Transocean Ltd (RIG) 2006 Q4 法說會逐字稿

Good day, everyone and welcome to the fourth-quarter 2006 earnings release conference call for Transocean Inc. Today's call is being recorded. Now for opening remarks and introductions, I would like to turn the call over to Mr. John Briscoe, Director of Investor Relations. Please go ahead, sir.

Thank you, Melissa. Good morning and welcome to our review of the financial results for the fourth quarter 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.

Also note that the Company has posted to its website a file containing four charts that will be discussed during this morning's call. The file containing these charts can be found by selecting Investor Relations followed by Presentations.

Participating in this morning's call are the following Transocean Senior Managers -- Bob Long, Chief Executive Officer; Jean Cahuzac, President; Steven Newman, Executive Vice President and Chief Operating Officer; Greg Cauthen, Senior Vice President and Chief Financial Officer; David Mullen, Senior Vice President, Marketing and Planning and David Tonnel, Vice President and Controller.

As has been our practice, we will begin with some opening comments followed by a question-and-answer period. Before I turn the call over to Bob Long, remember that during the course of this conference call, participants may make certain forward-looking statements regarding various matters related 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 or uncertainties materialize or underlying assumptions prove incorrect, actual results may vary materially from those indicated.

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

Thanks, John. Good morning, everyone and thanks for joining us on the call this morning. We had another good quarter with earnings a little above expectations due mostly to higher revenue than anticipated and costs just 1% or so higher than the range we had guided to. The $1.25 per share on an adjusted basis is a significant increase over the $0.83 we reported in the prior quarter and it is a good indication of the earnings power that we have built into the $21 billion backlog shown on chart one.

Full-year earnings on an adjusted basis of $2.93 were almost double 2005 adjusted earnings and we expect 2007 to accelerate this trend. We started off 2007 with a continuation of the very strong market conditions that we enjoyed in 2006. While there seems to be a lot of questions in the minds of investors regarding the energy business with commodity price volatility causing most of the concern, from our perspective, we think this concern is unwarranted. We have not seen any indication from our customers that activity is going to abate.

On the contrary, we continue to see a strong market in all asset classes and across all geographic areas where we compete. While the market also remains strong for jackups, I am particularly encouraged by some of the contracts awarded to deepwater newbuilds at rates in excess of $500,000 a day and the continuing strength of the mid-water market, which has contributed the majority of our increase in backlog.

I think the recent exercise by one of our customers of an option to extend the Deepwater Discovery contract from 2011 to 2013 is another extremely positive indication of the state of the market. That is all I'm going to say about the market, but David Mullen will give you more of a comprehensive overview after Greg goes through some of the details behind the numbers.

Before I turn it over to Greg, I want to remind you that we will not be commenting on our plans for stock repurchase. You saw that, as previously disclosed, we repurchased $250 million of our stock in the fourth quarter. That brought our total repurchases to $3 billion, leaving $1 billion outstanding under our authorized program. I continue to believe that stock repurchase is the right way to return money to shareholders and we expect to complete the remaining authorized repurchases, but we are not prepared to comment on when we might be in the market. We will continue to update you quarterly when we do our earnings releases.

With that, I'll ask Greg to give you a rundown on the numbers.

Thanks, Bob and good morning to everyone. In the fourth quarter of 2006, we had net income of $621 million or $2.05 per share or diluted share or $1.25 per diluted share after adjusting for gains from rig sales and the TODCO tax sharing agreement. This compares to net income of $309 million or $0.96 per diluted share in the third quarter of 2006 or $0.83 per diluted share again after adjusting for gains from rig sales.

Total revenues for the fourth quarter improved to just under $1.2 billion from just over $1 billion in the third quarter. $119 million of this increase in revenues resulted from the commencement of higher day rate contracts. The remaining increases stem primarily from a full quarter of operations at the reactivated rigs, Winner and Prospect, and the return to operations in the fourth quarter of the Sedco 709 and the Deepwater Discovery.

In addition, revenues in the fourth quarter benefited from increased integrated services activity. This was partially offset by the mobilization of the deepwater expedition from Brazil to Egypt, a full quarter of Discover 534 in shipyard and the commencement of shipyards on four jackups in preparation for their new integrated services contracts in India.

Revenues in the fourth quarter were higher than expected due to higher integrated services and recharge revenues, as well as the postponement to early 2007 of the mobilization of a jack base from Australia to the U.S. Gulf of Mexico.

As we look forward to 2007, revenue increases due to the commencement of higher day rate contracts should continue to be very meaningful as shown in chart two. With the completion of the three rig reactivations in 2006 and early 2007, we expect out-of-service time in 2007 to decrease compared to the levels we experienced in 2006 as shown on chart three.

Our integrated services revenue should increase substantially in 2007 to $185 million from $30 million in 2006. We now expect our recharge revenue in 2007 to be roughly $100 million, pretty much in line with 2006. In aggregate, this represents an increase in other revenue of roughly $45 million compared to our previous guidance for 2007.

Operating and maintenance expenses in the fourth quarter were approximately $570 million versus $561 million in the third quarter. On our last earnings call, we guided our operating and maintenance costs at a range of $530 million to $550 million. We exceeded the high end of this range by approximately $20 million. However, mostly due to approximately $11 million of client recharge revenues and approximately $4 million related to delayed mobilization at the base and increased activity on the Expedition, all of these more than fully offset by related increases in revenue. The remaining $5 million, which represented less than 1% of our fourth-quarter costs, related primarily to higher than expected costs of the C. Kirk Rhein's reactivation and the Sedco 709 shipyard.

Versus the third quarter, our in-service costs in the fourth quarter increased by approximately $20 million as shown on chart four due mainly to the completed reactivations of the two rigs, salary increases and ongoing maintenance inflation. Our supported integrated services costs increased by $6 million in the fourth quarter due to the salary increases and the increase in integrated services activity. These increases were partially offset by an expected decrease in out-of-service costs of $17 million primarily due to the completion of the two rig reactivation.

We currently expect our total operating and maintenance costs for 2007 to be between $2.43 billion and $2.53 billion. Our operating maintenance costs in the first quarter of 2007 should be slightly higher than the fourth quarter of 2006 with the primary drivers expected to be an increase in shipyard and integrated services activity offset by lower costs related to an expected increase in mobilization.

For the rest of the year, the level of cost each quarter will vary and is expected to be driven primarily by the amount of shipyard and mobilization activity and the timing of various maintenance projects on the rig.

On our last earnings call, we guided our 2007 full-year operating and maintenance costs to a range of $2.4 billion to $2.45 billion. We have adjusted the midpoint of the range to take into account an expected $40 million increase in costs related to recharge revenues and integrated services and a $10 million increase due to the weakening of the U.S. dollar. Both of these items expected to be fully offset by revenue increases.

The increase in 2007 full-year operating and maintenance costs versus 2006 actual costs is driven by four significant factors. First, we expect a cost increase of approximately $150 million related to higher integrated services activity in 2007, as well as $15 million related to a weaker U.S. dollar. Again, both offset by related revenue increases.

Second, our 2007 costs should include an increase of roughly $25 million related to additional training crews and the related recruitment and training costs to satisfy our newbuild and upgrade crew requirements, as well as to mitigate an anticipated increase in personnel attrition.

The third factor relates to a net decrease in costs from reactivated and sold rigs. With 2007 costs expected to include $84 million of operating costs and $22 million of contract preparation amortization related to our three reactivated rigs. This compares to 2006 amounts of $126 million of reactivating and operating costs for the same three rigs, as well as $24 million of operating costs related to rigs disposed of in 2006 or early 2007.

The fourth factor is year-over-year cost inflation, which based on the remaining increase after taking the first three factors into account should be roughly 10%.

Capital expenditures in the fourth quarter of 2006 were approximately $166 million. Of the $876 million of capital expenditures incurred in the year, approximately $149 million relates to the two 700 series upgrades. $459 million relates to our three newbuild drillships. $38 million relates to our three rig reactivations and the remainder relates to contractually required upgrades, fleet spares and normal operations. We expect capital expenditures for 2007 to be roughly $1.4 billion, off which $660 million should relate to our three newbuild drillships and $295 million should relate to the two upgrades.

Interest expense rose to $43 million in the fourth quarter as our increased debt impacted an entire quarter. During 2007, we expect our interest expense to decrease to less than $10 million a quarter by the end of the year assuming our free cash flow continues to be largely used to pay down the new debt. The reduction in interest expense also includes an increase in capitalized interest to an expected $20 million a quarter by the end of the year as we continue investments in upgrades and newbuilds.

During the fourth quarter, we settled our previously announced dispute with TODCO regarding the tax sharing agreement and recognized roughly $50 million of income related to the 2005 tax share. We will recognize the 2006 tax sharing agreement amount when TODCO files its 2006 tax returns most likely in the third quarter of 2007. Based on TODCO's 2006 estimated tax payments made to us so far to date, this should amount to approximately $110 million.

For the year, our effective tax rate was 18.5%. This excludes the previously mentioned impact on the income before tax related to the gains from the rig sales and the TODCO tax sharing agreement and also excludes various discrete items from income tax expense related to changes in estimates and the resolution of previous year's tax disputes in various jurisdictions. In 2007, we expect our effective tax rate should be between 17% and 20%. Although the actual rate will depend on our finalization of the impact of the new income tax accounting pronouncement, FIN 48.

With that, I will turn it over to David for the marketing outlook.

Thanks, Greg and good morning to everyone on the call. We had a good quarter in firm contract additions, achieving some excellent day rates and term commitments in all classes, most notably the mid-water sector.

The current contract backlog now stands at approximately $21 billion, which represents approximately $1 billion growth last earnings call. The market outlook remains positive for each of our major asset classes. I will start with a discussion of our high specification fleet, which includes our deepwater and harsh environment assets. Backlog for the high specification unit continues to increase with the leading edge fixed here on the Transocean Richardson at $450,000 a day plus a 10% bonus opportunity for a term of three years with Chevron in Angola.

Devon has exercised the option to increase the term of the Deepwater Discovery from three to five years at a rate of $425,000 a day, extending the contract commitment for the rig till 2013.

Ultra deepwater demand remains very strong with unsatisfied demand in the emerging areas of Mexico, Asia and India, while the more mature areas of the U.S. Gulf of Mexico, Brazil, Angola and Nigeria continue to look to add more deepwater capacity to fulfill the backlog of development and exploration projects. The strength is reflected in the fact that none of our high specification fleet has time available in 2007 or 2008 and very limited time available in 2009.

In the mid-water sector, the following four leading edge fixtures in the fourth quarter of 2006 translated into $1.1 billion in additional gross revenue backlog. Statoil signed the Transocean Searcher in Norway at $390,000 a day for 13 wells or approximately three years. Eni signed the Amirante in the Gulf of Mexico at $350,000 a day for three years. Woodside in Australia signed the 703, the Sedco 703, for $435,000 a day for one year and Total in the U.K. North Sea signed the Sedco 714 at $350,000 a day for one year. Q4 2006 was our best quarter ever in new fixtures for our mid-water floaters.

In the past quarter, the U.K. sector of the North Sea has shown evidence of as secondary market developing as some operators reshuffle their priorities and look to farm out some of their contracted commitments. The supply side to this secondary market has already been absorbed and the interest in the available units is very strong. The strength of the mid-water floater market is reflected in the backlog growth that continues to absorb all the available near-term supply with very limited availability in 2007 and 2008.

By geography, we are currently experiencing strength in all mature areas and new demand is emerging in Libya, Mediterranean, Colombia, Venezuela and Southeast Asia.

Turning finally to our jackup fleet. Petronas in Vietnam signed the Trident 17 for 13 years at a rate of $185,000 a day. Additionally, we are in advanced discussions with another operator in another multiyear deal for another one of our jackups. Consistent with our comments from the third quarter 2006 earnings call, the jackup sector continues to absorb the delivery of newbuild capacity at premium rates.

Consistent with our strategy of upgrading our overall fleet quality through selective upgrades, newbuilds and non-core asset divestitures, we have completed the sale of the Transocean Wildcat, a second-generation semi cold-stacked in the North Sea since early 2002. Proceeds from the sale exceeded $190 million.

We have also completed the divestiture of our tender rig business with the sale of the Searex 9, Searex 10 and W.D. Kent in 2006 and the Charley Graves in January 2007 for total sale proceeds of approximately $100 million.

Since May 2005, we have generated just over $500 million in total proceeds from our non-core asset sales, capturing significant value for our shareholders.

That concludes my marketing comments, so I will turn it back over to Bob.

Thanks, David. With that, I think we are ready to answer some questions.

(OPERATOR INSTRUCTIONS). Darren Horowitz, Raymond James & Associates.

Guys, good quarter. My first question relates to the international jackup. You mentioned the Trident 17 for three years at 185 and also you signed a couple other units with similar type terms. How do you think that blend between rate and term changes with a larger proportion of the jackup newbuilds entering the market this year and next?

David?

Good question. What we see -- we continue to see that the demand absorbs the supply with no degradation of day rates. We remain optimistic that that will prevail. As I said, we are in discussion with a number of operators on term commitments at market rates, so we see no degradation in rates and we see improvement in terms.

At what point in time do you think that you reach an inflection point and that changes? I.e. do you think that with a larger amount of jackups entering the market in 2008, does demand wane from an operator standpoint for contract in jackups past 2009?

What we see is that there is quite a lot of new demand developing in the Arabian Gulf and our hope and our expectation is this demand will absorb this supply and maintain the term for a significantly long term. So our expectation is that it will continue to remain as it is.

Right now, we are seeing -- we continue to be surprised by the demand in the jackup side and we are sensing increasing demand going to come out of the Middle East, more than what we had anticipated. So right now, we are not seeing any change from the bid rate, the 180 to 220, and we are not seeing any lessening on the appetite of operators for term contracts. Many of them in the two and three year range and some in the five year range. So far, we have not seen any effect of the newbuild supply coming in and it is difficult for us to anticipate it because we seem to be continually wrong when we guess as to when that might have an impact.

That's helpful, Bob. So can you just kind of summarize by saying that you are the most constructive on the international jackup market at this point than you have been in the recent past?

I think that we are as constructive as we have been for the last six or nine months. If you go back a year ago and I was a little bit concerned and I was surprised on the positive side and I have continued to be surprised. So I am as constructive now as I have been for the last nine months or so.

And just my last follow-up question to that, all of that being said, what type of opportunities are there out there in the market for you guys to do something similar to what you tried to do with those three jackup newbuilds in terms of going into the spec market trying to potentially acquire a few of those rigs if you can get an operator-backed contract that allows you to recoup your cost of capital? With a more constructive outlook on the market, are you looking more at that avenue for growth?

We are looking hard at the opportunity to acquire some of the existing newbuilds, both jackups and floaters. I don't think that it would be fair to say that we really anticipate the opportunity to do anything like we almost did with the other three jackups where we had an option, but we are continuing to look at opportunities to acquire jackups that could fulfill some of this longer-term demand in various areas. There are various ways we are thinking about to try to do that, but I can't really talk to you about them right now.

That's helpful. I appreciate it.

Robert Mackenzie, Friedman, Billings, Ramsey.

I had a follow-up, Bob, on your comments about the share repurchase earlier. One thing we have seen one of your competitors do apparently somewhat successfully for their stock price has been paying special dividends. You guys talked about that a while back; dismissed it. Is there any thought to revisiting that decision?

I think it is fair to say that we constantly revisit the question of when and how we should return cash to shareholders. The fact that -- I assume you are referring to -- Diamond has chosen to use dividends as the method of returning cash. I don't think it is particularly applicable or a good comparison with us since, with the dividends received exclusion in the tax laws and a major shareholder, it is much more tax efficient for that major shareholder to take money out through the dividend. We don't have that same situation.

But having said that, we do continually look at the alternatives and we have not ruled out a special dividend in the future. Though, as I indicated, right now, we continue to think the best course would be stock repurchase.

Okay. And then in your guidance earlier about the interest expense throughout the year, you said assuming we pay down the debt, the interest expense will go down. Do you anticipate paying down debt throughout the year or would your preference be to use pretty much all the free cash flow to buy back stock?

Well, you saw that we paid down some of the short-term debt that we took on. You recall when we borrowed the money and accelerated our stock repurchase, we indicated that it was an acceleration of our repurchase plan and we borrowed short term with the intent to pay that down. Now that doesn't mean that you should expect us to just continue to use all of our cash flow to pay down the debt. We will be looking opportunistically about completing our repurchase program. So I would say that you just have to wait and see what we are going to do.

And the final question is are you contemplating any further newbuilds at this point?

We are contemplating newbuilds. We are in discussions with one operator about a newbuild. We have been in discussions for a fairly long time. I continue to handicap that discussion at a 50-50 probability whether or not we will come to fruition on it. There are some other operators out there who have some potential interest in newbuilds. At this point, given that the newbuild delivery date will probably be in 2010 with earliest on location mid to third quarter 2010, that is getting into the period where we will have some existing fifth-generation capacity coming free.

So our preference would obviously be to contract the existing capacity where we don't have to commit any additional capital. There are some potential opportunities where the capabilities of the existing fleet might not be enough to satisfy the requirement of the operator, which would then necessitate a newbuild. So having said that, I guess there is some, to sum it up, there is a chance that we will be having the opportunity to build another new rig, maybe two, but don't put a probability better than 50-50 on that.

Lee Cooperman, Omega Advisors.

I missed the beginning of the call because I had trouble getting to the operator, but you must have said something about the repurchase that I missed. But essentially is it the present intention of the Board to complete the existing authorization this year or you can't comment on that?

I don't want to comment on it and give a date. It is our intention to complete the program on an opportunistic basis and I would say that I would be surprised if we don't complete the program this year, but I don't want to commit that we will.

Arun Jayaram, Credit Suisse.

Bob, I was wondering if you could update us or give us a progress report on the three newbuilds and the two upgrade projects.

I'm going to ask Steven Newman to do that for us.

So on the three newbuilds projects, Arun, I would tell you we're very early on in the schedule. We are in the process of finalizing our engineering. So we anticipate being at what we call design freeze within the next five or six weeks. We will actually start cutting steel on the first hole later this month and so for all intents and purposes at this point in time, everything remains on track for those three projects.

For the two major upgrades, principally the 702, which is in shipyard right now, we have received all of the critical equipment required for that project. Now there is some additional equipment that the rig will need prior to going to work, but our schedule with our vendors for that equipment doesn't cause us any concern right now. So we are simply managing that project to the critical near-term milestones.

So we are focused on getting the engines restarted. We are focused on getting our people back into the accommodations and getting the rig ready to commission and depart the shipyard. So we are fairly comfortable with the schedule for that rig right now and obviously the 706 is a bit longer term in perspective. So we are comfortable with what we have seen on the 702, that we feel like the 706 is going to go similarly well according to the schedule.

Great. David, regarding the North Sea semi market, there are, as you mentioned, some sublets out there. I think BP, CNR and Shell have some sublets. What are you seeing in terms of pricing in this secondary rig market?

For the most part, the operators are subletting them at the contracted rate they took the rigs on. So that would be at a discount to market rate. But as I have mentioned in the comments, we see that three of those five sublets have already been absorbed and the other two we understand are very close to closure.

Additional to that, we undertook a survey with all the North Sea operators and the sense we have after that survey is that the remaining operators that have contract commitments in the North Sea are to firm prospects. So we consider the secondary market to an extent fulfilled.

That's very helpful. And lastly Greg, on FIN 48, it looks like you are raising I guess the income tax guidance a little bit. Does that impact your cash tax rate as well?

Not in the short term. If you think FIN 48 is a good predictor of what will eventually settle tax dispute [facts]. Maybe it does. We are not convinced it is a very good predictor. So I would say no; it won't really increase our cash tax rates over the long term.

Dan Pickering, Pickering Energy Partners.

Greg, looking at the rolling forecast process that you guys have been putting in place over the last couple of quarters, can you just give us a qualitative update on how you feel that process is doing in terms of anticipating both your various cost categories?

We think it is improving every quarter, especially on the shipyard and maintenance side. There is a lot more focus in looking out at our maintenance projects and our shipyard projects and everything. I guess one measure of how it has improved is our '07 expectations for costs that we originally put out in August and then updated in November and I would say to now, it really not moved significantly other than items like integrated services, recharge revenues and inflation that don't have any bottom-line impact. So we think that we are keeping everybody well-focused on looking forward. Now we still have improvement opportunities and we are focused on that and there will be a lot of volatility in costs this year depending on shipyard timing. But at least from the rolling forecast process, we see continuous improvement.

And just to clarify or get a definition, when you say recharge revenues, these are -- that's essentially reimbursables that are going directly out to the customer?

That's right. It is either things we are buying on the customer's behalf or the customer asks us to pay a safety bonus to our crew and they pay for it. But we have to record the revenue and then record the offsetting cost. So there is really either no margin or very small margin in those items.

Thank you. And then, Bob, if you could just address for us, as you look at your '08 and '09 availability -- I think on some of the higher-end assets, there is a little bit of time for several rigs, two or three rigs. As we think about the next six months and the delivery of some new assets coming to the industry, do you want to be fully contracted for '08 and '09 soon or are you kind of playing the spot market?

Well, if you talk about the floater market, we are, for all intents and purposes, on the high end, have no availability in '08. If you look at our fleet status report, there is one rig there that has some time, but it has an option on it and we are already in very advanced discussions with the customer. So we really don't have any time to be bidding into the market.

We have got a little bit of capacity in '09. I think that is only on the order of 20% to 25% of our high spec capacity that is available in '09. We are marketing rigs -- marketing our rigs and we are having some discussions with customers for '09 availability. We are not anxious to go ahead and lock it up. We could do that probably if we were content to take somewhat lower rates, but we are still convinced this market is going to be extremely strong and we are, in most cases, continuing to try and get higher rates. So whether or not you will see us announce any new contracts for long-dated starts like '09, in the near term is tough to say because there is not a lot of urgency on our part to commit to it and the operators have a long time to look for alternatives.

Okay. And just to clarify, your comment that the operators would like a discount on '09 time at this point relative to kind of current contracts, is that -- is that a big number, 30%, or is it a small number, 5%?

I'm not sure I would characterize it as the operators want a discount. The operators have been resisting the rates that they have been having to pay for a long time. They continue to resist when we indicate the rates we expect in '09. I am not sure that I would characterize that as saying they want a discount from today's rates. They just want the lowest rate they can get all the time.

Roger Read, Natexis Bleichroeder.

Just real quick, Greg, if I can confirm what you said the tax rate expectation is for '07 at this point?

17% to 20% depending on where we finalize our FIN 48 adoption.

Okay. Then in terms of your rig fleet as you stand today, you have gone through selling of several assets this year and last. What do you -- are you happy with the rig fleet as it is now at least in terms of what you would get rid of outside of maybe some of the tender rigs or is there anything else you would want to dispose?

I think that there are a number of other assets that we would consider to be on the lower end of our fleet capability that while we are not actively trying to sell them in today's market, there is a significant amount of interest in assets and we are seeing some offers that may tempt us if it is received -- if they are received for some of these low-end, nonstrategic assets. So I would say we are not actively trying to sell a lot of equipment, but don't be surprised if you see one or two other sales come up simply because we are taking advantage of the prices being offered in the market.

Okay. And getting back to the operating cost outlook in terms of -- you mentioned several times the impact of a weaker dollar. Are there any situations where you are not able to recover from a weaker dollar and conversely if the dollar were to strengthen this year, are there any areas where you necessarily would benefit if that occurs?

As I indicated, versus '06, there is about a $15 million impact on our cost and that is hedged by -- a natural hedge by a related revenue impact of about 80%, say $13 million. And that is really the mix of our contracts around the world. So certainly there is -- 20% of that impact is not hedged, but 80% is hedged. Now that hedge works both ways. So if the dollar strengthens, our revenues will drop. As the dollar weakens, the revenues go up. So the hedge works both ways. But about 80% of our currency exposure around the world is naturally hedged by our day rate contracts.

Robin Shoemaker, Bear Stearns.

I wanted to ask, Bob, you have commented in the past about deepwater newbuilds and the somewhat optimistic timeframe for delivery that you see in the current schedule of deliveries. And I wonder if that is still your view. There is quite a few deepwater newbuilds coming out of Daewoo and Samsung in Korea ahead of yours and from what you see, are those likely to meet scheduled delivery dates or do you see trouble ahead in that sense?

I don't think I have changed my view. I can't tell you that we are monitoring the progress of any of these competitors' rigs carefully and we see any slippage, but I continue to think that when you get close to delivery date and you start going through the commissioning process and all of that, you are going to see some significant delays and I think I have said before I wouldn't be surprised to see an average delay of six months and my guess is that that is probably still fairly accurate.

Okay. And do you sense that any of -- of course many of the rigs that will be scheduled for delivery in '08 ahead of yours do have contracts. But do you sense -- are any of them potential rigs that you might buy or is that possibility now off the table?

Well, I mentioned earlier on the call that we are looking at opportunity all the time to try and acquire some of the existing capacity that is under construction. You have to put a low probability on success in those type of endeavors, but there are opportunities that come up fairly frequently I would say and under the right circumstances, if we could get the right deal in, we would proceed to do that. But there is a lot of factors that have to be considered there, not the least of which is the asking price and then the details in terms of due diligence on the shipyard contract and where there they stand and to the extent they already have a drilling contract, what the terms of that are.

Yes, right. Okay. Just one final thing. The asset sale program seems to have been quite successful here recently, especially the price you got for the Wildcat. Is there any -- is the asset sale program done now or are there still a few non-core assets that you might dispose of?

I wouldn't characterize it as done if by that comment you would be surprised if another sale or two happened. We are not actively trying to sell assets, but there is so much interest in purchasing some of the older assets. To the extent that we get offers for some of the less competitive equipment that we have, we have to consider it. So don't be surprised if you see another sale or two, but I don't think that you should expect to see very many more sales.

Pierre Conner, Capital One Southcoast.

I think this question might be for Steve. And could you comment about your uptime performance, you know on contracted days, maybe even by category, how that did in the quarter and sort of where you feel your ready -- get higher and higher rates of course, the sensitivity to being down for 24 hours or when you might get off contract I'm sure heightens.

Yes, I think Greg commented in his comments that our revenue performance in the fourth quarter was up slightly on revenue efficiency. And so our folks around the world continue to be focused on delivering the best uptime possible within the context of the maintenance programs and the operating plans that they're working with.

And this is a little bit of performance sequentially improvement and do you feel there's a little bit more you can do on that, Steve, or from here it's just maintain your high level that you've got?

We've given our folks very aggressive targets and they continue to work towards those targets. Whether we'll continue to see the same sort of upward trend over time I think is going to be a challenge for us, but certainly I think we're optimistic about our ability to perform at this level.

For example, our overall revenue efficiency in the fourth quarter was about 96% versus 95% for the full year. So as Steven said, a small uptick and we're hopeful we can continue that. Now that does vary a lot by asset class, so we see 95%-odd for our floater fleet and over 97% for the jackup fleet. So as floater day rates continue to tick up as new contracts roll on, that efficiency does hurt us, that lower efficiency on the floater fleet, that we are constantly focused on.

Right. Okay. That's helpful. And my other question is for Bob. It is just maybe more strategy-related to the backlog and contracting terms, etc., where you feel -- how much farther out you want to go. You commented that there is availability in '09, but neither you nor the customers have a lot of urgency. Are we getting to the inflection point close where the burn rate, the revenues in the quarter and the additions to the backlog begin to balance? We did see a sequential improvement in the backlog even with $1.2 billion of revenue. At this point, I know you're not managing for backlog, do you see that inflection point though?

It is tough to call the inflection point, but I would say we almost by definition have to be coming close because our burn rate is accelerating pretty dramatically as our revenues ramp up and we don't have the inventory of rig days available to contract near term to offset that. So to the extent that we have already contracted so much out into the future and there is less urgency to contract that capacity, which is forward start by two or three years, then I think you are going to start to see a potential turn here in the not too distant future.

Now I wouldn't read too much into that. I think that is just a natural progression here as we go forward and our revenues ramp up. It's just really not possible to keep up contracting as much backlog as we are going to start burning through as our revenues get to these higher levels.

Right. And that fits with what you said earlier about the urgency in the '09 and later. Great. Thanks, gentlemen. I will turn it back.

Ian Macpherson, Simmons & Company.

I just want to have a quick question on the ultra deepwater fleet. You may have alluded to this in your response earlier, but with the Sedco energy coming available at a reprice in January of '08, did you say that you're working on a negotiation for an option on that rig?

I think that the energy has an option already existing. It is a one year option, but we are in negotiations with the customer about an extension, which would eliminate the option and add additional term to the contract.

Okay. It seems to me that the day rates on these rigs are heavily influenced by the term structure or how many years on the term. So with that in mind, are you looking at something along the two or three year range for an extension or would it be more along the lines of a four to five year extension?

I think since we are in negotiation, we probably ought to just be silent on that. You should hear an announcement I would expect in the not too distant future.

Jud Bailey, Jefferies & Co.

Bob, you commented a little bit on the U.K. market already in the semi to mid-water market in that part of the world. I would be curious to get your thoughts on the outlook for Norway. You've had consolidation among the two major operators there. I would be curious to get your thoughts as we go over the next two, three, four years, how that might impact the market in that part of the world.

We are seeing very bullish signs in terms of the activity in Norway, but I will let David comment a little bit more on that.

We have had a few conversations with Statoil subsequent to their merger announcement and they remain committed to carry on the activity that was originally planned for both companies. So at this stage, I think one plus one is going to equal two. We have seen a lot of evidence in the past where a merger results in slightly less than one plus one post-merger. But all indications we have from Statoil is that they are going to pursue both programs in parallel.

What about outside of the North Sea like in the Gulf of Mexico, any change there?

No. In fact, one of the values in this transaction was getting that position in the Gulf of Mexico. I think Statoil is fully committed to the activity in the Gulf of Mexico. They see a lot of upside there. They have issued a few reports where they are looking at production rates declining in Norway. So their intent to go international is to more than offset that production rate, production decline.

And my follow-up is on India. Can you maybe comment a little bit on what you are seeing there on both the deepwater side and for the mid-water fleet?

India remains very robust. Over the past few years, we have seen some spectacular growth in India from basically no activity in deepwater to activity of between three and five strings. That has all been driven by exploration activity, Reliance and ONGC have had some success and now they are looking toward some development work on the back of the exploration success.

If you look at the license commitment and the drilling commitments that go with the license rounds, they are way behind on their drilling commitments. So there is every reason to believe that not only will the activity remain at current levels, it will increase.

On the mid-water sector, the same story holds up. I will even add a comment on the jackup sector because ONGC, most of the jackups in India are locked into the Mumbai High development and ONGC have aggressive plans to increase the recovery rate on Mumbai High current levels of about 28% to something around 40%, which will require a lot of additional drilling. So we see a lot of upside on the jackup activity in India as well. India is a very hot market right now.

Thomas Curran, Wachovia.

Greg, I was hoping you could -- you spoke to the expected ramp up in the integrated services revenue. Could you tell us what the gross margin was on that revenue in the fourth quarter and then what you are expecting for 2007?

It is roughly -- it was less than 5% in 2007; probably closer to 3%. That will grow over the integrated services period, but with a lot of startup costs. It is pretty low margin. You recall, we didn't really do that business to earn the margin; we did that because it allowed us to get five jackups on three year contracts. So it was more strategic in terms of contracting our jackups then entering into a new profitable line of business.

For winning that business in India?

What's that?

For winning that business in India?

That is exactly right. By offering the integrated services, we believe that allowed us to win those long-term contracts on the five jackups in India.

There is another driver for us there too in that we think that we significantly enhance the efficiency and the safety of our operations by managing the full integrated service package there. So that was a significant consideration for us too.

And then which rigs ended up seeing less downtime in the quarter than was indicated in the fleet status reports? What were the reasons and then how many days of variance were there for each?

That is a really too detailed question that you can talk to John later. But in general, the big changes from our last earnings call was the mobilization of the base where we had expected it to be mobilizing during the fourth quarter, but it actually got a new, very nice contract in Australia that delayed the mobilization at a good day rate. So that was the main change. There were certainly other minor changes, but John can go over that with you.

Okay. And then lastly switching gears here to new products. I was wondering if you could provide us with an update on the testing and commercialization schedule for the 1250t Modular Derrick Drilling Machine. In particular, I was wondering if any of your guys in the field or any of your prospective customers for this model have been complaining about an abnormal level of problems with performance of other top drive products.

The testing and delivery schedule for the new MDDM is on schedule. So we have had folks regularly visiting the Norway fabrication facility to check on the progress of that. We expect the prototype to be ready for some very robust factory acceptance testing this quarter and we are currently contemplating a field trial later this year. So we are confident that that project is well on schedule for delivering the new generation of drilling machinery to our newbuild projects. We don't have customers that complain inordinately about the performance of the existing equipment that is out there. Though they are eagerly listening to what we are saying about our new machinery and they want to be kept updated regularly on it. There are some discussions about field deployment of that equipment on existing rigs as well.

So then looking out to 2008, how many rigs, other than in newbuilds, how many existing rigs do you think you might currently upgrade to this top drive with and then what is the outlook for potential external sales?

The focus right now is on delivering the current production schedule for the newbuilds and once we get -- as we get confident that we can meet that schedule, then we will start exploring additional opportunities for deployment within our fleet.

Which will probably be governed by negotiations with our customers. So it is tough to say.

And then as for external sales?

Well, because of the relationship we have with Maritime Hydraulics, we do have preferential access to the production stream, but it is not out with them and their capability to sell it to other folks as well if we ultimately decide not to take the units as they become available.

We don't get any income from external sales.

That was what I was getting at. I just wanted to clarify that. Great. Thanks a lot. Very helpful, guys.

Alan Laws, Merrill Lynch.

We have a theoretical or a strategic question of sorts for you. Assuming that we see sector consolidation among some of your peers this year, what would Transocean's reaction to that type of sector activity be? Would it force you to look a little harder at similar opportunities or would you be comfortable sitting out a round of consolidation in the sector?

I don't think it would cause us to look any differently at what we are doing. We are very interested in consolidation ourselves, but I think the benefit of consolidation in this business is significant and I would applaud any consolidation that happened. It wouldn't cause us to change how we think about consolidation. We think about that all the time and it wouldn't change our criteria for accomplishing it.

That's a good answer. What do you think the probability of sector consolidation is in 2007 if you had to handicap it? Put you on the spot there.

I have never been very lucky in my life. So anything I handicap is a wrong guess and on this one, I couldn't really give you any significant odds. I know Seadrill has made it very public that they are interested in consolidation and you have to give John Fredriksen high marks for getting done what he sets his mind to do. But having said that, other than that, I don't know that there is a very high probability of any of the other existing contractors getting together in this environment. So I just couldn't really give you any handicap on it.

So you need Seadrill as the catalyst sort of thing?

That is the most obvious catalyst.

You have talked about improving the jackup fleet a couple of times and if you were to be involved in M&A, not just in corporate, but asset M&A, would you be leaning towards carving out more niche deepwater asset opportunities or would you tend towards the jackup side since there seems to be more availability in those opportunities?

I think that we would be interested in either one. We are obviously interested in increasing our position in the deepwater harsh environment business because that has clearly been the strategic focus of the Company. On the other hand, if we could upgrade our jackup fleet, we would be very interested in that. So it comes down really to a financial analysis and if we could get a reasonable transaction, then we'd look at it for either class.

[Lakar Saed], Tristone Capital.

Bob, do you have any guidance for integrated service revenues for '08?

Greg, do we --?

It should be more or less flat with '07. The five rig contracts will continue on, but then the Seven Seas will tail off. So I would say roughly flat for both sides.

And then in '09, how many of those contracts kind of end?

Well, they are three year contracts all beginning in '07. So they will pretty much go through the end of '09 and start [ending] in the first quarter of 2010.

Okay, great. And then on -- regarding new construction, do you have any slots available in the shipyards should you get any additional contracts to build a deepwater drillship?

We have a continuing dialogue with Daewoo who are going to build another Clear Leader class rig. I think that the difficulty that both we and Daewoo have is the delivery dates for equipment. So it is tough for them to commit to a specific date until they get a firm idea of what we're going to do because they can't get firm commitments out of the equipment suppliers. So right now, I would have to say we don't have anything firm.

So what could be the earliest delivery then if one has to guess? In 2010 sometime?

Our guess right now would be first or second quarter, probably second quarter 2010 if we were to order it today. Every day we delay makes that more problematic.

Right. And how much do you thing would it cost to build something like a Clear Leader today?

Difficult to say, but I would put it in the $650 million to $700 million range.

So prices have not really gone up that much then. You have been in that $600 million kind of range? There have been numbers thrown around like getting closer to $1 billion for new construction. So you think that is kind of outlandish?

Well, I am not sure I would agree with you that the numbers haven't gone up much. Going from $600 million to $700 million is a pretty significant increase. We are not seeing a $1 billion type trends at all at this stage for the class of rigs that people are building.

[Renee Valani], [Forest].

My question was about cost inflation and while I realize there is going to be volatility in cost inflation, is 12% to 15% a reasonable factor for 2008 as a potential increase?

It is really hard to say. What we have seen so far in broad terms is hovers around 10%. There is certainly categories of items that are much more than that, but there is other things that are less than that. So what we are seeing now and what we expect in '07 based upon the vendor price increases we have seen is that 10% range. Could that accelerate to 12% to 15% in '08? It could on the personnel side and on the vendor side. But right now, we see 10%.

Okay. Well, it was a good quarter. So I'm glad to see Bob was pleasantly surprised by the trends in the jackups and congrats.

We always like to surprise Bob.

We have time for one more question.

Joe Agular, Johnson Rice.

Actually I was going to ask a question please on the newbuild cost of a high-spec semi. If you had priced one out recently as well?

I wouldn't say that we have priced it out recently. So any cost estimate I think we would give you today would be a bit dated.

Well, is it north of $600 million at just a guess is what you all would expect?

No, not for a newbuild semi. I think you could get a semi for something less than the rigs we are building now. But again, we would have to reconvene with the shipyards and reengage in that dialogue to be able to give you a meaningful current estimate.

But I guess just generally the inflation -- shipyard cost inflation is still an issue and is a factor in your contractual discussions.

I think both shipyard cost inflation, but really vendor cost inflation. The cost of the drilling equipment is probably inflating faster than any of the individual components on the shipyard itself.

Interesting. Thank you very much.

Well, we thank all of you for participating in the call and we look forward to continuing a dialogue throughout the quarter and then updating you again next quarter. Thank you very much.

Once again, that does conclude today's call. We do appreciate your participation and you may now disconnect.