleets in the market are sold out until 2007. And the first rigs now available in the market or the speculating sixth generation rigs being built. Do you believe that oil and gas companies will contract these early 2006 or rather try to contract the existing fleet going of contract later in 2008 or early 2009?

Well, I think it depends on the customer, but my guess would be right now that there's more interest on the part of the customers in getting existing capacity that's coming available in about the time slot where the new bills would come out. I think that the customers are very leery about believing the delivery dates that have been announced on these rigs. Most of them have memories just like ours in terms of what happened in the last building cycle where rigs, almost without exception, were significantly delayed and then, once they got out on location, there was substantial downtime and start-up problems really over the the course of the first year. None of the operators that we've had brief conversations with are too excited about taking that on if they don't have to. So to the extent that there is capacity available in the existing fleet and that the day rate is comparable or at least competitive to what they think they could get from the new builds, then they're going to lean toward the existing fleet, in my opinion.

And if you are to build a new deepwater -- ultra deepwater rig today, did you mention that the delivery would be late '09 ', early 0'10 [sic?]

I think the delivery would be '09 at the earliest. Maybe we might be able to get a delivery slot for early '09, but I suspect that there aren't very many slots available that would come out in that timeframe. But that's -- I don't see anything coming out in '08.

My last question is related to the jackup markets, because the last quarters you have been highlighting that you are peering the jackup markets a little bit, you total the new building capacity at 42, 43, 44 jackup rigs on the construction. Are you saying now that based on the last three months with demand escalating you are not concerned at all for all the rigs to be delivered for the next three years; the new builds?

I would never say I'm not concerned at all about anything, so. [ LAUGHTER ]. I do think that, as a result of the losses inflicted by the hurricanes, the jackup market has got much stronger in the near-term than certainly I would have anticipated and probably anybody. I suspect right now that the market is going to stay very good into '07. Now, whether or not the market stays strong enough to absorb all of the 40 or 45 new units coming on is still difficult to say. I guess I'd have to say I'm a little bit more optimistic now that the industry has lost -- I don't know, seven, eight, nine existing rigs than it was before, but it's still something that I think we have to have a little bit of concern about.

Okay. Thank you very much.

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

Good morning. First question, Bob, on the share repurchase side, would you characterize your approach to this as opportunistic or more systematic? Some companies buy when they think the stock is cheap. Some just buy a certain dollar amount a quarter. How are you guys thinking about it?

I think, Dan, we prefer not to get into much detail about the repurchase program. As I indicated, we think that we're going to generate significantly more cash through this cycle than we can reasonably reinvest or prudently leave on the balance sheet. So when and if we'll be in the market at various times is something we'd rather not comment on right now.

Okay. And your sort of target cash level, I realize that that obviously is going to be a flexible number, but you are going to throw off a bunch of cash. And so at what point does all that cash become a liability and sort of a return on equity calculation versus a competitive weapon as you look forward to the next down cycle and the opportunities there?

I don't think that there's any number that we could give that really answers that question. We spent a long time over the last year studying alternatives for uses of cash, and you can get answers from different so-called experts that could say that that number could go from $2 billion to $6 billion or more. Right now we haven't formed any preconceived notions as to exactly what the right balance is going into the next downturn.

Okay. Obviously a lot of involvement in the North Sea market. One of the things I guess we've been hearing in the background is some discussions by the U.K. Government on taxation of your customer base. What's your take on any potential increases in taxes there, and what have you heard? How are you thinking about it?

Well, we've of course have heard the speculation about changes in fiscal regimes not only in the U.K. but in various other areas around the world, either the fiscal regime or the licensing concession terms. With these levels of oil prices, I think it's inevitable that the governments around the world start looking at how they can get a little bit bigger piece of the pie.

So I wouldn't be surprised if something happens. Now what impact that will have on the various markets in particular if they do something in the North Sea is difficult to say. But that's one reason it's tough to forecast whether or not there will be significant increases in demand for rigs going forward because it depends on what the economic impact of that -- any change in the law is going to be. So the rumors are out there, and I guess I'd have to say that, being a pessimist, I consider it more likely than not that ultimately some changes are going to be made.

And have you seen any change in interest levels in your North Sea assets as the volume's gone up on kind of the tax rumor mill?

No. Not at all.

Okay, so no change from the customer. I guess final question in -- more quickly, the one more granular the Nautilus BOP package, have you been out on location to try and retrieve that at this point?

Well, we're currently on location as we speak. Maybe Jean could add a little bit of color to that.

Yes, we just started the operation trying to recover the piece of equipment in the [MRP] two or three days ago. And it's a bit too early to know how long this operation would last, but the rig is operational and is on location.

Okay. And then finally, just a general question with respect to your marketing process. If we looked out at how you guys approach the marketplace, at this point, Bob, do you consider yourselves -- are you continuing to push the market? Are you leading day rates in most markets or are the folks with one off-rig availability are leading the market? What's the dynamic there?

Well, I think that it's fair to say that we're continuing to push rates, because we sense that the demand and the shortage of supply here continues to work in our favor. Whether or not there's somebody else that is pushing rates a little bit harder in specific areas on specific instances, I think it all depends on who's got the right rig in the right market at the right time. So my sense right now is where we took a leading role in pushing rates earlier in this upcycle. Right now I think all of the drilling contractors are taking advantage of the present situation and doing a pretty good job of capturing the rates that are available out there.

So no spoilers in the marketplace?

Not for the big rigs, no.

Great. Thank you very much.

Our next question comes from [Sanou Battidar] with Bramwell Capital Management.

You mentioned in the conference call the supply is tight until '07. In respect to that, how many rigs are uncommitted into '06, '07 and '08 timeframe?

Jeff, do you have any specific numbers? I found a list of some here. I can try to take that. This is Rob. I mean just looking at -- if you're looking at our fleet, we've got four of our fifth generation rigs with possible renewals in '06 and '07 and 10 of our other deepwater rigs. Obviously, there's more jackups that have got exposure in that timeframe as well. But when we're saying it's tight, I think what we're doing is we're looking at the announced deals. We look at the deals that are currently under way maybe at an LOI stage either by ourselves or our competitors, and then we look at the bidding activity that's out there. So what you see in terms of the actual fixtures probably understates to a significant degree the actual demand that's out there, and that's why we're comfortable saying certainly for the big rigs '07 and '08 ' look to be tight years.

Okay. You mentioned about the Middle East market and I believe you do not have exposure or you do have an exposure but the demand for jackups is pretty strong and there's an unmade demand. Do you plan to enter that area or you just want to stay away from it?

We haven't really made the decision to stay away from it or to enter it. As I said before we're seeing strong demand in the areas in which we operate, to the extent that there's no day rate dislocations between regions or other factors that would drive us to want to move our assets. Our lead case would be to stay put. That said, the Middle East is a big and growing market, and it's something that we keep our eye on to see whether there are opportunities for us there.

Okay, in terms of the competition, when you bid for the projects, who do you largely see in terms of your competition for the same kind of projects that you bid for?

Are you talking about in the jackup market?

Yes, in the various markets that you are appear. Is it Noble or some other companies or who are the closest competition to you in the jackups or floaters?

I mean it really depends on the market that you're talking about. I think most of us know who the big jackup players are. Those and then occasionally the smaller players are in the markets, but it really depends on the individual market. And it would probably would take awhile to go through each one of those in turn. But we certainly see the big players in a lot of the markets where we operate, West Africa and Southeast Asia in particular.

Okay, thank you.

Our next question comes from Poe Fratt with A.G. Edwards. Please go ahead with your question.

Great, thanks. You know it's been a long enough call, but just a couple of quick ones. Rob, did I hear you say that the Sedco 712 had been extended to 225 in the North Sea?

That is correct. Yes. A one-year extension.

Okay. And then Bob taking a look at the upgrade of the 700 Series, what's more important the water depth or the fact that it's going to be upgraded to DP?

I think both of them are important factors.

And anything that changes the utility of a DP unit going forward? It would seem that over time that would be much more popular.

The DP units are going to be more popular?

Yes. Just because of development activity not only in Brazil but also West Africa.

I think DP units have some inherent advantages over moored units in a lot of places, so. I think that that's probably an accurate statement.

And then looking long-term, Bob, you had said that you're thinking about fixtures into '08. How can you -- how are you going about protecting yourself from some of the cost escalation that seems inevitable in that timeframe? And thanks a lot for your time.

Well, when we make bids out into '08, we generally have cost escalation protection starting from today. So most of those cost escalation protections, they're not perfect in terms of the capturing of all of the costs, but they do give you substantial protection. Okay?

There are no further questions at this time. Please continue.

Well, all right I want to thank everyone for their interest and apologize for how long we took here in our opening remarks, but there's a lot going on, and we wanted to give you as much information as we could. So thanks again, and we'll look forward to talking with you in the future.

Ladies and gentlemen, this concludes the Transocean third quarter 2005 results conference call. If you would like to listen to a replay of today's conference, you may dial 303-590-3000 with access code 11041313. Once again, if you'd like to listen to a replay of today's conference, you may dial 303-590-3000 with access code 11041313. Thank you all for participating. You may now disconnect.