Transocean Ltd (RIG) 2005 Q4 法說會逐字稿

Good morning, ladies and gentlemen and welcome to Transocean's Fourth 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, February 14th of 2006. I would now like to turn the conference over to Jeffrey Chastain, Vice President of Investor Relations. Please go ahead, sir.

Thank you, Mary. Good morning. Welcome to the review of Transocean's Fourth Quarter and Full Year 2005 Results. A copy of the press release covering our financial results along with supporting statements and schedules is posted on the Company's web site at deepwater.com. You will also find on the Company's web site the complete update report covering the current contract status of the Transocean fleet as of February 14. In addition to highlighting contract signings since the last fleet update, we have included the currently expected schedule for 2007 mobilization and contract preparation shipyard or project out of service date by rig. The next fleet status update will be issued on February the 28th.

Participating in this morning's call are the following Transocean senior managers. Bob Long, President and Chief Executive Officer; Jean Cahuzak, Executive Vice President and Chief Operating Officer; Greg Cauthen, Senior Vice President and Chief Financial Officer; Rob Saltiel, Senior 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 recently-completed quarter and 2006 and Rob will offer comments on market developments and outlook. We will then take your questions.

But 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 numerical measures in the call today which are or may be considered non-GAAP financial measures under regulation G. Will you find the required supplemental financial disclosure for these measures including the most directly comparable GAAP measure and an associated reconciliation on our web site 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. Thanks for joining us this morning. I'm going to keep my remarks brief and let Greg and Rob handle most of the prepared comments. Greg will comment on some of the financials and Rob will give you our view of what's going on in the market. First I'll give you a quick overview.

Our financial results came in pretty much where we expected with some high cost due to a number of projects and revenue up a bit as rigs roll over to higher day rate contracts.

You can see from our cash flow statement that we continue to generate a significant amount of cash and we bought back $400 million worth of stock in the quarter. The average price was 66.50 a share and total number of shares was just over six million. I'll remind you that we're not going to be commenting on whether we've been in the market since the end of the quarter or when or if we'll be in the market in the future. We will update you quarterly when we announce our results.

I should point out that the market's changed quite a bit since we announced our stock repurchase program last October. When we announced the program at our last earnings call, I commented that we were starting to see some interest from operators in deepwater new builds. Since then, the interest has continued to increase. You see a number of announcements of new deepwater units which will be built to term contracts with an operator. We and our competitors have been approached by multiple operators who are looking for additional deepwater capacity. As a result, I think our opportunities to reinvest in the business are much greater today than they were last October. Since that time, it was also announced a second deepwater upgrade of a 700 series rig at a cost of approximately $300 million and confirmed the reactivation of two of our identify idle North Sea rigs. The upgrade and reactivations are being done with term contracts at very attractive day rates. They're also actively marketing two additional stack rigs and I'm hopeful that we'll be reactivating one or both in the not-too-distant future.

The Jackup market is showing surprising strength to the point where we see opportunities for three year term contracts at rates which we think could justify the capital required to buy a new Jackup. That's what prompted us to enter into the option agreement with PetroJack which most of you have probably read about. If we're able to secure a drilling contract with sufficient rate and term, we'll exercise one or more of those options. If we can't, then the options will lapse unexercised.

2006 should be a very interesting and exciting year for us and for the industry. Day rates continue to strengthen in all asset classes. Our backlog has grown to something over $14 billion, actually over $17 billion if letters of intent are included. We should see very nice growth in revenue and earnings as and when the fleet rolls over to the already contracted higher rates.

We will face a number of challenges in 2006 and quarterly earnings are potentially going to be volatile. We have over 20 shipyard projects to carry out in 2006 and a number of long mobilizations which means a lot of rig capacity out of service for varying lengths of time. The shipyard stretched to meet all our obligations to the risk that cost and time overruns will be incurred. The opportunity cost of having a rig delayed and starting a high day rate contract can be significant. In addition, it is difficult to forecast when of some our new higher day rate contracts will commence even for rigs without shipyard schedules. You can look at our fleet status report which indicates when one contract is due to expire and another starts. However, the contract doesn't actually end until completion of any well in progress and we are seeing some very long wells which can result in some long delays in getting to the new higher day rate contracts.

To compound the challenge quarterly costs could be significantly up or down from one quarter to the next depending on the work flow on the rigs while in shipyards. So I guess I'm cautioning you that forecasting 2006 earnings, quarter-to-quarter is going to be a challenge. With that, I'll turn it over to Greg for some details on the fourth quarter results and some additional comments on what to expect in 2006.

Thanks, Bob. Good morning to everyone. In the fourth quarter of 2005, we had net income of 151.6 million or $0.45 per diluted share. This compares to net income of 170.4 million or $0.50 per diluted share in the third quarter 2005.

Total revenues for the fourth quarter improved slightly to 771 million from 763 million in the third quarter. A net increase in revenue due to the commencement of higher day rate contracts and increased activities of approximately $52 million was mostly offset by lost revenue of approximately $26 million due to shipyards such as the Energy, the Shelf Explorer and the Trident Eight and the Trident Four and another $17 million of lost revenue on the Marianas and the Nautilus due to hurricane repairs and $3million due to mobilizations such as the Cunningham.

Although we expect revenues to increase significantly in 2006, due to -- due to the commencement of higher day rate contracts, some of the expected increase will be delayed by shipyards and other out of service time in the first quarter and even more so in the second quarter. Under our revenue recognition policy, we only recognize revenue during an operating or in service period. Our latest fleet status report contains our current estimate of all 2006 and 2007 out of service periods in excess of 14 days related to shipyards, rig reactivations, mobilizations and other periods during which we will not recognize revenue under our revenue recognition policy.

In addition to the out-of-service time shown on the fleet status report, we would expect another almost $30 million in lost revenue related to out-of-service periods of less than 15 days during 2006 with most of this in the first half of the year.

Operating and maintenance expenses in the fourth quarter were approximately 457 million versus 438 million in the third quarter. The increase was primarily due to $12 million related to the cost of hurricane repairs, a $4 million recurring cost increase related to compensation increases and a variety of other factors that net to $3 million. This quarter, we have published details on our web site of our historical operating and maintenance cost showing daily operating cost by rig types split between in service or operating days and out of service days. With out of service days representing days we're not recognizing revenue under our re -- revenue recognition policy, typically again due to shipyards, mobilizations and downtime. Please note that our operating and maintenance costs also include amortization of deferred cost so we have also included on our web site, schedules of deferred cost amortization by rig type.

Shipyards and major maintenance projects have a significant and volatile impact on our operating and maintenance costs since most such costs are not capitalized under our accounting policy unless they enhance the value of our rig. For example, cost related to steel replacement, major painting programs, or engine overhauls are expensed even if it could be several years until the next similar expenditures. If shipyard costs are incurred during the time after the signing of a contract, but prior to commencement and are directly related to the drilling contract, then the cost will be deferred and amortized over the firm contract period with the exception of repairs and maintenance, insurance, training and other expenses that are considered period cost and are expensed as incurred.

So, for example, in 2006, we expect to incur almost $100 million of rig -- rig reactivation cost related to the Prospect and the Winner and of this, $45 million will be expensed as incurred, $30 million will be deferred and amortized over the drilling contract period and only $25 million will be capitalized and depreciated over the remaining life the rig.

We expect our operating and maintenance costs to be significantly higher in the first and second quarter of 2006 relative to the fourth quarter 2005. Our normalized operating and maintenance costs should increase by 10% to 15% on a year-over-year basis due to labor and vendor cost pressures. In addition, cost incremental to our normalized operating cost are expected to significantly increase in the first and second quarter 2006 compared to the fourth quarter 2005. Incremental out of service costs in the first quarter will include the completion of the hurricane repairs on the Marianas, the reactivation of the Prospect and the Winner and a shipyard on the J. T. Angel. Based on these factors, we expect that the first quarter 2006 operating and maintenance cost will be 30 to $50 million higher than the fourth quarter of 2005.

The second quarter will continue to include the reactivation of the Prospect and the Winner and the continuation of the J. T. Angel shipyard as well as additional shipyards on the 709, Seven Seas, Expedition, 701 and 707, all reflected in the latest fleet status report, as well as a number of major maintenance projects across our fleet. With this expected level of shipyard and maintenance activity, we expect operating and maintenance costs will be 70 to $90 million higher in the second quarter of 2006. Again, relative to the fourth quarter of 2005.

Our operating and maintenance cost for the third and fourth quarter of 2006 should trend back towards the levels seen in the fourth quarter of 2005 with the expected increase in normalized operating cost being more than offset by a reduction in major maintenance projects and incremental out-of-service costs with only the Discover 534 expected to be in shipyard in the fourth quarter 2006 and all of the planned reactivations completed. However, if the Rhein and the Wildcat are reactivated, our incremental operating costs during out of service days would increase during the reactivation period and our normal -- normalized operating cost would increase once the rigs are reactivated and fully crewed, with the timing of such increases depending on when the reactivations occur and how long they take.

As we look forward to 2007, revenue increases during the -- due to the commencement of higher day rate contracts will be very meaningful and out of service time should be less significant than in 2006 as can be seen from the latest fleet status update. In addition to the reactivation of the Prospect and the Winner and the two 700 series upgrades, it is possible that we could reactivate the Rhein and the Wildcat, which could, depending on the timing, benefit 2007 results once reactivated but have a negative impact on either 2006 or 2007 during any reactivation period. However, it is unlikely that we would reactivate any of our other idle rigs. We are in advanced discussions regarding the sale of the Peregrine III and the Searex 12 although such discussions do not guarantee the completion of the sale. Some or all of our other idle rigs may be sold at market conditions or the availability of term contracts did not support reactivation.

Capital expenditures in the first quarter of 2006 should be roughly 90 to $100 million rising to between 130 and $150 million per quarter for the rest of the year. Of the 500 to 550 million of expected capital expenditures for the year, roughly $200 million relate to the interim payments on the two 700 series upgrades, 25 million relate to rig reactivations, and the remainder relate to contractual required upgrades, fleet spares and normal operations. As the equipment related to the capital expenditures interservice, depreciation expense should trend up during the year ranging from $103 million at the beginning of the year to $109 million by the fourth quarter of 2006.

Our annualized effective tax rate in the fourth quarter dropped to 16.8% from an expected 17.5%. During the fourth quarter, various discreet items resulted in a $5 million decrease in income tax expense and an actual effective tax rate of approximately 12%. In 2006, we expect our annualized effective tax rate to be around 16% before discreet items. This is slightly higher than our previous guidance due to law changes in some of the jurisdictions in which we operate. However our effective tax rate continues to be very volatile due to the law changes, discreet items and changes in the geographic mix of our income. Thus our actual effective tax rate is likely to be different from our expected effective tax rate. And with that I'll turn it over to Rob to discuss the market outlook.

Thank you, Greg. Good morning to everybody on the call. The worldwide market for both floaters and Jackups remains strong and day rates for all classes continue to move upward from our last conference call. As Bob mentioned, we've increased our firm revenue backlog to more than $14 billion and our market outlook remains bullish. Consistent with my usual practice, I'll now give an update on each of our asset classes.

Our high specification fleet which includes our deepwater and harsh environment assets continues to be very strong. Leading edge day rates exceed $450,000 a day and are trending toward $500,000 per day for our highest specification rigs. Our 13 fifth generation rigs are almost fully booked through 2007 so our other deepwater rigs are now benefiting from this tight rig supply with very strong fixtures. In our high spec fleet we now have 12 rigs that are under contracts that will extend into 2010.

In the Gulf of Mexico, we have three significant deepwater rig fixtures since our last call. The Nautilus has been renewed for two years at $425,000 per day which will keep the rig busy until the end of 2008. Marianas has been extended for three years at $435,000 a day until the start of 2010 which represents our highest fixture for a non-fifth generation rig. The Jack Bates will mo -- mobilize from Australia later this year to begin a two-year program here in the Gulf. All three of these rigs are moored and we are outfitting them with improved 12 point mooring systems to improve their resistance to possible hurricane damage.

Looking forward, we are still seeing unmet demand in the Gulf of Mexico for high spec rigs that is fueling continued optimism about the future of this deepwater market. In particular, and echoing Bob's opening comments, we believe that the industry has a real opportunity to add more capable new build rigs into the Gulf of Mexico.

Shifting now to South America, we announced two key fixtures that indicate the growing importance of the international oil companies to the Brazil market. In late November, we announced our second 700 series upgrade that will provide Chevron a dynamically positioned deepwater rig for a minimum of three years for their Frade Project starting in 2008. This month, we also signed the Deepwater Discovery for a minimum of three years with Devon starting in late 2008 after it completes a development drilling program in Nigeria. Petrobras has also recently announced a tender for three deepwater dynamically positioned rigs for multi-year terms that may be increased by a further two rigs or more. So, this region appears to have a bright future.

In West Africa, our other deepwater fleet has had good success in securing attractive fixtures. The Jim Cunningham secured a one-year contract to $300,000 per day which has already been followed up by a two year deal at $350,000 per day. The Richardson secured a one-year deal at $355,000 per day. We have four other deepwater floaters with -- with availability by 2007 and we have visibility on other deepwater programs for Nigeria, Angola, and the Congo that will drive additional demand.

Turning now to Asia, we recently signed the Discoverer 534 to a two and a half year firm program with Reliance that will fund a major refurbishment of that rig to ensure its viability and competitiveness for the next 10 to 15 years.

Our other floater segment is enjoying day rates that continue to trend upward as well. While we have also been successful in securing contracts that reactivate two of our rigs since the last call. We're hopeful, as Bob and Greg have mentioned that one or more of our remaining stack rigs can be reactivated on the back of sufficient contracts.

Our recent fixtures in the North Sea for the J. W. McLean at 250,000 a day, the Sedco 711 at $283,000 per day, and most recently, the Sedco 704 at $310,000 per day illustrates the day rate momentum in that market. We've also announced the contract to reactivate the Prospect for a two year term in the U.K. North Sea while the Transocean Winner, our last stack rig in Norway, will return to service later this year for a three-year program at $350,000 per day. We expect that unfulfilled demands for shallow water floaters in all regions will keep our active fleet busy and as I mentioned, offer possible reactivation opportunities for our remaining rigs.

Turning now to Jackups. Our international fleet continues to perform very well and we have been able to secure significant fixtures that confirm the strong upward trend in day rates that I spoke of on our last call. The biggest deal by far has been our five-rig package deal with ONGC in India for a total of 15 rig years and a possible revenue of $800 million. The equivalent day rate of 147,000 plus per day over this term is more than double the current rates of the four rigs that are in India.

We continue to market the PetroJack rigs that we have an option on for term deals that would justify a purchase of one or more of these rigs. As Bob indicated, we don't have anything yet to report, but recent fixtures of other premium rigs suggest there may still be an opportunity for us here. That's really all I have on the marketing front so with that, I'll hand it back to Bob for closing comments.

Thanks, Rob. As you can tell from Rob's comments, despite the near term uncertainty in quarterly earnings as a result of all of the factors we've mentioned, I think the outlook for our business has never been better. The opportunity cost of out of service days and high cost due to shipyards in 2006 are really investments for what should be great returns in 2007, 2008 and beyond. With that, I think we're ready to open it up for questions.

[OPERATOR INSTRUCTIONS] Arun Jayaram, Credit Suisse First Boston

Good morning.

Morning.

Greg, Bob, I'm just trying to understand, looking at the cost structure, if you think there is -- a permanent change in the cost structure as you look to '07 or does the guidance for the first half of '06 -- is that indicative of a bunch of shipyard projects, mobilizations and the reactivations?

Clearly, the latter. If you -- if you sort of look to the fourth quarter, of the $457 million of cost in the fourth quarter, about 440 million is what I would call our normal identified costs. If all of our rigs were operating not in shipyards, that would be what our costs and in that quarter, we had another $17 million of incremental costs, the costs that are incremented because of shipyards, major maintenance and things like that.

When you look into '06, we have a significant increase in incremental cost. In fact, for all of '04, similar incremental costs were maybe 40 million and for '06, they're going to be 80 to $100 million. So it's more than a doubling of the incremental shipyard costs. Where the normalized costs, we would expect to increase that 10% to 15% I mentioned. So, there is a big increase in shipyards in '06 and unusually, it all concentrated in the first half of the year and especially in the second quarter.

So, when we look forward into '07, although they'll continue to be cost pressures on our normalized costs, the shipyard activity should really drop closer to '05 levels so we expect that -- that incremental shipyard cost to drop back closer to the '05 levels with some adjustments for inflation and everything.

One caveat I'll add to what Greg just said, when you're dealing with shipyard costs, timing gets to be a little bit more difficult to -- to actually project. So, while Greg's comments were targeted mostly on the second quarter, it could easily happen to some of those projects get accelerated into the first quarter or slip into the third quarter so you're getting our best guess right now, but guessing about the timing on shipyard projects can be difficult.

However, we will continue to update our fleet status report with our latest estimate of our out-of-service timing.

Okay. Second question on the Kirk Rhein and Wildcat, if you're to go ahead and reactivate those rigs, can you give us a sense of what the total costs could be on those rigs and what percentage of those costs would you expense?

We gave you some guidance on percentages, roughly $100 million of reactivation expenditures, 25 million is CapEx, 45 is expense, and the rest is deferred. I think those similar percentages would apply to a reactivation of the Rhein or the Wildcat but I'll let Jean talk about the total reactivation cost of those.

The total reactivation cost will depend to some extent to the geographical area where -- where the rig would operate. It probably would be higher in the U.K. than outside of the U.K. But to the ballpark figure, I would say that the C.K. Rhein reactivation cost in the $30 million range. And the Wildcat will be in the $50 million range, that's roughly.

Last question, Greg. You have the tax sharing agreement with TODCO. What are your expectations for the recognition of the other income and the magnitude of that for 2006?

Well, I'm going to decline the comment on that. We're currently in a dispute with TODCO. We have active litigation going. We don't think their -- their claims have a merit, but because of that active litigation and the application of the gain contingency rules, we may not recognize any income until that litigation is completed and so that -- that casts a doubt on when we'll be able to recognize that income. Again, we don't think their claims have merit, but we really can't comment any further because of the active status of the litigation.

Okay. I'll turn it over. Thanks.

Dan Pickering, Pickering Energy Partners

Good morning, guys.

Good morning.

I want to make sure that I understand kind of the dynamics of the cost numbers. I know you spent a lot of time on them. But I want to -- I want to do the idiot's guide here. If I look at the fourth quarter numbers; baseline operating cost about 417 million; hurricane, another 13; project-related, 27; total's 457. As we look to Q1 and Q2, those baseline costs of 417 million, you are anticipating those will climb slightly, but only slightly. Is that correct?

Well, it depends on what you mean by baseline. Because even in our baseline cost, we have a lot of major projects, engine overhauls or other things that don't rise to the level of shipyard that can cause the cost to be -- to be volatile. But if you exclude those kind of major projects, what you say is correct, we would expect on an annualized basis, a 10% or 15% increase, but quarter-to-quarter, a lot less than that. So, going into the first and second quarter, the proportional increase on those baseline costs.

Okay. Then hurricane costs; they were 25 million in the third quarter, $13 million in the fourth. What are you thinking, Q1, Q2 here?

We really don't want to go shipyard by shipyard. The Marianas will continue repairs in the first quarter, another $13 million related to the Marianas, but then it is going to go back to work. And so -- so you'll have the full crewed cost. So the -- your -- your cost number of 27 million in the -- in the fourth quarter is going to be replaced by -- is going to go down, but it is going to be replaced by crew costs so you have to be careful looking at that fourth quarter number. So, that's why I use a baseline number in the fourth quarter, 440 million, not the 417 to take into account the recurring crew costs.

Okay. And then Bob, your -- your PetroJack options, I think March, April, are the expirations. Rob mentioned that current market was encouraging in terms of potential there. If we just looked at the current market, what would that translate to in terms of -- of kind of return economics for Transocean, if you exercise the options with the contract?

If we exercise the options to purchase for -- to purchase one of the Jackups?

That -- that's correct. I'm just curious at current market, what's the math for you guys? Is the return 10% or 20% or how do you think about the return?

Dan, typically, I think as we've said in the past, we don't focus primarily on returns because trying estimate a return on the investment involves a lot of guesses about what happens over a long life. What we focus on is how much payback we can get during the firm term contract that justifies the investment. Excuse me. What we've typically looked at is 80% simple payback more or less in a five-year period. With these Jackups, we'd be looking at, probably, something along the order of 60 to 70% simple payback in a three year period which would be actually slightly better economics assuming that the out years panned out than our typical 80% rule.

Okay.

Dan, if you -- if you assume, and this is just a wild assumption, but if you assume for the rest of the Jackup's life, it got the day rate that supported these economics, that's anywhere from a 20% return on the three-year economics down to 15% return on the five-year, 80% payback. So, our payback is a discipline but it does translate into high returns depending on your out year assumptions.

Okay. Last question. Obviously a lot of noise on the cost side but, essentially a lot of it is driving '07 revenue opportunities. You talked about a $14 billion revenue backlog. I realize that stretches over a number of years. Can you help us with what you think in terms of revenue is currently contracted for '06 and '07?

Jeff, have you updated that [inaudible]?

Yes, rough estimates would be -- were -- actually, I don't have this total [inaudible].

We -- we haven't totaled that up, Dan, right in front of us here, but I'll just give you a real ballpark numbers based on --

That's fine.

Our -- our backlog, when it was about 11 or 11.5 billion, I think about 3.2 of that was in '06 and about 3.4 was in '07, and then it tailed off going all the way out to 2010 or 2011, there was still some out that far.

Yes Bob, I've located it now, it looks like about 3.1 in '06 and 3.9 in '07. So similar to what you mentioned.

Okay.

Now that's just the firm revenues. So, there is certainly unreported LOIs and other things for '07 and out years.

Okay. Thank you.

Scott Gill, Simmons & Company

Yes, good morning, Bob.

Good morning, Scott.

Bob, you sound a lot more optimistic about your opportunities for new rig construction in the deep water. I guess I'm somewhat surprised we haven't seen a contract announcement yet on your Company's part. Can you speculate as to when you might think you might have a contract in hand for a new build?

I can, but I'm not going to. No, I don't think we want to comment specifically on the opportunities and the timing there. We are seeing, as I mentioned, interest from a lot of operators if you kind of track the history here. Two calls ago, I mentioned that we -- we had hardly seen any interest and at that time, maybe only one operator who kind of mentioned there was some interest. Last call I mentioned that that interest had picked up and there were several operators who were indicating potential interest. Right now, over the last couple of months, we've seen interest from quite a few operators, both major internationals, independents and some NOCs and it involves interest in capacity that could be used anywhere from the Gulf of Mexico to South America to West Africa to the far east.

But those discussions, that interest is -- is -- it takes a long time just for them to make decisions on that order of magnitude. So I'm not going to give you any guesses as to when we might see an announcement or if we're going to be successful. We're not having exclusive negotiations necessarily. All of these are competitive situations.

I guess what I look at when you look at your kind of project backlog, you've got two rigs under reactivation, two under upgrade. Potentially two more reactivations and it sounds like you're pretty close on pulling the trigger with the Rhein and the Wildcat. How many of these new builds would you feel comfortable with pursu -- in terms of pursuing here given the project backlog that you have now?

Bearing in mind that when you undertake one of these new builds, it's really a -- about a three-year project we're estimating. And the first six months or so, is engineering intensive. We'd be fairly comfortable, depending on the design of the rig and what we wound up building and where. It is really a function of If we are building multiple rigs in the same shipyard one right after the other with -- with, pick a number, six-month delivery times between each one, we could easily do a number of rigs, two, three, even four if it's to stage like that. Same yard, same design. Six months apart.

If you started to talk about three different designs in three different shipyards around the world, I think that would be a real stretch for us. So, that's kind of just an indication for you. It depends on what the actual opportunities turned out to be.

My last question, maybe for you, Rob. Going back to the PetroJack options, can you extend that agreement beyond kind of the March, April time frame and are you planning to do so?

We do have an opportunity to extend the agreement for a fixed period of time. And I think any decision to do that, we really can't comment -- comment on. We're -- we're certainly targeting, if we are going to exercise the options, to have everything in place by the middle of March.

Okay, thank you.

Doug Becker, Banc of America Securities

Thanks. I was just hoping you could discuss the relationship between day rates and contract duration in the ultra deepwater market. The Deepwater Discovery has a contract that would decline if the terms extended. Should we be assuming longer term contracts receive lower day rates now in the ultra deepwater?

Yes, directionally, I think that's right. Although what we used to call a short term contract has certainly changed in duration. I think the three-year contracts are becoming the norm and in a couple of cases where we've -- where we've had a customer who may have interest in a five-year deal, we've given them an opportunity to lock in a longer term for a lower rate. But directionally, that is correct although again, I think that -- that the time frames we're seeing are elongating to where three years is kind of a norm now for the --

[Laughter]

Okay, thanks. And then on, the Sedco 709 contract that was announced the other day, came in a little bit lower than we were expecting. Fully understanding that the contract was bid quite some time ago, are there any other contracts that are outstanding that may come in a little bit lower than -- than current market rates that we should be aware of?

At any number of time, we have a number of letters of intent that are going through either an approval process and/or a negotiation process with the client. So, we do have other letters of intent that we haven't disclosed at this time.

I would say with confidence that the 709 situation was really an anomaly. And a bit of an extreme example where we were working on that -- that project for a long period of time to get to closure. With the market moving as rapidly upward as it has been, with regard to day rates, I think it particularly stands out as -- as a fixture that is certainly not in line with market and inconsistent -- very inconsistent with the other fixtures that I -- that I talked about in my prepared comments on ,for example, the Jim Cunningham or the Richardson. So, yes, there's always some LOIs out there, but both in terms of the aging and the deviation from market, I'm confident in saying that's an anomaly.

Okay, and then just one housekeeping item. I just want to make sure I'm clear on this. On the cost guidance that's been given, it is including or excluding any reactivations to the Kirk Rhein or Wildcat?

It excludes the reactivation of the Kirk Rhein and the Wildcat.

Thank you.

Rob McKenzie, FBR.

Good morning, guys. Question for you on day rates. We've seen a dramatic convergence of the low end rigs to the higher end rigs, starting to hear some chatter about a fifth gen rig signing well above 500. When do you think we can see that kind of move, based on your view of the current market, particularly given that the lack of availability into 2007, 2008 of fifth generation?

You're asking when we think we'll see a fifth gen rate over 500,000?

Yes, say 550 or -- or so.

I'm not sure that we can really speculate on -- on that. We obviously are trying to get the highest rates that we can, but you -- you put your finger on one of the factors here. There isn't a lot of availability. Most of the contracts we're looking at are forward start contracts, as I refer to them as. And I wouldn't be surprised if you saw a rate announced in excess of $500,000 in the not-too-distant future. But I'm not going to predict it.

Okay. And then given the interest in new builds and the fact that there's really not a lot of fifth gen rigs available until 2008 and 2009, and you could get a new build almost in a similar time frame, how much of a cap do you think that new build rigs might put on -- on existing rig day rates?

Actually, that's a little bit difficult question to answer. If you looked at a long -- a really long-term contract, five years, seven years, something like that, I suspect that the premium that an existing rig could get over new build would be small. I think it could get some premium just based on avoiding the up-front difficulties that you inevitably have with a new build.

If you look at a shorter term contract, two years, maybe even three years, I think the existing rigs can potentially get a significant premium to the new builds because of the A, more certainty in delivery potentially and B, avoidance of all of the difficulties that an operator is going to have, and knows he's going to have with a new build rig. So, certainly the new builds are going to have an influence on the rate structure but I don't think it is fair to say that they cap the rates particularly on the shorter term contracts.

If I could just add to that. The commitment to a new build, certainly as we think about it, is -- is a significant term commitment. And we would target five year commitments for -- for new build capacity. Finding customers who are willing and able to commit to that level is a bit different than finding customers who are interested in a two or three year program as Bob alluded to. So in some cases I don't think they're directly comparable because of the -- of the term differences as Bob pointed out.

Okay, great. My final question, is -- is basically how much in your cost guidance that you guys gave earlier on the call, how much insurance inflation is forecast into that? And refresh my memory to when are you renewing your insurance?

We renew our insurance May 1st. But our insurance cost is only about 1.5% of our total operating and maintenance cost. There's certainly some insurance inflation in that cost guidance but frankly, it is a wild [inaudible] guess because we're not in the market yet. We don't know what our insurance rate increases will be and we're well prepared to take significant deductibles or self-insure if the rates don't make any sense, where our cash flow and financial strength doesn't require as much insurance coverage as we've had in the past. So -- so it's really hard to say now what those -- what that decrease would be but because of the low percentage, it is really not significant on our cost structure going forward.

Okay, thanks. I'll turn it back.

[Jason Gilbert, Goldman Sachs]

Sorry, I was on mute. Hey, guys. Bob, first question, when you are reactivating a rig and let's say reactivation costs run significantly higher than you expected, do you have any ability to pass that along to an operator?

No.

Under no circumstances? Do you ever talk about that?

No. Operator is not willing to sign blank checks for the start-ups. We're already pushing them pretty hard. If you look at the rates and the terms we have for the two reactivations that are ongoing, in order to entice us to reactivate them, we’ve had very high rates and required a minimum of two-year contract at those rates. The operator is not inclined to give us a blank check on top of that for any cost overruns. That's a business we're supposed to be in so they expect us to be able to do it.

Yes. Okay. Secondly, you -- you didn't mention the Explorer. I was wondering is that another possible sale candidate?

What -- what we do with the Explorer depends a little bit on timing and how successful we are in getting the Rhein and the Wildcat out. If we do succeed in getting Rhein and Wildcat reactivated in the near term, then we'll be looking at opportunities for the Explorer. On the other hand, if the Explorer is not working by the end of the year, I hope I don't still own it.

Then a rig like the P3, how much do you think a rig like that gets in the market these days? If you're selling it?

You mean sales price?

Sales price, yes.

Well we're right in the middle of finalizing a deal to sell that so I think it will be a little bit premature to comment on what the price is, but you should see that fairly soon. I think we're going to conclude the sale in the very near term.

Okay. Then lastly, you talked about a number of -- seeing a incremental need for a number of new build floaters out there. Can you -- can you quantify sort of the number of opportunities out there?

I hesitate to do that because some of these opportunities start with a discussion and then some of the operators are looking at putting together a partnership with one or more other operators and then they -- they sometimes succeed in doing that and sometimes they don't. So, I wouldn't want to mislead you and put out the number that's too high. But it is -- it is a handful of opportunities out there.

Okay. Thanks very much.

Robin Shoemaker, Bear, Stearns

Yes, thanks. Bob, I was wondering if you could just give us maybe a couple of examples of operators who are extending the length that the con -- an old contract when they're in the middle of drilling a well? And are we talking about days, weeks, months potentially in which a contract can be extended beyond its official termination date?

Robin, these -- these contracts are - are extended automatically. It is not -- it is a provision in the contract. You can't just plug in a bin in a well because you've come up to a certain date. They have to have the right to finish the well and it really varies across a fairly wide spectrum. If you're drilling wells in an area where the well normally takes 30 or 45 days, you sometimes -- I guess I would have to say you frequently would run over the contractual date for the end of the contract by anywhere from a few days to a few weeks.

There are other areas, like the Gulf of Mexico, where some of these wells can take six to nine months to drill. Depending on when that well gets spudded, if you're four months from the end of the contract when they spud a well and it takes nine months to drill, you can wind up four, five, six months over the end of the contract term. Most of the time, the really long wells we're seeing are in the Gulf of Mexico. But there is also -- the same potential in Brazil. West Africa, the wells tend to be a lot shorter. So, it really runs a wide gamut and it is not like the operator is coming in and delivering us with a written notice saying hey, I'm going to extend this contract. It just happens as a result of the process of drilling a well.

Right. And the day rate is the same?

Correct.

Okay. So, then if we think about what you've offered the rig to another -- another contract, with a start date, which has to be postponed, is that -- is that problematic in any cases, Either in terms of a clause that provides some adjustment in that future contract which is necessarily postponed by the overrun on the existing contract?

Generally, no. Contracts are generally worded that they will commence in direct continuation of the prior contract. So, the operators understand that there's some uncertainty in terms of exactly when they'll get the rig.

Okay. Well that's all for me. Thanks.

Okay.

Roger Read, Natexis Bleichroeder

Good morning, gentlemen.

Good morning.

Given the number of spec build deepwater rigs that are out there, would you consider doing something like you're doing with PetroJack or is it just make more sense in those type of units given the massive cost investments to build them yourself and have complete control of the situation?

Well, I guess it would be fair to say that we would consider doing something if it was possible. Certainly it was possible to get an arrangement like we have with PetroJack which is essentially a free option. I would say, however, that we would be very, very careful about what it was we were getting into because we would have to do a lot of due diligence on the specifications and the outfitting of the rig. It is a lot more complicated to build one of these ultra deepwater rigs than it is to build a standard Jackup. So, if the opportunity was there, yes, we would look at it but so far, we haven't seen any opportunities to do that.

Okay. Just kind of following along with that, presumably, you're comfortable with the way PetroJack has approached building these rigs and all of the due diligence has made you comfortable with the value you placed on them in terms of the option value to purchase these rigs assuming a contract is signed?

Well, we did do due diligence on the construction process so we have got ourselves comfortable. We had to do that before we were willing to bid these rigs to any operator. As far as the price that we're paying, since that's -- we're only going to exercise the option if we can get our payback criteria, I guess that's what makes us comfortable with the price.

Okay. And then one final question. On the operating cost thing that's been hammered on pretty well here. If we look back, the kind of, certainly the '02, '03, '04 period, Transocean spent a lot less on CapEx on a per rig basis than -- than most of its peers. Is any of this that we're seeing here on either the reactivation cost or additional cost that we're -- that are being impacted in the shipyard on -- on the working fleet, any of that a result of kind of catch up on CapEx that might have been deferred before or is this just when a rig fleet is working at full speed, things need to be done and that's just what we're seeing here?

We don't see significant catch up. What I suspect you see if you compare our CapEx to our competitors is everyone uses different accounting methods. So, things, major projects like steel replacement, major painting, engine overhauls, we expense and we always have. But I suspect some of our competitors capitalize them. So, I think when you look forward, you'll continue to see us, for recurring CapEx, be under our competitors but our operating and maintenance will be higher and more volatile. It is just the function of our accounting method.

Okay. Thank you.

Geoff Kieburtz, Citigroup

Good morning. Going back to your -- your first half guidance, it's self-evident that the outlook for earnings is considerably lower than most Wall Street analysts had. And yet can you tell us whether it is lower than your expectation and if so, what's changed?

Not sure I understand the question, Geoff, of when you say lower than our expectations.

Well, I mean if you went back three months ago and went through sort of an expectation of earnings in the first and second quarter, is your -- just published guidance in line with what your three months ago expectation was?

I think I would have to say that our expectations have been adjusted down slightly over those last three months as some of the projects become more firm and the timing of them becomes more firm. Also, we see a little bit more visibility on these contract rollovers due to well in progress as you get closer to the end of some contracts. So a number of things that give us better information as we get closer to the period have naturally occurred and those factors are what we've outlined to you. All tended unfortunately to be on the downside.

Okay. Can you split that at all between the cost side and the revenue side? Is it predominantly the current wells taking longer than anticipated or versus your estimate of cost?

Not sure that we can do that for you right now.

Okay. I guess what I'm trying to figure out is whether the market conditions in this -- in this business have changed in such a way that we're systematically going to see contract rollovers pushed out. We should be thinking about that in terms of our modeling. Is there any reason that you would suggest that we should do that?

I think, Geoff what's ch -- I don't think that the business has changed any in terms of these contract rollovers. They've always existed. I think what's changed has been the dramatic runup in rates. So that when you see a jump in day rates, on the order of magnitude of 100 and $200,000, then a delay in rolling back contract has a big effect. Most of the time in this business, if you are rolling to a new contract, it's plus or minus 10, 15, $20,000 a day. So that's what's changed I think in the business today and it's the rapid acceleration of rates across this period that's made it so much more volatile until -- until the forward curve starts to flatten out a bit. I think this is going to be a factor that's significant and you have to be a little bit sensitive to it.

Okay. Are there any specific rig contracts that you're -- you're seeing? You mentioned earlier that it's kind of occurring across a wide spectrum. But as you look at it from a -- from a revenue or an earnings perspective, are there two or three rigs which are going to be running on for months longer than originally expected? Or is it -- is there too many to sort of highlight any -- ?

I don't -- I don't think, Geoff, that there are any right now that we would point to and highlight as is going to be a problem. So, we just kind of have to monitor it. We'll try in our bimonthly fleet update, as we get close to the end of the contract and we're on a well where we know what the -- what the well program is and what the likelihood of exceeding the contractual end date is, we will try and get you that information by updating the fleet update report appropriately. But we can't really guess if you go out six months in advance and we're likely to spud one or two more wells before the end of the contract. Then we'd just be picking numbers out of the air.

Okay. Last question, you -- you gave us some update on the -- on the backlog and the letter of intent status today. I think roughly a month or so ago, you had given us some similar numbers and it seems like backlog has moved from about 10.5 billion to something a little bit greater than 14 billion. And the letter of intent of around three billion has -- has stayed the same. Is that increase in backlog because the three billion of letters of intent a month ago have been converted to contracts and you have another three billion of letters of intent or is it the same three billion and you just signed a bunch of contracts in between?

I think it is fair to say that a significant chunk of it is conversion of letters of intent to firm contract, replaced by new opportunities but I don't think you should assume that it was 100% that way.

Fair enough. Thanks very much.

Okay.

James Stone, UBS Securities.

I have two questions. First is, Greg, if I can just close the loop on your -- forget about the quarter-by-quarter cost outlook and you just sort of look at your full year, so we eliminate the uncertainty of which project happens in which quarter. I mean are we looking at an operating cost number for the year of around $1.9 billion? Is that -- and that's of where my math get me to, and I'm just trying to figure out where I'm off, based on your -- on your baseline costs escalating and -- and the cost that you've given us, the 100 million or so of [inaudible]?

That -- that's certainly in the ballpark with it -- with it really front loaded towards the first and second quarter. So, that's not -- and that's not a necessarily a permanent cost increase of that 1.9 billion as I indicated earlier. Almost 100 million is sort of this incremental shipyard-related cost and based upon our current project plans for '07, we would expect that to drop back towards the 30, $40 million level that we saw in '05.

So, you would probably be expecting '07 costs to be up around two billion then.

Yes, I mean because the recurring -- the recurring --

With the infla -- with the recurring inflation.

I'm sorry.

With the recurring inflation and dropping off the shipyard costs, you would probably be closer to two billion.

You know, looking at it from this point, I'd say that's in the ballpark.

Okay. Bill -- Bob, my second question is, with the prospects for new builds that you're looking at, and with the strength in your balance sheet that you have rebuilt over the last several years, can you give us a sense as to whether or not you would be willing to debt finance the construction of rigs and continue to pursue the task of returning cash to -- returning of some your free cash flow to free cash holders?

Well at this point, we don't intend to debt finance any of the new builds if we're lucky enough to get some. We think we're going to have enough cash flow that we can fund the reinvestment and still return a significant amount of cash to shareholders so that's probably going to be the route that we take.

Okay. But in terms of your ideal business model, I mean what -- where do you think your appropriate debt-to-capital ratio should be?

Well since we're a Cayman Company and don't get benefit in our cost of capital from carrying any debt, right now, we -- we really don't see any reason to have any debt. And frankly, if the yield curve ever positions itself such that we could get a significant MPV benefit of paying off the remaining debt that we have, we'd think about doing that. So, the answer is that the debt doesn't necessarily play any role in our structure going forward other than if certain opportunities came up where we had to tap the Capital Markets for a temporary period.

And just to be clear, that's because we get no tax shield from debt because of our structure.

Okay. That's very helpful. Thank you.

Alan Laws, Merrill Lynch

Good morning. I was wondering if the 20 projects that you -- you laid out there for shipyard time, how does that differ from during the Q3 conference call as far as magnitude?

Not sure I can answer that question.

Well, were there 20 projects laid out at that point in time versus today or were there less?

There's actually more than 20 and I would guess, I can only think of a couple that have been added into the queue for 2006. Although perhaps the actual time that we're estimating they would be in the yard has crystallized a little bit better.

And moved up, so the cost part of the projects has -- has escalated, is that fair?

Well, the out of service time.

Okay. And then versus a normal run rate of shipyard projects, is this two times what is normal in any given year for -- ?

Well, I guess it's -- trying to think back over the years, but if you just look at '05, it's -- it's about twice as many as we had in '05. I'm not comfortable in saying it is twice as many as any year in the past. But that's an indication.

All right. So, would you characterize this or could you characterize this as an acceleration of these projects then in '06?

Well, it is a combination of a lot of things. Some of it is generated by the new term contracts that we're getting, where we need to put the rig in and do some contract specific changes and then we take the opportunity to do either SBS that might be due within a year period or some other maintenance that we want to get done so it doesn't interrupt the contract.

So, overall, you sort of characterize 2006 as kind of like a kitchen sink type year and a lot of things get pushed together at this point and it makes '07 and beyond look a lot brighter, is that fair?

A little brighter. I'm not -- I wouldn't want to characterize it as being a complete anomaly. There is a bit more going to be going on in '06 and I think the biggest problem is it is kind of crowded in the front half of the year. But I don't want to give the impression that we might not have --

More of these in '07.

More in '07. If you have almost 90 rigs here, you're going to have a fair number -- these rigs have to go in for SBSs every five years anyway. So, you do the math there and you wind up with 15 or so rigs every year that are due for an SBS.

So, you don't have any survey surges like Diamond has, so to speak, in the next couple of years. It is more level loaded so to speak.

I'm not sure what you mean by survey searches.

Survey surges.

Surges, oh, okay. No, I wouldn't say we have any dramatic uptick in terms of the near term SBS requirements.

Could you remind us what the potential upgrade cost for the Wildcat and the Kirk Rhein are?

I think the [inaudible] we mentioned was in the $30 million reactivation -- reactivation cost [inaudible] in the $50 million [for the Wildcat].

Okay, the last question I have is that you have a lot of revenue visibility on the focus really now has shifted to cost inflation and you essentially laid out more of a volatile cost backdrop. It is a little concerning, but I just wanted to know is the 10 to 15% a new run rate post-2006? Most people were building a particular cost inflation into their models and wondered if it should be stepped up a little bit?

When you say run rate, you mean 10 to 15% escalation every year going forward?

Oh, yes, off of -- off of the base that we kind of normalize to after the surge in projects.

Well, this is just a gut feel so take it for what it is worth. My sense is that the 10 to 15% escalation that we'll likely see in '06 will be mitigated a little bit in '07. I think the personnel related costs are 60% of our costs we're likely to continue to see double digit type increases even in '07. But my hope would be that the cost for parts and equipment would come out of the double digit range and come down as suppliers are able to build up capacity to deliver. So that the increase will still be significant but won't be as great in '07 as it is in '06. And I think hopefully by '08 most of our personnel-related cost pressures will start to abate and it will come down even more if you go out that far but that's a lot of guessing if you go out that far on costs.

All right. Thank you very much.

Mary, why don't we take a couple more questions then conclude.

Darren Horowitz, Raymond James

I realize the call has been lengthy so I'll be brief. I was just wondering if we could get a little more clarity or perhaps more outlook on what the cost and duration is going to be to upgrade the mooring units on the Gulf of Mexico. Some of your competitors are obviously looking at ramping up the amount of wenches they have per unit. Others are looking at maybe installing more anchors in the seabed floor. I was cures with the Nautilus, Marianas and Jack Bates specifically being the ones that -- that could have that happen most recently, what it would mean?

Jean will answer that.

When you look at the cost, of upgrading these rigs you have to look at -- to look at it from two point of view. First, it is the out of service time within the case of the Nautilus, Marianas and the Bates, it's [evaluated] between 30 to 60 days depending upon the rig and the cost of upgrading the mooring -- the mooring system is in the $5, $6 million range. Per rig.

Okay. So, that's -- that's going to include what? Increased wenches?

It's -- no, it's preliminary system, reinforcement of -- structural reinforcement. Preliminary system, it's the way we're looking at it is without adding wenches.

Okay. And when you look out over the horizon, how many rigs in total could potentially need the upgrades? Is it around 16?

Well, all of our [DP] rigs will not require any upgrade. The rig's operating in shallow water, like -- like the Falcon 100, for instance, is unlikely to require upgrades. Having said that, we're still working as part of the joint industry project to define what would be the requirement long-term and we're having discussion [MMS]. So, there is no final discussion taken -- decision taken. But I would say the upgrade that we're describing on the Nautilus, the Marianas and the Bates are probably the biggest upgrades that will be -- we would have to do in the future.

Okay, so it shouldn't exceed more than five to 6 per million per rig then?

Not with the approach that we are taking. Out of service time in '06 and '07 to be able to complete these upgrades.

Sure and just one quick housekeeping question, and I apologize if you had already mentioned it, '06 SG&A guidance?

It should run around $22 million a quarter. Reflecting recent compensation increases.

Any stock option expense in there?

Yes, that includes -- we've been expensing stock options since '03 on a perspective basis, the amount of expense has ramped up each year but that 22 million includes our stock option fully amortized expense.

Thank you.

Thank you. Management would you like to take one final question?

We'll take one last one, yes.

[Josh Haggerty, Choice Asset Management]

Yes, hi. I was just curious about what the cancellation policy is on any of these longer term contracts that you're putting together? And then secondly, is there any historical precedence for renegotiating rates if -- if day rates say three years off are significantly lower than what the contracted rates are?

On the contract cancellation provision, in general, the operators did not have a right to cancel the contract. There -- there's always the risk that the contract could be terminated for a material breach if we commit some kind of a fundamental error. But I think that that's always existent in any contract. Other than that, in general, they either have no cancellation provision, or if there is a cancellation provision, then they would have to pay us the MPV of the remaining contract and those provisions are relatively rare. As far as the renegotiation, I think it is fair to say that historically, a number of operators will look at the possibility of trying to negotiate high rates down if there is a dramatic shift in the market but that's always a negotiation and there's going to be a quid pro quo. Normally, if there is anything given up there the -- what we get in exchange is a longer term. But I'd say that those instances are relatively rare and in my experience, the operators, despite the fact that they'll try to negotiate you down, they will honor the contract. So we're not particularly concerned about any of the operators breaching the contract or abrogating the contract.

Okay, great.

Okay, I guess that's the last question. And we'll wrap it up for now. Appreciate all of the interest and as I said before, I think that despite the near term volatility and uncertainty, the outlook for our business is about as good or better than it's ever been. So, with that, we'll sign off and look forward to talking to you again next quarter. Thank you.

Ladies and gentlemen that does conclude Transocean's Fourth Quarter 2005 Results Conference Call. Once again thank you for your participation and at this time you may disconnect.