Transocean Ltd (RIG) 2007 Q1 法說會逐字稿

Good day everyone and welcome to the first-quarter 2007 results 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, Deanna. Good morning and welcome to our review of the financial results for the first quarter of 2007. A copy of the press release covering our financial results along with the 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 on the Company's website by selecting Investor Relations followed by news and events and webcasts and presentations.

Participating in this morning's call are the following Transocean executive officers -- 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 such as the risks, assumptions and uncertainties involved in these forward-looking statements -- include the level of crude oil and natural gas prices, rig demand and operational and other risks which are described in the Company's most recent Form 10-K and other filings with the U.S. Securities and Exchange Commission.

Should one or more of these risks and uncertainties materialize or underlying assumptions prove incorrect actual results may vary materially from those indicated. Also note that we will use various numerical measures in the call today which are or may be considered non-GAAP financial measures under Regulation G. You will find the required supplemental financial disclosure for these measures including the most directly comparable GAAP measure and an associated reconciliation on our website. And for your convenience non-GAAP financial measures and a reconciliation table are included with today's press release. That concludes the preliminary details of the call. I'll now turn it over to Bob Long.

Thanks, John, and good morning to all of you on the call. You'll have seen from her press release that we had an excellent quarter with earnings on an adjusted basis of $1.77 per share as we continue to see earnings growth driven by our significant backlog and the rollover of contracts to new higher day rates.

We also want to recognize the tremendous contribution of our people around the world whose focus on execution and operational excellence delivered 97.5% revenue efficiency fleetwide during the first quarter. This resulted in revenues somewhat higher than we anticipated and contributed significantly to beating earnings estimates.

We also did well controlling costs in the first quarter, but I caution you not to annualize the first-quarter number and not to assume we will come in under our previous cost guidance. Greg will update you on cost guidance in a few minutes.

I told you last quarter that we started 2007 with a continuation of the very strong market conditions that we had experienced in 2006, those conditions continue as we see very strong demand for rigs in all asset classes where we compete. We are particularly encouraged by the increasing interest we see in deepwater drilling with new demand developing in the Far East, West Africa, Brazil and the Gulf of Mexico. We've even started to see requirements from several operators for worldwide exploration rigs with deepwater capability.

We're pleased that we were able to develop a relationship with Pacific Drilling that allows us to market two ultra deepwater drillships which will be delivered in 2009. This will allow us to meet some of our customer demands which we otherwise would not be able to satisfy. We're already engaged in discussion with operators about contracts for the rigs and intend to exercise our option to purchase 50% of both rigs through an ownership interest in a joint venture as soon as we secure a contract on one of the rigs. This could mean that we would effectively be buying 50% of one of the rigs on speculation, i.e. without any contract coverage. But we're confident enough in the deepwater demand that we're comfortable doing that.

I think our partnership with Pacific Drilling is an excellent deal for both sides; we get additional deepwater capacity much earlier than we could otherwise do so and they get our operational and marketing expertise together with our experience managing drillship construction projects. We will be providing construction advisory services at our cost until we exercise our option to purchase a 50% interest.

I'll turn this over to Greg to give you more detail on the numbers and then David Mullen will give you more color on the market. But before I do that, I remind you again that we will not be commenting on our stock repurchase program. We did repurchase $400 million worth of stock in the first quarter at an average price of around $77 a share; that leaves $600 million on our authorized program. And yes, we do plan to complete the program and anticipate that we will do so before the end of the year, but I'm not going to be giving any detail on when we might be in the market. Greg, over to you.

Thanks, Bob, and good morning to everyone. In the first quarter of 2007 we had net income of $553 million or $1.84 per diluted share or $1.77 per diluted share after adjusting for gains from sales of assets. This compares to net income of $621 million or $2.05 per diluted share in the fourth quarter of 2006 or $1.25 per diluted share again after adjusting for gains from rig sales in the TODCO tax sharing agreement income.

Total revenues for the first quarter improved to $1.328 billion from $1.186 billion in the fourth quarter. $131 million of this increase in revenues resulted from a commencement of higher dayrate contracts. Additionally, the commencement of the reactivated C. Kirk Rhein in India, the return to operations in the first quarter of the deepwater expedition after its mobilization from Brazil to India, and additional integrated services activity in India all increased revenues for the quarter.

The first quarter also benefited from favorable revenue efficiency compared to the fourth quarter. These increases were partially offset by the mobilization and shipyard of the Jack Bates and the effect of a shorter quarter. Revenues in the first quarter were higher than expected primarily due to the marked improvement in our revenue efficiency which rose to roughly 97.5% in the first quarter of 2007 compared to 95% during most of 2005 and 2006. The improved revenue efficiency was mainly due to lower downtime and higher incentive revenue during the quarter, much higher than we have seen for the last several years.

This was an outstanding achievement by our operations personnel around the world. However, I would caution you that maintaining this level of revenue efficiency in future periods will be extremely challenging and you shouldn't necessarily reflect this in your models going forward.

As we look forward we believe that revenue increases due to increased activity in the second quarter of 2007 and the commencement of higher day rate contracts for the remainder of 2007 should continue to be very meaningful as shown on chart 2. With the completion of our rig reactivation program we continue to expect out of service time in 2007 to decrease compared to the level we experienced in 2006 as shown on chart 3. We expect our integrated services revenue to increase from $30 million in 2006 to $185 million in 2007 mainly due to the commencement of the five new integrated services contracts in India. Finally, we anticipate that our recharge revenue for 2007 will be roughly $105 million.

Operating and maintenance expenses in the first quarter were $568 million, slightly lower than the $570 million we incurred in the fourth quarter of 2006. Versus this preceding quarter our support in integrated services cost increased by $23 million as shown on chart 4, chiefly driven by the expected increase in India integrated services activity. This cost increase was more than offset by a decrease in out of service cost of $18 million due to the completion of the C. Kirk Rhein reactivation and reduced other shipyard activity as well as a decrease of $6 million in our in-service cost due to a temporary reduction in the number of maintenance projects carried out on operating rigs during the quarter.

The level of operating maintenance cost in the first quarter of 2007 was slightly lower than we expected as a number of rig maintenance projects and two short out of service periods were postponed to a later date in 2007. So we do not anticipate that this favorable variance will have much effect on our total 2007 expenditures.

We continue to expect our total operating maintenance cost for the entire year 2007 to be between $2.43 billion and $2.53 billion. This continues to include an expectation that core inflation for 2007 will continue at a roughly 10% rate versus 2006 excluding the effect of rig reactivations, rig sales and the additional training, recruitment and development cost necessary to satisfy our new build and to upgrade crew requirements as well as in response to anticipated increases in attrition.

For the rest of the year we expect that the level of cost each quarter will continue to be driven primarily by inflation pressure, the amount of shipyard and mobilization activity, the timing of various maintenance projects on the rigs and the level of our integrated services activity. For the remaining quarters of 2007 we expect operating maintenance expenses to be significantly higher than the amount in the first quarter of 2007 due to a temporary increase in the number of maintenance projects scheduled to be carried out on operating rigs during the next two quarters, the return to operations of the Jack Bates and increased shipyard and integrated services activity.

General and administrative expenses were $26 million in the first quarter which we expect to trend upward with inflation for the remainder of the year. Depreciation was roughly $100 million in the first quarter and we expect it to gradually increase and reach $110 million to $115 million in the fourth quarter of 2007.

Capital expenditures in the first quarter were approximately $465 million. Approximately $302 million of that amount relates to our three new build drillships, $58 million relates to the two 700 series upgrades, and the remainder relates to the life extension upgrades of the Trident 14, Trident 2 and Discoverer 534, contractually required upgrades, fleet spares and normal operations.

We expect capital expenditures for 2007 to be roughly $1.4 billion of which $650 million relates to our three new build drillships and $300 million relates to the two upgrades. The $1.4 billion estimate does not include any capital expenditures that may be made if we commit to additional new builds or if we choose to exercise our option to purchase an indirect ownership interest in the two Pacific drilling new builds.

Interest expense, net of interest income, decreased to $32 million in the first quarter as debt levels were reduced and capitalized interest increased to $13 million in line with greater investments in upgrades and new builds. During the remainder of 2007 we expect capitalized interest to increase to roughly $20 million per quarter by the end of the year. The resulting amount of net interest expense will depend on whether free cash flow for the remainder of the year is used to make new investments, repay debt or repurchase shares.

Other net in the first quarter of 2007 included $15 million related to the Global Santa Fe patent infringement settlement. For the rest of 2007 we expect to recognize roughly $1 million per quarter related to the 3% royalty on the two global dual activity rigs which are operating.

For the quarter our annual effective tax rate was 13.7% excluding the gain from dispositions of assets. We adopted FIN 48, the new accounting standard for uncertain tax positions, in the first quarter of 2007 and the adoption resulted in an increase in tax liabilities and an adjustment to retained earnings of $145 million primarily related to Norway.

Our effective tax rate in the quarter was significantly lower than we expected as our geographic earnings mix and increased profitability lowered our effective tax rate more than we anticipated. This was complemented by the fact that the impact of FIN 48 on our ongoing effective tax rate was much lower than expected. We currently expect our effective tax rate to be approximately 14% for the remainder of 2007, again excluding the impact of any gains from asset dispositions and any TODCO tax sharing agreement income.

Finally, I'd like to make a few comments regarding payments we have received and expect to receive under the TODCO tax sharing agreement. As a reminder, we have received and recognized as other income $62 million of tax benefits from TODCO since their IPO. Additionally, we have received another $118 million with respect to the 2006 tax year that will get recognized later in 2007 when TODCO files their 2006 tax return.

Other than tax benefits related to the exercise of employee stock options, there remain roughly $200 million of tax benefits that we expect will either be paid out over time as utilized or 80% of any amount not yet utilized will be paid out under the change of control provision in the tax sharing agreement even when Hercules completes its acquisition of TODCO.

For example, if the Hercules acquisition of TODCO were to occur on July 1, 2007 we would expect to receive roughly $50 million for the 2007 short period and another roughly $120 million related to the 80% change of control payment. In addition, we believe there remains $19 million of tax benefits related to employee stock options, calculated based on our stock price on April 30, that should be paid out as the options are exercises.

Thus we could recognize more than $300 million in other income this year or next from the TODCO tax sharing agreement if the Hercules acquisition of TODCO is completed with the timing depending in part on when TODCO files its tax returns and when stock options are exercised. With that I'll turn it over to David for the marketing outlook.

Thanks, Greg, and good morning to everyone on the call. The marketing and purchase option agreements with Pacific Drilling enables Transocean to acquire a 50% interest in a joint venture company through which we and Pacific Drilling will jointly own the two drillships. This is a positive deal for both parties. For Transocean it provides access to two ultra deepwater drillships with very favorable delivery schedules. This agreement whereby Transocean can buy in at cost recognize the value to Pacific Drilling of our marketing, operational and new build construction expertise of these complex assets. We view this arrangement as a win win for both parties.

Once again we had a good quarter in firm contract additions. The current backlog stands at approximately $21 billion, essentially flat to the last quarter earnings call. I will start with a discussion of our high specification fleet which includes our deepwater and harsh environment assets. Backlog for the high specification units continues to increase with a fixture on the Sedco Energy at $478,000 a day for a term of three years in West Africa and BP exercising the one-year priced option on the Sedco Express in Angola.

In the short time since concluding the marketing and option agreement with Pacific Drilling we have experienced very strong interest in the new build drillships amongst a number of operators. With very limited capacity available in 2009 we anticipate securing a firm commitment during the period of the option. Ultra deepwater demand continues to outstrip supply with unsatisfied demand in the emerging areas of Mexico, Asia and India, while the more mature areas of Angola and Nigeria, U.S. Gulf of Mexico and Brazil continue to look to add more deepwater capacity to fulfill the backlog of very substantial development and exploration projects.

In the midwater sector we also continue to grow backlog with some leading-edge fixtures. The following four leading-edge fixtures in the first quarter of 2007 translated into approximately $530 million in additional gross revenue backlog. Chevron signed the Sedneth 701 in Angola at $360,000 a day for a period of 30 months. BP signed the Transocean Legend in Sakhalin at $405,000 a day for a period of one year. Total signed the John Shaw in the UK North Sea at $380,000 a day for one well with an expected duration of 100 days. And Nippon Oil signed the Sedco 601 for one well at $330,000 a day.

The strength of the midwater floater market is reflected in this 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 most of the mature areas and new demand emerging in Libya, Mediterranean, Columbia, Venezuela and Southeast Asia.

In the U.S. Gulf of Mexico we are not seeing the level of demand for term contracts that we are seeing in other geographic areas. There are however numerous potential opportunities for short-term work. Our focus will be in capturing some of the longer-term opportunities outside the U.S. Gulf of Mexico.

Turning finally to our jackup fleet. There are no new fixtures to our jackup fleet in this quarter; however, we are in advance discussions with an operator on a multiyear deal for one of our jackups and in discussion with a number of operators are jackups deals with terms of approximately one year. Availability within the fleet for 2007 is very limited. As such we are therefore targeting forward start contracts into 2008 and beyond.

Consistent with our comments from the fourth-quarter 2006 earnings call, the jackup international sector continues to absorb the delivered new build capacity at premium rates. That concludes my marketing comments, so now I'll turn it back to Bob.

I think with that we're ready to entertain any questions someone might have.

(OPERATOR INSTRUCTIONS). Doug Becker, Banc of America.

Just wanted to get a little more color on the revenue efficiency. Just talk a little bit more about that and maybe some things that we should be watching from the outside looking in going forward. Is it just primarily a function of utilization on the performance bonuses or is there something else we can be looking at?

I think we'll have Steven Newman answer that question.

Doug, I think there are a couple of things that play into this revenue efficiency story and, as Bob and Greg both said during their prepared remarks, it's really all down to our people. They've been focused on a couple of key initiatives over the last few years that I think are really starting to pay real dividends. One of those is standardization of equipment and processes. Another one of those is rigorous attention to detail when they're executing their procedures. And so both of those deliver real confirmation in the performance and the reliability of our equipment.

A couple of years ago we put together two teams that were focused on the two most contributory pieces of equipment in our downtime story and that is subsea equipment and top drive. And so we've seen some initiatives come out of those teams like dual IBOPs and redundant lube oil systems for our top drives that really address top drive reliability. And so when you put all those things together our equipment downtime story is really starting to pay dividends in terms of the revenue efficiency our people are delivering.

So it sounds like while you don't want us to get too carried away with it, it's real in things that should be continuing going forward?

Yes, but I would caution you. I think there are some areas we're still paying a lot of attention to. One of those is attrition, as Greg mentioned, the dilution of talent and expertise amongst our rig crews. And so we're focused on retaining our people and retaining that expertise. Now the other area we're continuing to pay a lot of attention to and focus on is the performance of our vendors in terms of their supply of reliable equipment to our offshore rigs.

And so, I have no doubt that our people will continue to focus on their performance, but there are a couple of things that we need to continue to pay attention to in order to maintain this high level of performance.

Okay. And this is probably for Steve as well, just wanted to get an update on the 702 upgrade?

Yes, we continue to watch that project very closely. I'll tell you that all of the electrical equipment, which was a key component of this upgrade, all that electrical equipment is on the rig. The engines and generators have been load tested and so we're seeing great progress there. We're in final outfitting on the accommodations so we hope to have our people in the accommodations, living on the rig in the next couple of weeks. All of the key drilling equipment is at the shipyard so that's ready for installation and they're in final outfitting and commissioning on the drill floor on the derrick.

The key subsea equipment, the BOP and the BOP control system is en route, that's been fully factory tested, so we're confident that once that arrives on the rig that will be ready to go. So we're still targeting an on-time delivery and a commencement of that contract in October.

So it sounds like most of the equipment is either being delivered right now or already on the rig?

That's correct. The key drilling equipment is there, the BOP is on its way.

Okay. And then, Bob, just finally, could you give a little more color on how the deal with Pacific came about? And really within the context of were there some company specific issues or is this just the sign of things to come and we're finally to the point where kind of the bid ask spread for some of the Norwegian rigs is finally narrowed to the point that some of the larger public companies are interested?

I guess on the first part of your question, how it came about, sometime back, almost a year ago, we realized there were some target markets and some customer requirements that we felt were really strategic for us and we would like to target getting and that we didn't have any assets to really satisfy the demand in the time period they wanted. So we made a focused effort to see if we could identify some possibilities to acquire some of the assets that would be available in time and we started a dialogue a long time ago.

But these are the types of things that take a while to come to fruition and I don't detect really, on the second point of your question, that there has been any (technical difficulty) movement in price expectations from the builders of these rigs. So right now we're not seeing any opportunities that have changed much from when we started getting serious booking about a year ago. So the price expectations are not moving or not coming down.

Okay, that's helpful. Thanks.

Darren Horowitz, Raymond James.

Good morning, thank you. I was curious -- kind of a follow-on to that previous question. When you're looking at the Pacific deal from an IRR standpoint it seems to be very attractive. What kind of opportunities are out there for new build jackups to structure a similar such as that as was struck with Pacific, certainly given the majority of a lot of that new construction is on contract? And at the end of the day in terms of gaining premium assets and getting them into the market in the shortage duration, it seems like the most beneficial way to grow the fleet. So do you think that that's going to be a trend going forward?

Well, in terms of the jackup opportunities, frankly right now we don't see a lot of opportunities for acquiring jackups at prices that seem to make sense. We certainly don't see any appetite among the owners of the available jackups to offer any kind of an option agreement, a contingent arrangement similar to what we were able to do with Pacific Drilling. So I'm not optimistic that you're going to see much happen on the jackup side of the business.

Bob, do you think that that outlook changes when we approach the middle of next year when all that new capacity is scheduled to come due?

That's really hard to say. We've continued to see a lot of success. The market has been so strong, certainly on the floater side. We continue to see quite a few of these new build rigs getting contracted at very, very nice rates. I think one of our competitors just announced a job yesterday for another one of the speculative new build floaters. So something like 75% of the floaters that are under construction are already contracted and, given the demand we see out there, I'm expecting that there's not going to be too much difficulty getting the rest of them contracted.

The jackup side is a little bit different, although to date, again, we haven't seen much of an impact. The market is absorbing the rigs as they become available. So if that continues and we do see a number of areas around the world where jackup demand could ramp up enough to absorb the capacity coming in certainly at least for the rest of this year and maybe next year, that's just a hard call to make.

Okay. For my second question I actually want to grab on to something that you just mentioned. When you talk about three-quarters of the floaters already being contracted out there, when you look at your backlog with $21 billion currently standing and you look at your midwater fleet specifically, on the contracts with the John Shaw and the Sedco 601, obviously they were shorter term in nature. Is this more of a strategy that you're employing to keep more spot market exposure for some of those assets given that you've already got a very, very visible top line? And what would that mean for -- if it is, what would that mean for units like the Sedco 700 and the Falcon 100 that are coming due for renewal in relatively short order?

I think from the standpoint of a strategy we would prefer to target the longer-term jobs, but there seems to be enough demand and I think the Shaw rate is an indication of what the demands for short-term contracts are, that we are continuing to bid fairly aggressively on the long-term opportunities. So the rate band that we been talking about for a while now for midwater floaters in something like the low threes to in certain cases 400,000 a day we see as continuing to be the valid band and we're continuing to try and obtain long-term contracts in that area.

Meanwhile, to the extent that we're unsuccessful, we continue to play in the short-term market. So whether or not we will change that strategy over time I don't know, but right now we're not too concerned about being able to place the rigs, although we are targeting we prefer to get some of these longer-term contracts.

Okay, that's helpful. And then my last question is on the Indian jackup market. You've got a large presence in that market, you've obviously got some longer-term contracts with ONGC and you've also got about two or three rigs that are coming due for renewal here in the short-term like the Nordic and the Thornton and the McClintock. When you are bidding those rigs right now are you trying to get similar term to what you did with that ONGC fixture on those handful of jackups? Or is the spot market extremely robust where you can maybe keep some optionality with those units?

David Mullen here, I'll take that. No, in fact we're looking to continue with long-term contracts and we're pretty confident we're going pretty advanced discussions. So we think that's how that will play out.

Okay, thanks for the insight, guys. Keep up the good work.

Lee Cooperman, Omega Advisors.

Good morning, everybody. Congratulations by the way, excellent performance upon the team. Just a question. I know you're not going to address the buyback, but you really addressed it in the sense that you said you're committed to complete it and complete it by the end of the year. But on the other hand, there was an article the other day in [Barons] where they were exhorting you and your industry to pay cash dividends.

I thought it was a little bit humorous in the context that one of the key advocates of that I think wrote a report about two years ago recommending you recapitalize the Company and buy back 40% of the equity. So now I guess using the cash dividends. What do you think the Board's view is? Stock is 88 presently, you know what your outlook is. In terms of the likelihood of further repurchases as opposed to cash dividends, any opinion on that?

I think that all I can tell you is that this is a subject that we continuously revisit at the Board. From my own perspective I continue to think that the stock price is continuing to be not reflective of the backlog and the outlook. I think that the market is discounting in a downturn in this business well before we see anything possible that would [participate] that.

So right now my guess is that we will continue to conclude the stock repurchase as the preferred method, although I won't rule out the fact that we might consider a dividend. So it's just something that we will continue to evaluate.

Good luck. Thank you very much.

David [Smith], JPMorgan.

Good morning. Looking at the deepwater rigs, it was contracted out beyond 2010. I'm wondering from your point view what is contracted, dedicated to programs, specific programs, and what is just to secure availability?

I think in this case what we're seeing is the vast majority are contracted to firm development projects. And we see relatively few that are contracted to exploration projects where you could imagine that a couple of dry exploration wells may condemn a program. We're now starting to see a number of operators looking for long-term rigs for worldwide exploration. Reserve replacement is becoming a primary driver. But to answer your question, no, what we see the ultra deepwater, the deepwater, the vast majority of these rigs are locked into firm development programs.

Do you see any urgency on the exploration programs from maybe some environments where they have -- where the lease has expired, maybe say offshore India? I think that's when we saw that in the Gulf of Mexico, but maybe other areas?

Yes, India is one area. In fact it's almost impossible that (technical difficulty) and Reliance are able to complete their programs within the required timetable. I'm sure they'll get an extension. But I think around the world the biggest driver is really reserve replacement.

Thank you. On the John Shaw, great rate on that. I know sometimes there is a lag between the LOI and the fleet status where it shows up. I'm wondering if that rate was signed recently or if that really reflects our current market strength?

Correct, that was signed recently. There wasn't any significant lag between the LOI and the contract signature. I'm going to guess a little bit here, but I think it was about two or three weeks.

Fantastic. Thank you very much.

Ian Macpherson, Simmons & Co.

Good morning and congratulations on the quarter. Back to the Pacific Drilling rigs, can you just talk about your confidence level with the budgeted time and construction costs for those units?

We're fairly confident. Our due diligence of the contract, the construction contract with Samsung is very good. They've taken a similar approach to what we took in that the contract is a fixed-price turnkey contract. Their contract includes very little OFE and so almost all of the responsibility lies with Samsung and so we are pretty confident at this point, given the level of involvement that we've had and our due diligence up until now, we're fairly confident with the construction schedule and the promised delivery.

Okay. You sound very confident on a contract for at least the first of those two. Do you already have a letter of intent in the making for one of them?

No comment on that.

Okay. I think the question was asked with regards to further consolidation opportunities on the jackup side. But let me just ask that question as it relates to other floaters. Are there other speculative floaters out there that would also make sense and could be structured in a similar type transaction for Transocean?

Well, there certainly are other speculative floaters out there. The second part of the question is the hard part. I'm not sure that it's very likely that we're going to be able to structure a deal that would be similar to what we've done with Pacific Drilling. And frankly I guess we'd have to think hard about whether or not we'd even want to do a similar deal because joint ventures obviously are not our preferred course of action. It means that we have to dedicate resources to a rig that we're only going to get 50% of the return for.

Now in the Pacific Drilling case we saw a lot of good reasons to do it in terms of our strategy and the timing and we found a partner that we're very comfortable with. So there are going to be conflicts of interest potentially in the future with the joint venture rigs versus our rigs. And if you contemplate getting another joint venture with somebody else then the world starts to get very complicated.

So I suspect if we're going to try and do something else we'll have to come up with some different innovative structure and we are always thinking about those types of things.

Okay. And if you don't mind, if I can squeeze in one more quick question. Last quarter it seemed like the outlook for deepwater was still very strong, but it seemed like we were in a bit of a holding pattern as it relates to your interest and your customer's interest in locking up the next round of availability for '09 and beyond. Is that -- the current fleet I mean. Is that still the current state of affairs or should we look for new fixtures on rigs like the Nautilus and the Pathfinder sooner than later this year?

I think in general I'd still caution you that my guess is it's going to be later this year or maybe even early next year before you see a lot of activity focused on the rollover of rigs in 2010 which is when most of the fleet starts to become available. We are having some conversations and making some offers on several rigs that don't have availability until 2010, but we continue to have the dynamic that we're looking for some pretty healthy rates and the operator is talking about a period of long time out.

So there's not a lot of urgency to commit at this stage. So you may see a few happen in the next three or four, five months, but I suspect it is going to be next year before you see a lot of activity on that 2010 rollover.

Okay, thank you, Bob.

Roger Read, Natexis Bleichroeder.

Good morning, gentlemen. Greg, if you could real quickly on your tax settlement with TODCO, is all of the -- are all of the numbers that you talked about cash recovery numbers, or is there just simply in other income recording there, but not necessarily a cash impact?

No, there will be a cash impact. $118 million of cash related to 2006, we have already received, just not recorded as other income yet, until they file their tax return. But the amounts related to '07 and the change of control acceleration, we have not yet received, and so would receive over the next few months or in conjunction with the change of control.

Okay, that helps. Back on just sort of the general market outlook, Bob, you spoke the last time or maybe really the last couple of calls and you were talking on the answer to the last question customers holding off for 2010 commitments. You signed a deal here at Pacific Drilling, gets you two rigs before that date. Where do you stand today in terms of looking at the likelihood of adding new capacity yourselves for rigs that say would have a delivery date middle of 2010 or later? Is there anything on the table; is that off the table at this point? Can you help us out there in understanding that?

Well, I have been telling you I think for the last might be nine months or more that we were working on at least one additional new build, and that I think I have been consistent in saying it was 50-50 that we were going to get there. We continue to work on that one opportunity and I'd increase my probability that we are going to actually be successful there. I won't give you a probability, but it is -- I have moved well past the 50-50.

We are having some other potential discussions on new builds. What we are trying to, any time we talk to an operator that has a requirement in that time period, we are trying to see if they would be interested in an existing rig. The requirements that we're seeing right now tend to be for capabilities, rig capabilities that exceed the existing fifth generation capabilities, therefore the new build discussions continue. I'm not optimistic that we'll land a lot more new builds at this point, but I won't rule it out either.

Okay. And a large Norwegian company just signed some new rigs, day rate well above 525 -- well, I guess right at 520. Is that the rate we should think of at this point in terms of a new build?

I think you need to be careful. It depends on the capability of the rigs, it depends on the location, it depends on the term of the contract. So I would not necessarily assume that all new builds are going to be in excess of 500, but I think that you are going to see rates in the high fours for most of them, depending on the length of the contract. We are seeing some potential opportunities for longer-term contracts, longer than five years. If you go past five years then that rate is probably going to be below the high 4's or 500 level.

Okay, thank you.

[Martin Nystrom], [Coffing] Bank.

Good morning, guys. Just a question regarding the midwater market. I recently saw one of the Norwegian companies securing a contract for the duration of five years starting from 2010 with (inaudible). Can you give us some color on that? Is it more -- is the midwater market now starting to be more visibility in terms of oil companies willing to secure longer-term contracts because they see that the market continues to be tight beyond 2010?

Yes, the specific vessel you're referring to was into the Norwegian market and the Norwegian market has been long for quite some time. I mean, we've secured a number of contracts there, three-, four-year durations. So no date surprise there. The Norwegian market, harsh environment; we've seen that long for the past 12 months at least if not more. I think we continue to be very upbeat on the midwater market. In fact, one area where we see a lot of demand is in Southeast Asia. A lot of it is new demand; a lot of it is in the back of expiration. But we're seeing -- we're very comfortable, very confident in the midwater area.

If I could ask a follow-up. Given the jackup market, you mentioned that, but a significant amount of the new builds that are entering 2007, in addition to that you have a lot of existing ones coming off contracts. Could you say anything regarding if you see that oil companies are more determined to secure floater capacity than jackup capacity because they believe that the new builds will soften the demand supply side of it?

As I said in my comments, we're in discussion -- we're in advanced discussion on some pretty long-term contracts in the jackup market in Southeast Asia. The jackup market remains very strong in India. [O&GC] have the Mumbai redevelopment plan. They have a need for additional jackups beyond what they've got there today and it's a very long-term need. And we're seeing very strong demand in the Arabian Gulf.

It's a little bit difficult at this stage to say whether that incremental demand is sufficient to absorb all the incremental supply that's coming in. And I think only time will tell that. But for the near-term 2007-2008 we're pretty confident that rates will stay up there. We don't see rates moving much beyond where they are today, but we see them staying up there.

Thanks, guys.

Alan Laws, Merrill Lynch.

Good morning. A couple questions on your impressive revenue backlog. I guess first, when you look out over the balance of 2007 and sort of the LOIs that you have in hand or bids that you're seeing, is there room for the backlog to grow or has it reached sort of a high or maybe even a plateau for a time?

I think you'd still see there's a little bit of room for growth. Obviously the backlog has gotten to a point now where if we look at our existing fleet, on the ultra deepwater side they're so far out it's kind of hard to imagine how you're going to grow that. I think there's a bit of room for growth with our access to the Pacific Drilling units, potentially at one, maybe another new build and the midwater. And I don't think you'll see a lot of growth, but I think you could see growth over the next quarter or two.

Okay. Sort of a follow-on question. At this time next year, as far as rig time goes, do you think that we'll see a similar proportion of rig day coverage for '09 as we see for '08 currently -- i.e., do you think there's demand out there to continue to book out on the -- over term?

Yes. I'm not sure I fully understood your question.

It's a question -- out more than a year do you still see your rig days being booked up far in advance I guess is what I'm asking?

Yes, yes, we do.

All right. A clarification question I guess here too. On your use of cash ranking, you prefer repos over dividend but you're considering a dividend as number two, is that fair?

Well, actually in terms of our ranking we prefer to reinvest in the business. But it's pretty clear as we're starting to ramp up our cash flow here that it doesn't seem feasible that we will be able to reinvest a very significant part of our cash flow. So we continue to look at the best way to return cash to shareholders. We concluded in the past that the best way to do that was a stock repurchase. We continue to look at all alternatives and I guess as three alternatives, stock repurchase, a special dividend or a regular dividend, although the regular dividend would probably have to be in conjunction with one of the other of the first two (multiple speakers) on the size of cash flow we've got.

So on a dividend basis or structure of the dividend you're looking at both fixed and variable or special like [Diamond] has, is that fair?

We would consider all alternatives. We haven't ruled anything out. We will cross that bridge I guess once we complete our existing -- remaining $600 million program, then we'll decide what it is we want to do as we go forward.

Okay. Appreciate the answers, guys. Thank you.

John Broderick, Permit Capital.

Good morning, thanks for taking my call. My question relates to personnel and labor. Right now the labor environment seems like it's very tight and it seems like it's only become harder for you as time goes on and you take delivery of new rigs. And I just want you to comment on some of the actions you're taking now in anticipation of the road just getting steeper on the personnel side.

Jean Cahuzac will address that.

You're right, there is no doubt that the main channels of industry relates to (inaudible) personnel and that relates to manning of the new builds, division of customer expertise and retention program. However, we believe that Transocean is very well positioned to face this challenge for a number of reasons. The first point I would like to highlight is the Company's size and our global presence which give us the flexibility that we need to recruit, train and develop key personnel all around the world.

We continue to see the positive impact of our nationalization effort that began over five years ago. We have now key supervisory personnel from countries such as Brazil, Nigeria, India and (inaudible), etc. who are available to be assigned to our operations worldwide and that's a (inaudible). We also have been very proactive in terms of meet carrier recruitment with a program which was initiated in 2004 to accelerate the development of individuals from non-traditional recruiting areas such as Eastern Europe and our records have been very good there, in fact we exceeded our expectation.

And we also remain very committed to providing a competitive total compensation package. We have introduced very recently some retention tools which have been very well received by our people. So I think although it remains a challenge and will remain a challenge in the coming year, I think we are very well positioned to face this challenge. But we have to continue the focus.

And just to conclude, I would say that regarding the new build rigs and the 700 upgrades, plans have been established and most of the key personnel (inaudible) even for the new builds which are going to come 2009. So personnel remains a challenge, we continue to focus on it. I believe that we are very well positioned.

Thank you.

Jeff Tillery, Pickering Energy Partners.

Good morning. Could you talk a little bit about just the internal construction management capability at Transocean. You've got five new builds and deepwater upgrades right now. You add on the two tanker Pacific rigs. Kind of talk about where you are from a management -- construction management point of view?

One of the benefits we have particularly with the enhanced enterprise class new builds is that those are being built in the same yard with sequential delivery schedules. And so we'll have one project team that will be effectively seeing all three of those new builds to fruition. On the 702 ,706, because they're essentially carbon copy upgrades we'll have a tremendous benefit from the learning curve on those two units as well.

And so taking on construction management if we do exercise our purchase option with the joint venture, taking on construction management for the Pacific drilling rigs will simply represent incremental requirement for our construction management resources. And it's something we've focused on a long time because we've always got major projects going on. So it's core expertise that we consider very well equipped to handle. So I don't think it will really put an overly tremendous burden on our capabilities.

So you feel like you have the personnel in house right now to do all seven of the projects?

Yes.

Okay, thank you very much.

Adam Comora, EnTrust Capital.

I just had a follow-up in terms of returning excess cash to shareholders. You guys are in a very enviable position of having terrific visibility and certainty of cash flows given the backlog. I'm curious why it doesn't make sense to lever up the balance sheet and do something more meaningful. You guys obviously think the stock is at an attractive price to repurchase. And I commend you on the current share repurchase program. But if we wait for all that cash to come in I'm not sure we're going to have a chance to buy it at these kinds of prices. So I'm just curious if you guys have considered something more meaningful and use the certainty of the cash flow to perhaps lever up the balance sheet?

Well, if you recall, we did that to a small extent about nine months ago. And at the time we said we were willing to lever up to the extent of something like 12 or 15 months of forward cash flow. As we consider what we want to do going forward we continue to look at all alternatives and while I don't want you to think that it's likely that we might conclude that we would do something similar, it is something that we continually evaluate. So it's not something that we just have closed our mind to, it's we're considering all of the possible alternatives here.

Terrific. And then just one quick follow-up to a comment you made earlier where you don't see this similar downturn that I guess the stock price is predicting. Can you just talk a little bit about your thoughts on how long this can last or these kinds of business conditions can last?

Well, it's a little bit difficult to give you any crisp answers on that, but from all of the sense we have here in the business and the opportunities out there, particularly in the deepwater, if you look around the world there are so many different emerging areas in deepwater that seem to be highly prospective and the level of unsatisfied demand -- if you just take the amount of deepwater drilling that would probably be done today if there was capacity to do it and move it forward, the amount of unsatisfied demand appears to us to make it highly likely that this cycle is going to continue well past 2010. And it seems to us that the market must be discounting in a downturn after 2009 or 2010 and we just don't see it given all of the opportunities that we see out there.

Okay, sounds good. And given that I would agree; it seems like a very attractive opportunity to buy back as much stock as possible at these levels given that kind of a view. Thanks.

Thank you. That will conclude today's question-and-answer session. At this time I'd like to turn the conference back over to Mr. Bob Long for any additional or closing remarks.

Okay, well I don't have any additional remarks and I think you all for joining us and we'll talk to you again next quarter.

Thank you for your participation. That does conclude today's conference, you may disconnect at this time.