Transocean Ltd (RIG) 2006 Q1 法說會逐字稿

Good day, everyone, and welcome to the first quarter 2006 earnings release conference call for Transocean. Today's call is being recorded. Now for opening remarks and introductions, I'd like to turn the call over to Mr. Jeff Chastain. Please go ahead, sir.

Thank you, Allen. Good morning and welcome to our review of our financial results for the initial three months of 2006. A copy of the press release covering our financial results, along with supporting statements and schedules, is posted on the company's website at deepwater.com. A copy of the company's fleet status update report, covering the contract status of the Transocean fleet was issued on May the 1st, and can also be found on the company's website. In addition to highlighting contract signings since the last fleet report, the update includes the currently expected schedules for 2008 mobilization and contract preparation and shipyards, or projected out-of-service days for your modeling purposes. The next fleet update is expected to be issued on May the 31st.

Participating in 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, Senior Vice President of Marketing and Corporate Planning, and David Tonnel, Vice President and Controller. Bob Long will provide opening comments. Greg Cauthen will discuss some of the financial details pertaining to the recently completed quarter and the remaining months in 2006, and Rob Saltiel will offer comments on market developments and outlook. We will then take your questions.

Before I turn the call over to Bob, though, let me 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 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 involve 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 Securities & 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 we will use various numerical measures in the call today, which are or may be considered non-GAAP financial measures under regulation G. You will find the required supplemental financial disclosure for these measures, including the most directly comparable GAAP measure, and an associated reconciliation on our website, and, for your convenience, non-GAAP financial measures and reconciliation tables are included with today's press release. That concludes the preliminary details. I will turn the call over to Bob Long.

Thanks, Jeff, and good morning, everyone. As you saw from our press release, our financial results came in pretty much in line with what analysts have been expecting, at $0.49 after adjusting for the gain on the sale for two rigs. This was somewhat higher than what we had guided towards in our last conference call. One of the drivers of the improved results versus our guidance was lower costs than we had expected. Greg can give you more details if you're interested, but I do caution you to remember what I said about earnings volatility during periods when we have so many shipyard projects.

The costs were lower not because of completing projects under what we had estimated, but rather due to scheduling issues, which means we didn't get everything done we wanted to, and that means likely higher costs in Q2 than we had guided towards last time as, hopefully, we catch up on the work scope. So bearing in mind that we guided towards flat earnings for both the first and second quarter, and we accelerated some of those earnings from Q2 into Q1, second quarter earnings are likely to be correspondingly lower than our previous guidance.

We did continue with our stock prepurchase program in the quarter, buying back $200 million of stock. You can see from the cash flow statement we included, the 200 million was essentially all of our excess cash flow for the quarter. Many of you have asked if we're going to do anything different in terms of returning cash to shareholders, given that our revenue backlog has grown so dramatically from about $8 billion when we announced our repurchase authorization, to about $17 billion today. All I can tell you at this point, is that we're taking some advice and considering all of our alternatives.

In regards to reinvestment opportunities, we've been very successful since our last call, with a contract for a newbuild, deepwater drill ship, and a contract that justifies reactivating another one of our idle floaters. We're still seeing interest from a number of operators for newbuild deepwater rigs, and are hopeful that we'll be successful in our efforts to obtain drilling contracts that will justify committing to one or more additional new builds. As for additional reactivations, with the pending sale of the Transocean Explorer, we will only have the Wildcat as our last remaining idle floater. We've bid the rig to a number of operators for opportunities that would justify the reactivation of the rig, however, we're also considering potential sale opportunities, too, so I am not sure that we can really tell you what's going to happen to that rig at this point.

You're probably all aware that we did not exercise our option to purchase any of the petro jackups. You should not take that as an indication that we think the jackup market is not going to remain robust. On the contrary, it looks very solid now and for the next couple of years. However, the time period that we had under the option was just too short to allow us to get a firm contract commitment that met our payback criteria; hence, we didn't exercise the option. With that, I'll ask Greg to give you some more detail on the numbers.

Thanks, Bob, and good morning to everyone. In the first quarter of 2006, we had net income of $205.7 million, or $0.61 per diluted share, or $0.49 per diluted share after adjusting for gains from asset sales. This compares to net income of $151.6 million or $0.45 per diluted share in the fourth quarter of 2005. Total revenues for the first quarter improved to $817 million from $771 million in the fourth quarter. $45 million of this increase in revenues resulted primarily from the commencement of higher day-rate contracts, with another $22 million coming from the return to active status of the Sedco Energy, the Shelf Explorer, and the Peregrine 1 after the completion of their planned shipyards during the quarter. This was partially offset by $16 million related to the effect of the shorter quarter.

We continue to expect revenues to increase significantly during 2006, due to the commencement of higher day-rate contracts, and the completion of the reactivation of the Prospect and Winner, in June and August, respectively. However, some of the expected increase will be delayed by shipyards and other out-of-service time, particularly in the second quarter. As we look toward to 2007 and 2008, revenue increases due to the commencement of higher day-rate contracts will be very meaningful, and out-of-service time as a percentage of total revenues, should be less -- significantly less than in 2006, as can be seen in the latest fleet status update.

Revenue will also be increased in 2007 and 2008 by the reactivation of the Prospect, the Winner, C. Kirk Rhein, and the two 700 Series Upgrades. As Bob had mentioned, the Wildcat remains a possible reactivation candidate if a suitable contract can be obtained. A reactivation of the Wildcat could benefit 2007, but have a negative impact on 2006 and 2007 during any reactivation period. It is unlikely we would reactivate any of our other idle rigs. During this quarter, we've sold the Peregine 3 and the platform rig, and we're in discussions related to the sale of the Searex 12 and the Transocean Explorer, although these discussions did not guarantee the completion of a sale.

Turning to operating and maintenance expenses in the first quarter, they were approximately $475 million versus $457 million in the fourth quarter. Approximately $19 million of the increase reflects a commencement of reactivations of the Prospect, Winner, and C. Kirk Rhein. Additional cost increases related to the hurricane repairs on the Transocean Marianas, and the commencement of the J.T. Angel shipyard, but were offset, largely by lower shipyard costs and the rigs that returned to operating status during the first quarter. These costs were lower than our original estimates, due to the clay delay in the J.T. Angel shipyard and the postponement of the Sedco 710 shipyard.

In the second quarter of 2006, we expect our operating maintenance costs will be significantly higher than the level incurred in the first quarter, by up to $75 million, as we are planning to conduct a total of 15 major shipyards in mobilizations during the quarter, including the completion of the J.T. Angel shipyard. Operating maintenance costs in the second quarter should include almost $30 million related to the three reactivations, compared to $19 million in the first quarter. In addition, we are projecting to incur approximately $55 million of both incremental costs related to the 15 shipyards and mobilizations, as well as increased costs relating to a number of maintenance projects scheduled on another 30 operating rigs across our fleet. These cost estimates for the second quarter are higher than originally expected, primarily due to the shift of the J.T. Angel shipyard costs from the first quarter, as well as due to the reactivation of the C. Kirk Rhein. We expect our operating maintenance costs for the third quarter will be significantly lower than the expected levels in the second quarter with fewer shipyards and major maintenance projects. Operating and maintenance costs in the fourth quarter should continue to trend back closer to the level seen in the first quarter of 2006, with any increase in normal operating costs being mostly offset by a reduction in major maintenance projects and incremental shipyard costs.

However, I would caution you that the timing of these shipyards and major maintenance projects is volatile and subject to various factors, including the completion of ongoing drilling contracts, availability of shipyard time, or boats in delivery from vendors. Therefore, estimated project timing might change, and this could result in costs and out-of-service time, shifting from the expected quarter to another quarter, as we saw happen in the first quarter for the Sedco 710 and the J.T. Angel. In addition, if the Wildcat is reactivated, our incremental operating cost during the reactivation would increase, and our normalized operating costs would increase once the rig is in service and fully crewed, but the timing of all those increases will, of course, depend on when that reactivation actually occurs.

Capital expenditures in the first quarter of 2006 were approximately $180 million, and they're expected to be roughly similar in the second quarter. By the third quarter, we expect them to be between 250 and $280 million, and then trending back down to 150 to $175 million in the fourth quarter. For the year, our estimate of a total between 750 and $800 million of capital expenditures. Roughly $230 million relates to interim payments on the two 700 Series Upgrades. $220 million relates to interim payments on the deepwater drill ship Discover Clear Leader. $25 million relates to rig reactivation, and the remainder relates to contractually required upgrades, fleet spares, and normal operations. Please note the majority of the difference from our previous capital expenditure estimates is related to the Clear Leader construction.

As the equipment related to our capital expenditures enters service, we expect depreciation expense should trend slightly up during the year, ranging from $105 million in the second quarter, to $110 million by the fourth quarter of 2006. Now, however, note depreciation will not be impacted in 2007 -- or 2006 related to the 700 Series Upgrades and the Discover Clear Leader and won't be impacted, until they actually enter service.

Finally, our annualized effective tax rate for the quarter was 17.6%. During the first quarter, various discrete items, including asset sales, resulted in almost $25 million increase in income tax expense, and thus, an actual effective tax rate of approximately 23%. For the remainder of 2006, we expect our effective tax rate to be between 17 and 18%. However, as always law changes, discrete items, and changes in geographic mix of our income could easily cause our effective tax rate to vary from this estimate. And with that, I will turn it over to Rob to discuss the market outlook.

Thanks, Greg, and god morning to all of you on the call. We've had a very busy period of activity since our February conference call, with a number of market-leading fixtures across all three of our major asset classes. As a result, our backlog now stands at approximately $17 billion, or nearly $3 billion higher than it was in mid-February. Day rates across all asset classes continue to trend higher, and we are not seeing any signs yet that rates have peaked for this market.

I will start with a discussion of our high-specification fleet, which includes our deepwater and harsh-environment assets. Since our last conference call, we've contracted six of these high-spec rigs, including a newbuild drill ship, for a total of 16.5 firm rig-years, and nearly $2.8 billion of new revenue backlog. In the Gulf of Mexico, the big deal for Transocean and, frankly, for the industry to date, has been our $1.7 billion agreement with Chevron. This deal includes a newbuild Enterprise-class, enhanced deepwater drill ship to be named the Discover Clear Leader, and term contract extensions for the Discover Deep Seas and the Cajun Express. At an estimated cost of $650 million, the Clear Leader will be the most capable drilling rig in the off-shore industry.

The rig will leverage the success of our Enterprise-class design by incorporated our patented dual-activity drilling system, and providing the same ample deck space, variable deck load, and personnel complement, to benefit both exploration and development programs. The Clear Leader will be enhanced beyond the current Enterprise class by supporting 12,000 foot water-depth capability, and increase load path, fluid storage, and pumping capability, to allow drilling up to 40,000 foot wells into the lower tertiary plates.Our agreement with Chevron is noteworthy, not just for its dollar size, but also for its longevity of service, as the Cajun Express, Deep Seas, and Clear Leader will be under contract until 2010, 2011, and 2014, respectively. The committment represents our client's confidence in Transocean to design, build, and operate the most advanced drilling rigs for the off-shore industry.

Also in the Gulf of Mexico, we extended the Discoverer Enterprise for an additional three years, allowing this rig to maintain continuous support of BP's Gulf of Mexico programs through the end of this decade. This is the second three-year extension of the Enterprise, since its initial five-year contract, meaning it will have completed eleven years of service with BP at the end of the agreement.

Elsewhere, we added a three-year extension on the Deepwater Frontier with Reliance in India, bringing its total contracted time with that client to five years. The Frontier will mobilize to India later this year to begin these consecutive programs. Looking forward as Bob indicated, we are in discussions with a number of operators who have unmet deepwater drilling needs and interest in additional deepwater newbuild capacity, both in the Gulf of Mexico and elsewhere. We think that our enhanced Enterprise-class drill ship design represents proven capability and efficiency, and we are hopeful that one or more additional opportunities to expand our high-spec fleet may materialize in the weeks ahead.

Turning now to our other floaters, this segment continues to benefit from upward movement in day rates in all regions of the world, and continued supply pressure, as more of this fleet and the higher-end alternatives are contracted for extended terms. Since the last call, we secured a two-year contract for the C. Kirk Rhein, a second-generation rig that has been stacked since 2002 at $340,000 per day. The rig will be reactivated and mobilized to India, where it should commence drilling for Reliance later this year. With the anticipated sale of the Transocean Explorer, the Transocean Wildcat will be our only midwater floater without a contract, however, as Bob indicated, we are in discussions with a number of operators regarding a reactivation possibility for 2007 service.

The continuing strength of the shallow-water floater market is evident in our recent five-month fixture of the Transocean Legend in Indonesia at a rate of $435,000 per day. Also we have just announced the signature of the second-generation Sedco 703 to a five-month contract in Australia at $400,000 per day. These rates are approaching what many fifth-generation rigs have recently received. And while, certainly leading-edge for the shallow-water floater market, they do illustrate clearly the significant upside earning potential of this sector to Transocean. Fortunately, Transocean has 11 of its working other floaters with available time between now and the end of 2007. So, we do expect to benefit from the continued rate increases in this segment, as we renew these rigs.

Turning briefly now to our international jackups, the story is somewhat similar to that of the other floaters. Rates continue to trend upward for even the lower spec rigs, and our backlog continues to expand with a number of attractive fixtures. Since our last conference call, we signed a one-year deal with a Shelf Explorer at $212,000 per day in Malaysia that represents our high water-marked fixture for any jackup of Transocean's to date. We also concluded a one-year, $189,000-per-day extension of the Trident 9 in Vietnam. Additionally, we secured extensions of six months or more, on four of our other jackups since the February call. 10 of our 25 jackups have available time in 2007 and 8 more come available in 2008, so we have upside in this fleet, as well, to drive future earnings higher. We are seeing new programs materialize in the markets where we operate, that give us increasing confidence that the worldwide jackup market will remain strong through 2007 and into 2008, despite the arrival of newbuild rigs. And with that, I'll turn it back to Bob for closing comments.

Thanks, Rob, but I think we'll just go directly to questions now.

Thank you. [OPERATOR INSTRUCTIONS] And we'll go first to Alan Laws with Merrill Lynch.

Good morning. I have a couple questions. The first is the on the midwater. You announced a few really strong contracts for 703 and the Legend. I know the 703 is in Australia. so that has some impact. Are these the new rates that we should expect most of the midwater rigs to trend towards, or are these more special situations?

I'll let Rob answer that.

Yeah, as I mentioned in my comment, these are clearly leading-edge fixtures, and they've been helped, I think, by the fact that they were rigs that were in the region and available in a fairly prompt period of time. Both of these rigs, I should also note, were contracted for relatively short-term period of time, so roughly five months on each rig. As I said, the rig market for the other floaters is clearly going up, and the rates will continue to increase, but I would say that rates in the 300's are going to be more typical of where the market is now, and going forward, but certainly having breached 400, I think that rates in the 400's are certainly achievable on the longer term basis as time moves on.

Does this sort of portend the much larger number for the higher-spec rigs then, as they become available?

Well, there's no question that the higher-spec rigs will command an even greater premium. The challenge on the higher spec rigs is that the availability is quite limited right now, and for Transocean, a lot of our capacity at the very highest end is contracted through '07 and into '08, but there is no question the whole market is compressing upward toward the highest end of the fleet.

All right. My second question has to do with the share repurchase. It slowed a little bit in the quarter below what we were thinking, but I had a question on how you're thinking about that. Are you, essentially trying to match the free cash flow to the repurchase, or are you in a situation where you would be more strategic in the buyback, and if you had a dip in the price that you would be more aggressive?

Well, we are, as I said in my opening remarks, we're in the process of reconsidering or reevaluating what we're going to do with our cash, since our cash is -- our backlog has grown so significantly since we announced the program. So, what we might do going forward here, is, right now, a little bit of an open question. In the quarter we essentially used all of our free cash flow to buy back the stock. When we announced our original repurchase program, I think the only parameters we put on it was that we probably had no intention of borrowing to buy back the stock, and we were going to use a balanced approach. We might build some cash, and the rest would be -- the rest of the cash would be returned to shareholders by the buyback. Given the rapid increase in our backlog, the thought about starting to build cash at an early stage has probably got less of an imperative than we thought back in October. Therefore, we used all of the cash to buy back stock instead of building any cash. But as I said, we're in the process of kind of rethinking everything in -- related to our repurchase program and use of cash. So, don't take what we did in the first quarter as necessarily an indication of what we might conclude going forward.

Okay. Would you mind sharing what you feel the alternatives are that are in front of you? I know you're talking around it. I was wondering if you can talk a little about what you think the alternatives are that you're considering.

Well, I think we're going back and reevaluating everything that we considered last years which ranges from a regular quarterly dividend, to a special dividend, to a larger stock repurchase program, to the possibility of accelerating the stock repurchase program by potentially taking some leverage on the balance sheet, so at this point, I'd say all alternatives are being considered.

All right. Thanks. I will leave it at that. Appreciate the answers.

We'll take our next question from Darren Horowitz with Raymond James.

Good morning, guys. Bob, a quick question for you on the jackup newbuilds. I know that for a couple conference calls in the past, you had been concerned about some of those new units coming in and degrading price in the 2007 time frame, and now it seems like the tone has changed a little bit, especially as it relates to 2007 and -- as well as 2008. Where do you see, as it relates to deliverability schedule and from an operator standpoint, their desire for deliveries of jackups in 2009? Where do you see that total number going, and at what point is there a threshold where you think that those units could actually come in and start impacting price internationally?

Well, I think you're accurate in that my feeling about the market has changed. We see a tremendous amount of demand in the jackup business right now. In fact, we've had to decline to bid on a number of different opportunities. With the unsatisfied demand, I think that it is pretty clear to me, barring some development that I can't foresee, that all of the jackups that are going to be delivered in '06 and '07 are clearly needed. Right now, I'd even guess that the jackups coming out in '08 are going to be needed. When you get out to '09, it's a little bit difficult. The jackup market isn't customarily a long-term contract market, so there is a fairly significant amount of the existing fleet that's available starting in '08, and most of it is available in '09. So you can have some pretty significant changes in the demand picture between now and then, so it is a little bit difficult to say what that market is going to look like then.

Okay. Shifting gears for my second question as it relates to the domestic semis, I was hoping that you could update us on the status of both cost and duration for mooring system upgrades. If my memory serves correct, it was about 30 to 60 days down time per rig and maybe about 5 to $6 million per rig, per your last guidance. Is that still ballpark? Or, any update would be appreciated.

I will let Jean answer that. I think the time periods are going to be shorter, because we've already got a lot of the foundation laid, so, Jean, do you want to answer?

We're planning to upgrade the three units, the Nautilus, the Marianas, and the Bates when she arrives in the Gulf from Australia later in the year. The out-of-service time is in the 30-to-45 days and the cost in the $6-to-$8 million. We've ordered equipment, and the signing of the shipyard will depend upon the delivery of the equipment. Could happen late Q2 or Q3 for the Nautilus or the Marianas.--

And those expenses are going to be realized by you. Is there going to be any portion that's passed through to the customer?

In terms of the dayrates during the shipyard, depending upon the contract that we have, part of it would be taken by the customer, but not all of it. The upgrade costs will be on our account.

Thank you. That's helpful.

We'll go next to Dan Pickering with Pickering Energy Partners.

Good morning. I would like to, I guess, get a little bit of clarity on the cost numbers. Greg, you mentioned that we pushed some costs from Q1 to Q2. Can you quantify that number for us, $10, $15 million or so?

Yeah. For the cost they shifted from Q1 to Q2. It's about 10 to $15 million. So, as we indicated in my comments, that that's going to lead Q2 costs to potentially be $75 million higher than Q1 costs, although if some shipyard timing or project timing shifts, some of that $75 million could shift over into Q3, but right now, our best estimate is that's what's going to shift into Q2.

Okay. And then, when we think back to the last conference call, I guess I am just wondering in that time period, we pushed a few more costs into second quarter. Has your revenue outlook in Q2 changed much? I mean has it changed, gone up, down, sideways?

Well, it's -- certainly with more shipyard time in Q2 than we had originally estimated, then our revenue outlook for Q2 has probably moved down a little bit. What we're seeing is, and you should be able to see this from the latest fleet status report, but there's probably 40 or $50 million of revenue increase driven by higher dayrate contracts that are commencing in Q2 or commenced in the last half of Q1, and then another 40 or $50 million which would have been an improvement due to a lot of the rigs returning to work, the Marianas returning to work, the Prospect starting, is going to be almost completely offset by the out-of-service time, 40 or $50 million of lost revenue from out-of-service time. So, that's why we indicate in the press release, that the net all that, your revenues maybe will only increase 40 to $50 million, versus costs increasing as much as $75 million. So a lower quarter, although if you look at the first quarter and the second quarter, in line with what we thought, it's really just been a shift, with the first quarter being higher than we had expected, and all that far flopping into the second quarter bringing it lower. The first six months is still in line with what we were seeing several months ago.

Got you. And then your underlying -- the shipyard costs are moving things around. I guess I'm curious if you can comment on generally your inherent costs of operation which are also in this line. Any changes, there, to your viewpoint on cost inflation during '06 and into '07?

Not really. It is certainly hard to estimate what will happen later this year, but it should still be in that mid-teens area that we should still continue to see both vendor cost inflation and personnel cost inflation.

Thank you.

We'll go next to [Douglas Clifford] with Omega advisors.

Good morning. On the issue of stock buybacks and, perhaps taking on some leverage, Bob, you had said that you're taking advice and considering all the alternatives. What's the time frame that you'll be doing this, and how formal is the process? Is this something where you've engaged a financial advisor specifically for this issue?

Well, Doug, it is a very intense process that we're going through. Obviously, it is a major strategic question for the company and that the board is very involved in, and we have consulted with a number of financial advisors. At this point I wouldn't like to comment on whether or not we have formally engaged a financial advisor, but this is an issue that's got a lot of focus in the company at the present time. In terms of timing, I would hope that we are going to be in a position to make some conclusions sooner rather than later. But, I don't want to give you a specific date where you might hear something from us.

Thank you.

We'll go next to Mike Urban with Deutsche Bank.

My questions have been answered. Thank you.

Our next question comes from John Criss with European Investors.

Thank you. My questions have been asked. Thank you.

[Operator Instructions] We'll go next to Scott Gill with Simmons.

Yes. Good morning.

Good morning

Bob or Rob, either one, if you were to look these upgrades of the 700 Series and were to grid one of those in the market today, what type of dayrate do you think you could get for one of the upgraded 700s?

Well, that's a really tough question, Scott, because it depends on a lot of circumstances. One of the big benefits of a 700 Upgrade is that, assuming shipyard space is available, we can deliver it a lot sooner than a newbuild, so if you have an operator that has a real urgent requirement for capacity, and you can satisfy that demand in the time frame that's really important to them, then you see situations like you saw with the Legend. You can get very high dayrates that are probably not representative of what the average spot market is at the time. So, to try and guess what circumstances -- what might exist, and what rates that might generate is really tough, but it could be a very, very high rate. I'd also tell you, though, that it would have to be a very high rate, because any future 700 Upgrades that we contemplate, we would have to take into account opportunity cost that today, is probably, as Rob said, in the at least mid-300 range, $350,000 a day, may be even higher, and that adds substantially to the effective cost of the Upgrades. So, any dayrate that we got would have to be significantly higher than what we got on the last ones.

Well, Bob, I guess that kind of leads into my second question, then. What is your appetite for doing further upgrades when you kind of balance that against the opportunity cost, the long-term benefit of having a higher quality asset in the fleet upon completion of an upgrade. How do you think about that proposition, going forward?

Well, it's really pretty much come down onto an economic decision, and if we could get the right circumstances with an operator willing to pay some kind of a dayrate during the out-of-service time, and if we can get the out-of-service time minimized, part of the effort we have here is that the actual time you have to be in a shipyard for these upgrades, I think, is six to eight months, so to the extent that we can minimize that out-of-service time by managing the contract time up to then, and get some -- get the right terms with the operator, it is not out of the question that we can do it another upgrade, and it is something that we would very much like to do, because we like to upgrade our fleet, and we think there are some advantages, as I said, in the timing there versus a newbuild. So, we're interested. We've had a few discussions and feelers, but I would have to tell you that I consider it to be a fairly low-probability event that we'd actually do another one of these.

Okay. Thanks. Last question, then, on the potential for the Wildcat reactivation. What type of rate and contract duration, generally speaking, are you looking at for that rig?

Well, we've got a couple of bids out.

Well, I am happy to take that, Scott. We're -- just kind of round numbers, we would look for a multi-year commitment, so it would be two or more years, and the rates are going to be in the -- certainly in the $300,000-plus range, I think, trending toward the mid 3's.

Okay. Would it stay in the North Sea?

The rig is most likely to be focused on the North Sea market, yes.

Thank you. Thank you, gentlemen.

We'll go next to Waqar Syed with Petrie Parkman.

Hi. Would you consider the sale of an additional floater? Would you put any terms in the sale of contract that prevents this rig from being upgraded and coming back and competing against your other rigs?

Probably not. If we could do that and get the price that we want, then obviously, we'd do it, but if it's going to impact significantly the value we get for the rig, we probably would not desist on that.

Okay Are there any opportunities as a production units for this rig?

We don't know of any right now.

Okay. Thank you very much.

We'll go next to Jason Gilbert with Goldman Sachs.

Good morning, guys. I've got sort of a capital structure question. Bob, I was wondering how important is the corporate credit rating to you and the board? How do you think about that? I think you're a B double-A1 A-minus right now. Is there a level out there that you think is particularly important for you to maintain?

I think that our view really is, that as long as we maintain an investment-grade rating, access to capital in this business through the cycles can be important, particularly to take advantage of opportunities.

Yep.

And we've always considered that it was important to maintain an investment-grade rating, but other than that, we don't have any focus on raising the rate within that, as long as we stay investment grade.

Right. And then, I guess, the follow-up to that is, have you done the analysis to estimate how much debt you could put on the books, buy back stock and maintain a BBB plus?

No.

Okay. Next question is you've given a breakdown earlier, Greg, on CapEx for '06. I was wondering if you can talk about for '07, how you saw that breaking down between the Clear Leader and some of your other projects?

The Clear Leader CapEx going into '07 should be a couple hundred million, and then you've got the remainder of the CapEx on the two 700 Series Upgrades, so another 2 to $300 million on that, and then our normal CapEx.

Right. Thanks very much, guys.

We'll go next to Doug Becker with Banc of America Securities.

Thanks. I haven't heard an update on the tax-sharing agreement with TODCO and I know there is some litigation going on with that. Without commenting specifically on the litigation, is this something we should pulling out of our estimates for 2006?

No. The main focus of the dispute and the litigation are on some option provisions that frankly, don't -- haven't been the major focus of the tax-sharing agreement.

Okay. While it is still difficult to quantify, it will -- you will be getting a sizable dollar amount for that?

I mean, that's what we would expect.

Okay.

And, now, in a litigation context it's hard to talk about any specifics.

Okay. And then I guess, you renewed insurance May 1st. Just wondering if you could talk about what type of increase there was in premiums or what type of self-insurance you had to take on?

On our main whole and machinery program, we actually have the same retention levels that we've had historically, with a $10 million per-occurrence deductible, a $20 million plus aggregate, annual aggregate top of that. However, for Gulf of Mexico windstorm, our program is capped at $250 million of insured losses, $300 million if there is a total loss, so that cap, so we've taken retention at the top, that we've not had in the past, because of the tight market with the hurricane conditions, and that led to year-over-year, about a 40% increase in our insurance, but our insurance costs -- in the big percentage of our operating maintenance costs, I think last year, it was about 1.5%, so that's not going to have a big impact. I think it takes the run rate from $13 million a quarter to $80 million a -- or -- or $13 million a quarter to $20 million a quarter.

Yep. And just with dayrates so high at this point, have you taken a on more loss-of-hire insurance?

We've never had loss-of-hire insurance. And, given what happened in the market last year, loss-of-hire insurance is getting even more costly, and, frankly, in the past, we never thought it was priced right. We think it's better to focus on reducing and eliminating the incident, not relying on the insurance companies.

Maybe a little more theoretical question. There's at least some talk from operators about more rig-sharing agreements. In the past, they've been driven by the lack of work programs, but I guess now really driven by lack of rig availability and trying to get a little more efficiency. Is that something that you're seeing operators talk about a little bit more, and how do you view that as affecting your business?

I think that we're actually in an environment where there is less rig-sharing programs. We went through a period I am going to say started a year-and-a-half or two years ago where a lot of operators came together. We currently have a number of our rigs working on contracts that were entered into some time ago, and they're working for consortiums, effectively rig-sharing programs. Those generally come about when operators all have exploration programs as opposed to development programs, and exploration programs where they only have one or two or three wells apiece, so to get a rig on term, they have to come together and be able to give a term commitment. In today's market, with everything pretty well booked up, there is not a lot of opportunity for that. There is a lot going on in the market, I think, among the operators, where operators are talking to each other trying to get farm-outs, and get time on rigs already under contract, but I'm not aware of lot of change in terms of operators coming together to try to go out and contract a rig ,starting with a new contract. Rob, do you have any other sense of that?.

Yeah. The only comment I would make, Bob is that is certainly right for the existing rigs. I think on some of the discussions around newbuilds, I think there may be some interest of operators to maybe get together and share some of the risk, if they're entering into a longer term contract, but certainly for the existing rigs, availability has become so strategic for customers, that in a lot of our deals that we've done recently, it's been access to the rig that drove the customer to go longer term, and then they're relatively confident in this market that they can farm out any excess capacity they may have contracted, so again, for existing rigs we really don't see much clubbing.

Okay. That's helpful. Thank you.

We'll go next to Rob Mackenzie with FBR.

Thanks. My question has been asked.

[Operator Instructions] And we'll go next to Geoff Kieburtz with Citigroup.

Thanks. Good morning. Just a question about contracting strategy insofar as you built up this rather impressive contracted cash flow going out well into the future. Are you at all thinking about maybe shifting a little bit, and maybe holding back a little bit on contracting further rig time, in order to potentially capture some of these opportunistic high rates?

It's a little bit difficult in our business, Geoff, to overmanage the duration of our contracts. For the most part we are bid takers. The operator has a requirement in a certain amount of time. To the extent that we can affect the length of the contract, in today's market, it is mostly in terms of -- given all the opportunities, do we want a longer term? And it is like reactivating the rigs . We insist on at least a couple years. We've got some situations where operators are looking for shorter terms, and we prefer these rates to have longer term, but I wouldn't want to give you the impression that we have a lot of flexibility in terms of all of our contract portfolio in choosing whether we want to work for one well or one year, so, I'm not sure how else to answer that question actually.

Okay. Fair enough. Completely separate question on the topic of litigation, what is going on in regards to the dual-activity patent litigation?

We have a hearing set, I think it is in August, so, hopefully, we're going to get a judgment at that time, and we'll see where we go from there.

Okay. Great. Thank you.

We'll go next to David Smith with J.P. Morgan.

Good morning.

Good morning.

Does the Wildcat have the AOC to work in Norway?

No.

It does not?

No.

Okay. Thank you.

[Operator Instructions] And it appears we have no further questions, Mr. Long. I would like the turn the conference back over to you for any additional or closing remarks.

Okay, well thank you. I don't really have any additional remarks. I appreciate everyone's interest, and we'll talk to you again next quarter. Thank you.

And ladies and gentlemen, that does conclude today's call. Thank you for your participation, and you may disconnect at this time.