Transocean Ltd (RIG) 2007 Q3 法說會逐字稿

Good day, everyone. Welcome to the third-quarter 2007 results conference call for Transocean Inc. Today's conference is being recorded.

Now for opening remarks and introductions, I would like to turn the conference over to Mr. Gregory Panagos, Vice President of Investor Relations and Communications.

Thank you, [Sarah]. Good morning, ladies and gentlemen, and welcome to Transocean's third-quarter 2007 earnings conference call. A copy of the third-quarter press release covering our financial results along with supporting statements and schedules is posted on the Company's web site at Deepwater.com.

We have also posted a file containing four charts that will be discussed during this morning's call. That file can be found the Company's web site by selecting investor relations, followed by news and events, and webcasts and presentations.

With me on this morning's call are 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.

Before I turn the call over to Bob Long, I would like to point out 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 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 Web site and, for your convenience, non-GAAP financial measures and reconciliation tables are included with today's press release.

That concludes the preliminary details of the call. I will now turn it over to Bob Long.

Thanks, Greg. Good morning, everyone, and thanks for joining us on the call. I will start by giving a very brief overview of the quarter and my sense of the current state of the market, and then Greg Cauthen will give you some detail on the numbers before David Mullen expands on some of the developments in the various markets around the world.

We did have a very nice quarter with a lot of good news. Earnings of $2.12 per share on an adjusted basis were better-than-expected, thanks in large part to continued good revenue efficiency and postponement of some maintenance projects. We got clearance from the Department of Justice on our Hart-Scott-Rodino filing relating to our merger with GlobalSantaFe, removing one of the critical path items to getting the merger closed.

We achieved a new record dayrate of $600,000 a day for our rig the Pathfinder. We were awarded a commitment for a four-year contract for the first of the two Deepwater Pacific rigs and have exercised our option to purchase a 50% interest in the joint venture that will own those rigs once they are constructed. We obtained a four-year contract on the Polar Pioneer commencing in late 2010. I think that is the first commitment for an existing rig coming off contract in that time frame. Finally, our backlog increased from $21.2 billion as of the last conference call to $22.9 billion today.

Going back to the merger for a second, we still have some things to do before we can close the merger with GlobalSantaFe. Our shareholder meetings are scheduled for November 9 and then we need approval of the Cayman Grand Court. If all goes well, we hope to close by the end of the year.

Meanwhile, the markets continue to be very good, particularly the floater market. While I would prefer not to see so many newbuilds ordered, the demand for deepwater newbuilds continues to surprise me on the upside. We have a lot of interest in the second Deepwater Pacific newbuild and are very optimistic that we will get a contract before year-end.

I am also happy to see the developing interest in contracting existing deepwater rigs with availability out in 2010. I mentioned the Polar Pioneer contract already and we have multiple customers interested in two of our other -- two of our ultra-deepwater rigs, with availability in 2010. I ddid not expect this demand to manifest itself until next year, so the developing interest now is a nice, positive sign.

As far as the jackups are concerned, I continue to be pleasantly surprised by the strength of the market. We signed a lot of new contracts during the quarter, adding about $400 million to our backlog. But I will let David Mullen fill you in on those details after Greg goes through the numbers.

With that, I'll turn it over to Greg.

Thanks, Bob. Good morning to everyone. In the third quarter of 2007 we had net income of $973 million, or $3.24 per diluted share, which includes $276 million of income recognized in the quarter from the TODCO tax sharing agreement, a $52 million reduction in our income tax expense due to benefits from foreign tax credits and an $8 million gain from the sale of one rig. This compares to net income of $549 million, or $1.84 per diluted share, in the second quarter 2007, which included $11 million of similar items.

All of my comments, including our expectations, are based on Transocean as a stand-alone company, assuming no merger with GlobalSantaFe. For any questions you have regarding the merger, I would refer you to the proxy we filed with the SEC on October 3.

Total revenues for the third quarter improved by $104 million to approximately $1.5 billion. $99 million of this increase in revenues resulted from rigs commencing or continuing contracts at dayrates higher than in the second quarter and approximately $13 million resulted from the extra day in the quarter. These revenue increases were partially offset by unanticipated downtime on the M. G. Hulme.

Third quarter revenue efficiency of 96% remained in line with the second quarter and is still one percentage point higher than the 95% average efficiency we saw for the entire year of 2006.

As we look forward to the remainder of 2007 and 2008, we expect revenue to continue to increase due to the commencement of higher-dayrate contracts, as shown on chart one. We expect to experience approximately 89 out-of-service months in total for the year 2007 and approximately 68 out-of-service rig months in 2008, as shown on chart two.

Operating and maintenance expenses in the third quarter were $663 million, which represents roughly a 6% increase from the $627 million we incurred in the second quarter. Versus the preceding quarter, our in-service costs increased by approximately $14 million, or 3%, in the third quarter, as seen on chart three. This increase is mainly due to an increase in the number of maintenance projects versus the prior quarter.

Our support and integrated services costs increased by $13 million, including $6 million of integrated services costs, which is in line with the integrated services revenue increase. We experienced an increase of $8 million in out-of-service costs during the quarter due to increased shipyard time.

We expect our total operating and maintenance costs for the fourth quarter of 2007 to be between $660 million and $690 million. We expect operating maintenance costs for the full year to be at the higher end of our previous guidance due to an incident during the M. G. Hulme shipyard, other shipyard overruns, higher costs from integrated services and the continued weakening of the U.S. dollar, with the latter two largely offset by related revenue increases.

The actual amount of costs we incur in the fourth quarter this year will continue to be affected by the duration and amount of shipyard mobilization activity we performed and the timing of various maintenance projects we undertake.

Looking forward to 2008, we anticipate that our full-year cost will be roughly 11 to 13% higher than our expected 2007 full-year costs. This increase is higher than our previous guidance mainly due to increases in shipyard costs, additional investment in our people and the full-year impact of the weaker U.S. dollar, with the latter expected to be largely offset by revenue increases. I would continue to caution you, however, that these projections could be affected by a number of factors including, among others, the amount, scope, duration and timing of shipyard mobilization activities; the actual level of equipment, labor and shipyard inflation; and the performance of foreign currencies against the U.S. dollar.

General and administrative expenses were $27 million in the third quarter, compared to $29 million in the second quarter, and we expect them to be between $28 million and $30 million for the fourth quarter of 2007. Capital expenditures in the third quarter 2007 were $305 million, of which approximately $170 million relates to our four newbuild drillships, roughly $90 million relates to the two 700 series upgrades and the remaining roughly $45 million relates to contractually-required upgrades, fleet spares and normal operations.

On October 24, we announced the exercise of the option to purchase a 50% interest in the joint venture that owns the two Deepwater Pacific rigs currently under construction for a total investment of $238 billion. The joint venture will be consolidated with our other financial results and we expect the consolidation to have a $15 million impact on our capital expenditures for the remainder of 2007. We expect capital expenditures for the full year 2007 to increase from $876 million in 2006 to roughly $1.5 billion, of which approximately $770 million relates to our six newbuild drillships and roughly $365 million relates to the two upgrades. In 2008, we expect our capital expenditures to be approximately $1.7 billion, including approximately $310 million for the two Deepwater Pacific rigs.

Interest expense, net of interest income, decreased to $16 million in third quarter as debt levels were reduced and capitalized interest increased to $19 million, in line with higher investment and upgrades in newbuilds. We expect interest expense, net of interest income, to continue to decrease based on further increases in the amount of capitalized interest and assuming we continue to use free cash flow to build cash or reduce debt.

Other net in the third quarter of 2007 of $287 million included $276 million of income from the TODCO tax share agreement, with $118 million related to amounts received during the third quarter under the change of control provisions and the remainder primarily related to amounts received in previous periods related to TODCO's 2006 and 2007 tax returns. As a result of the third-quarter acquisition of TODCO by Hercules, we have now recognized most of the earnings we expected to receive under the tax sharing agreement with TODCO.

In addition, other net includes $10 million related to licensing income from our dual activity patent. We expect to receive and recognize roughly $2 million of other income during the fourth quarter of 2007 from our dual activity patent.

Finally our effective tax rate was 14% for the third quarter, excluding various discrete items. We currently expect our annual effective tax rate to be 14.6% for the fourth quarter, which excludes the impact of any gains we may realize from any asset dispositions and other discrete tax items.

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

Thanks, Greg, and good morning to everybody. We had an outstanding period in contract fixtures since the last earnings call, highlighted by the exercise of our option to purchase a 50% interest in the joint venture with Pacific Drilling on the back of a firm commitment for one of the two ultra-deepwater drillships that are currently under construction. We paid approximately $238 million for our joint venture interest, which represents half of the documented costs for rigs as of October 18, 2007.

The first joint venture newbuilds unit, Deepwater Pacific 1, has been awarded a firm commitment for a four-year drilling contract with Reliance Industries at a rate of $526,000 a day for operations offshore India. Reliance has the right to convert to a five-year contract by October 2008 at the rate of $513,000 a day. The drilling contract is expected to commence in the third quarter of 2009 following shipyard construction, sea trials, mobilization to location and customer acceptance.

The second joint venture newbuild units, Deepwater Pacific 2, is expected to be completed in the fourth quarter of 2009. We are currently in active discussions with several customers regarding the award of a long-term contract for that rig.

As shown on chart four, our total current contract backlog, including the Reliance contract for Deepwater Pacific 1, has increased by approximately $1.5 billion since the last earnings call to $22.9 billion as of today.

Turning to our existing fleet, I will start with a discussion of our high-specification fleet, which includes our deepwater and harsh environment rigs. The Deepwater Pathfinder was awarded a three-well contract with an estimated duration of 120 to 160 days at a rate of $600,000 per day. The Polar Pioneer was awarded a four-year contract with StatoilHydro at $490,000 per day for work offshore Norway, with contract commencing in 2010.

We're seeing a lot of customer interest in the existing high-specification units with availability in 2010 and this interest is beginning to translate into commitments. The fixtures I have just mentioned support the view of an extended up cycle for the high-specification units. We continue to see unsatisfied demand in the mature deepwater petroleum basins and in the harsh environment basins offshore of northern Norway. We see incremental demand growth for exploration activity in the emerging deepwater basins.

We also continue to see strong demand in the other floater market sector. In the UK sector of the North Sea, there is a lot of interest in rigs with time available in 2008. Additionally, we had a three-year term commitment on the Sedco 601 for work in Southeast Asia at $255,000 per day.

We had an active quarter in the jackup sector, with a number of fixtures which translate into approximately $400 million of the $1.5 billion in backlog growth that I referenced earlier. We continue to see growing demand for jackups, particularly in the Middle East and India.

While we remain cautious on supply additions in 2008 and 2009, we anticipate that additional supply will be absorbed by incremental demand through the first half of 2008. Beyond that, we just do not have the visibility on the demand side.

The C.E. Thornton and F.G. McClintock were contracted on term contracts for three years at a rate of $145,000 per day for work on the Mumbai High Redevelopment with ONGC. The Comet was awarded a two-year contract with GUPCO in the Gulf of Suez for $112,000 per day. The Trident 16 was awarded a firm commitment for 42 months at a rate of $180,000 a day for work in Southeast Asia. The Shelf Explorer was mobilized to Johor Port, Malaysia, to undergo some maintenance work while waiting to start its next contract, which begins the first week in December at a rate of $175,000 a day for a minimum of two firm wells.

The Transocean Nordic was mobilized to Singapore to undergo a scheduled shipyard visit and we are in advanced discussions with a customer for follow-on work on a term basis. Additionally we have a number of deals under LOI that are expected to achieve closure by year's end.

That concludes my marketing comments, so I'll now turn it back over to you, Bob.

Next to David. I think with that, Sarah, we're ready to entertain questions.

(OPERATOR INSTRUCTIONS) Roger Reed, Natixis Bleichroeder.

Bob, a question for you. You started off talking about how deepwater has really picked up in terms of the contracting of existing units for 2010 and beyond. How did you -- obviously for the high-spec equipment, that is the case. In terms of maybe a fourth-generation or a strong third-generation rig trying to compete in this market, is this pretty much just the fifth-generation spec'ed equipment you're seeing this for or are you starting to see demand on down the line as well?

Right now, the demand, the interest in contracting rigs coming available in 2010 is primarily the high-specification and ultra-deep rigs.

Okay. And is any of that the Arctic areas of Norway or Russia that you're seeing at this point?

Yes, I will chip in for that one. The Polar Pioneer was one contract that we did get a follow-on contract commitment starting in 2010. And yes, there is a lot of demand in northern Norway. We see that part of the market with customers willing to sign up term contracts starting in 2010.

Okay. Then my only other question for Greg, you mention in the operating cost expectations for '08 a little higher than what you had previously expected. Have you had any successes anywhere in terms of mitigating cost increases or is this -- I mean, it is what the industry is facing and you cannot fight the tide, so to speak?

Well, we are actually starting to see some successes on a variety of supply chain initiatives that we have going, but those will really be multi-year efforts before that starts to have an impact. But, frankly, the areas -- our normal operating costs are not the areas that we continue to have issues with. It continues to be maintenance shipyards, not our newbuild shipyards. Those are all in very good shape, but our shipyards for our older rigs. The shipyards' capacity is heavily constrained and we continue to have surprises on a couple of our shipyards. Although I would say probably 70% of our shipyards go well, but the few that do not go well, like the M.G. Hulme this quarter, tend to have a big impact on our costs.

So we are -- I may let Stephen comment on a variety of efforts we have ongoing on shipyards.

I would just echo what Greg said about our newbuild construction projects. The shipyards we are working with there, both Daewoo and Samsung, newbuild construction is their core business and so they are very focused on it and very process-oriented. On the Clear Leader project in Daewoo, they are meeting their deadlines spot on. So we're very comfortable with how things are progressing there.

On the routine recurring shipyard projects, the maintenance shipyard projects that Greg alluded to, we have just gone through our regular quarterly forecast and budgeting exercise and we have really taken a critical eye at those work scopes to try and eliminate as much of the work scope as possible and really identify the critical items that absolutely have to be done and then focus on executing a very robust plan with a strong partner, in the terms of the shipyard, to be able to deliver those projects according to our plans. So I think our regular planning exercise is extremely robust and we will continue to focus on executing against that plan.

Okay, has there been -- it sounds like maybe not, but has there been a recurring theme in the 30% sort of challenged R&M shipyard-type projects or is it different countries, different types of rigs and you have not really identified a single issue yet?

If there is a recurring theme, Roger, I would characterize it as third-party performance, whether it is the shipyard whom we are relying on or equipment, the original equipment manufacturer we are relying on for equipment turnaround. It is just generally very constrained capacity, which is contributing to performance problems on the part of those third parties.

Okay, thank you.

Geoff Kieburtz, Citi.

I wondered if you could put the Pathfinder and the Polar Pioneer contracts in a little bit more context. With the Pathfinder, we just have a four-month contract. How should we think about that? Is $600,000 the new dayrate or is there some special circumstances around that situation?

Jeff, I think you need to be careful putting the $600,000 in the context of the new threshold for the fleet in general. I think this is an example of what we have been saying for some time, that if you have availability, particularly of ultra-deepwater rig, nearer term, then you could get some very high dayrates. I would be careful to not extend that necessarily to other contracts and rollovers that might happen in 2010. I do think there is a possibility you will see some other dayrates in that ballpark based on the unique availability circumstances of some of the rigs, but I would be careful at this point to translate that into a general move in the rates.

I think the Polar Pioneer is an example of the tremendous demand that we are seeing offshore Norway for high-specification rigs. The Pioneer, obviously, is not a deepwater rig. There is a tremendous amount of activity that I think we're going to see in the future there. Again, that is a fairly limited market in terms of the number of rigs that are capable of drilling in that environment, so you need to be careful about extrapolating that on a broad basis.

How many rigs would you say are in the fleet today that have those characteristics and how many are being built?

David, can you answer that?

I cannot answer that precisely, but in the fleet today there is a very limited number. The Polar Pioneer is rather special. It has the capability to work in the Barents Sea and it has worked in the Barents Sea very successfully, especially from an environmental point of view. There obviously are quite a few rigs under construction that can be -- can operate in that, namely the harsh environment semis. Hazarding a rough guess, I would say you're talking about five or six rigs. The demand is such that that will be more than absorbed. I mean, if you look at what is happening on the Russia side of the Arctic, look at what is happening on the Norwegian side of the Arctic, but there will be some additional capacity coming into that space.

Okay. And on the jackup side, we have heard from at least one source an expectation that there will be a new jackup ordered for every jackup delivered as we go over the next 18 months or so. I would be interested in your thoughts on that subject, but my question is really if that were to occur, do you think that the market would be there to absorb that many jackups?

Do you want to take a stab at that, David?

That is a tough one. As I mentioned in the comments, we are very pleasantly surprised. We had a very good quarter on jackup fixtures. And if I look out towards what were we are currently discussing with our customer base, I have every reason to believe we will have another excellent quarter next quarter.

With respect to capacity additions, we do not -- we are concerned at the amount of newbuilds and I think the jackup market is such that you do not have a lot of visibility as you go out there. I mentioned in my comments that we have good visibility to the end of '08, but beyond that, we do not really have very clear visibility. We see there are certain areas where there is strong growth. The Middle East is a very strong growth environment. Some people will tell you that Saudi Aramco are looking for anything up to 20 more additional units over the next two or three years. Other reports will come in and say that is more likely 10, but 10 to 20 is still a huge number.

India has a huge demand. ONGC has a big demand with their redevelopment of Mumbai High and I do not know what the total number is there. We are also seeing a number of independents going into India.

The rest of it is more a slow growth pattern and the big question mark is the U.S. Gulf of Mexico. I think there is probably a mild positive in the U.S. Gulf of Mexico. It has reached a low point where I think there is about 18 jackups, which you would say are internationally marketable jackups, remaining in the U.S. Gulf of Mexico, which is a low point. The recent lease sale was positive in the U.S. Gulf of Mexico. There was a number of -- pretty high lease activity in the jackup space, higher than what we've seen in the past.

So on the demand side, we are encouraged and we are concerned on the supply-side. How the two balance remains to be seen and really, if we continue to add supply, I would get concerned.

There was a little disappointment on the contracts you signed for jackups in India. Is there any comment you can offer on that?

Well, the two contracts are term commitment of three years, which is quite unusual in the jackup space. And to also consider, these are relatively low-spec jackups. They have got two mud pumps. They are part of an older set of jackups. So in balance, we think that is a good rate for those jackups. As you can see, on some of our more higher-spec jackups, we have got substantially a better rate. And the range, I think we are at a very healthy range.

Great, thank you.

Dan Pickering, Tudor Pickering.

Bob, maybe you could walk through for us how many of your higher-end rigs do have 2009 spot availability and then does the Pathfinder contract indicate that essentially now you're sort of moving to a spot market model there, that you want to keep those rigs on spot and will worry about 2010 for the longer-term contracts?

Dan, I think that, if I am not mistaken, we do not have any other high-spec rigs available in 2009. We have the Nautilus, which comes available very late '08 and might slip into '09. Nautilus is not a DP rig. It has got 7000 or 8000-foot mooring capability, but that is the only rig that we would have time available on right now before 2010. We are in discussions with a number of operators for that rig.

But in terms of whether or not we would stay spot or go long, based on the interest we see in the market, I think we are still in the mode where we have been for long time. We're not trying to trade rate off against term. We're looking for good rates and good terms. I think we can get both.

Okay, thank you. Then just as we look at the GlobalSantaFe transaction, you mentioned two items, the shareholder vote and then Cayman Court. Could you walk us through the status in any of the other foreign jurisdictions? I know the UK was looking at the deal. Is that a condition to close and what is the status there?

I think as far as the merger goes, we need to limit our comments to just referring you to the proxy and the other information that is out in public for the time being.

That is no fun. Then one other question, if I might. As we look out there we have seen -- we saw Diamond basically take an approach which looks like sort of a consistent special dividend, if you will, in terms of returning cash to shareholders. You have talked about your focus being finding rigs and then potentially debt. Has anything changed post the Tanker Pacific transaction?

No, I do not think anything has changed. Obviously with the merger and the debt that will be incurred as a part of that, our focus in terms of cash is going to be on paying down that debt for the next couple of years. That being said, we think we still have a tremendous amount of financial flexibility and if there were opportunities to acquire additional rigs, particularly rigs that are already under construction, and if we could do that a reasonable cost, we would certainly be interested and we think we have got plenty of financial capacity to do it.

Thank you.

Thomas Curran, Wachovia.

I was hoping to explore the shipyard issue in a little bit more detail. I was curious -- you know, Diamond mentioned that they have been struggling with rising inefficiencies in the Gulf of Mexico shipyards, in particular. Could you speak to what you're seeing in the various shipyards you use around the world on a regional basis?

I think Steven has referred to this already. In terms of the shipyards, for what I will call normal maintenance, special surveys and the standard stuff that we go through all the time, it is extremely difficult because of the amount of work the shipyards have committed themselves to. In newbuilds it is extremely difficult to find capacity. When you have a shipyard that you have to go into and you have uncertain timing, which frequently we have -- because you cannot take a rig off location in the middle of a contract, you have to wait until the end of a well and those can get extended for long time -- that causes additional problems in terms of finding the space. You might find some capacity available, negotiate a deal and then not be able to deliver the rig in the window that you promised it. That leaves you scrambling for shipyard space on relatively short terms, which does not put you in the best negotiating position.

Then when you get in the shipyard, particularly if it is a yard that has some major projects or newbuilds, that is the primary focus of the shipyard and you frequently find yourself coming up with less people dedicated to your project than was originally scoped out. Those type of issues are difficult to deal with and we are seeing them in shipyards virtually all around the world.

So it sounds like, Bob, that you're not necessarily seeing any meaningful differences between certain regions that might lead you to shift some work or mobilize rigs solely to get some shipyard work done because you do not want ongoing exposure to the yards in certain places?

There is not a lot of that. We are seeing some shipyards that are coming -- there is new capacity being introduced. Whether or not it makes sense, mobilizing a rig a very long distance can add as much or more time as the inefficiencies in a shipyard that you are closer to. So we look at that -- I do not want to give you the impression that there is a whole shopping list out there and a lot of choices, but we do look at the available alternatives and have to make those trade-offs in terms of the distances.

No, and on that topic, I was just thinking of something that is fairly proximate, like sending a rig from the North Sea to Los Palmas or something like that, but -- and then on the vendor side, on average, how many different vendors are you dealing with for a standard regulatory inspection or repair and maintenance stay?

Steven, you want to take a shot?

You can really be dealing with a number of vendors if you've got to send electrical motors off the rig to be cleaned and rewound, then you've got to find an electrical shop to do that. If you're dealing with BOP equipment or well control equipment, you've got to deal with the vendor that does that. If you're dealing with simple fabrication work, you have got to find a vendor that is capable of doing that. If you've got electronic equipment you need some help with, the list of vendors can be quite long depending on how much equipment you've got to ship off and what type of equipment you've got to ship off.

So it does not sound like you're having issues with, say, one very big one in particular.

No, it really spans the space we're dealing in.

Okay, that's helpful. And then my last question, returning to the jackup outlook, we saw over a month of downtime on the Shelf Explorer in Malaysia before its most recent contract was announced. Could you provide some color on what happened there and then looking out, whether or not there is the risk of similar occurrences of downtime arising for further jackups that are going to be rolling over soon?

With respect to the shelf, it was the follow-on work was -- left a small gap and it was an opportunity to get caught up on some maintenance, so it actually stand out pretty well. As I said for the first half of '08, we see that with the dialogue, ongoing dialogue we have got with our customers, we can see that we are going to fill our gaps pretty smoothly and we will see them roll over from one contract to another contract. Beyond that, we do not really have the clear visibility.

Okay, that's helpful. I appreciate it, guys. I'll turn it back.

Angie Sedita, Lehman Brothers.

On the midwater market, Bob, you stated on prior occasions that you thought there could potentially be some upside there in rates, and that was one segment that there was still some potential movement. You have the Shaw and the Sedco 700 rolling over early 2008. They're both at good rates there, but is there some potential for those rates rolling higher?

Do you think we could still see some leading-edge rates that are a bit higher than where we are today, or are we starting to hit a wall?

David, I'll give that one to you, too.

Okay, I think we are in the -- if you go long, I think you'll see the rates will be pretty much where we are today. If we go short, we will see some potential upside on the rates. The demand in the North Sea is still very, very strong. The current high commodity prices is driving huge amounts of demand in the North Sea. And we are continuing to see growth areas in the midwater sector, Libya, Mediterranean, are prime growth areas. So the midwater sector remains very, very strong.

Okay, and then I would assume it would be a similar scenario on the demand you have for the 2010 for the two high-spec deepwater rigs that, given the timeline and I would assume term, that it would be at leading-edge rates versus being able to push rates whatsoever.

Well, since we're in negotiations and discussions, Angie, I think it is best if we don't comment too much on that.

Okay. Finally, you spoke about the uses of cash and buying potentially existing rigs. Are you still looking at or are there any joint venture opportunities, or would you even consider that at this point? Do you have a slot or an option for another new build, and is that still a consideration?

Well, we would consider joint ventures, although they are not our favorite mechanism. I think our Pacific drilling joint venture is a unique situation with a very good partner there. I think that opportunities to do joint ventures on terms that we would find attractive are very limited, and I would characterize that as unlikely.

We are trying hard to -- there is a lot of interest in new builds still out there among customers. We are trying hard to interest the customers in looking at existing capacity, since any new builds you order today probably could not be on location before the end of 2010 or even into 2011, and there will be capacity available by then.

Having said that, if the customer insists -- and obviously we'll talk with them -- we do not have a firm slot or option available right now, but we think that we could get a new build delivered in late 2010 or early 2011.

Okay, great. That's all I have. Thanks, guys.

Mike Drickamer, Morgan Keegan.

Greg, I want to follow up a little bit on your guidance. Is the guidance for integrated services that you'd previously given still good, $160 million in '07, $190 million in '08?

Yes.

How about some guidance for DD&A in the fourth quarter?

Flat with the third quarter is reasonable.

And then, Greg, one more for you. You guys have several rigs that earn performance bonuses. Can you quantify what the impact was in the third quarter from the performance bonuses?

You know, I do not have that number off the top of my head. We will get that to Greg Panagos and he can get that to you later.

Okay. Great, guys. That is all from me.

David Smith, JPMorgan.

I saw somewhere that Qwest had revised its five-year demand performance for the subsea tree awards downward by about 12.5%, and I recognize how tight market is for the deepwater fleet, but I'm wondering if at the margin you're seeing any issues that are pushing back the deepwater development programs that you are tracking?

No, in fact, on the contrary I would say the deepwater development programs are -- we're seeing accelerated demand. I have not seen what report you are referring to on the subsea trees, but I suspect that is so far out in time that it may not be that meaningful, because what I have been seeing is that up till 2010, subsea tree demand was beyond the capacity to deliver.

Okay, well I appreciate that color. Also wondering if you could just discuss what you're seeing in terms of maybe out-year demand growth from the majors relative to the NOCs?

What we're seeing is that there is a shift in the out-year demand growth. We're seeing more and more (inaudible) of the out-year demand growth coming for the national oil companies. Petrobras, Statoil, PEMEX. PEMEX have taken commitment on four units and our sense is that it will not be enough over the long-term. So I think you're going to see a certain shifting in the balance between the national oil companies and international integrated majors in the ultra-deepwater market and the harsh environment market.

I did not know if you're seeing maybe any other players that might accelerate demand growth, looking at KNOC, maybe Petronas, for example, that maybe are not as aggressive as they might be a few years out.

Yes, I mean you're seeing more and more new national oil companies coming into play. I do not know particularly about the two you just mentioned, but certainly the Chinese players are becoming a significant element. And when you look at all the emerging plays in deepwater, a lot of basins in Southeast Asia, you're seeing more and more active participation amongst national oil companies in that space. The Mediterranean and Libya will open up deepwater at some time in the future. Brazil remains extremely active as they expand their traditional basin of activity, the Campos Basin, to the basin to the north and the basin to the south. So yes, I would agree with your comment.

David, I think it is a little bit difficult to comment too precisely on a lot of the NOCs that do not have big, established production basins, like CNOOC and KNOC and Petronas, though Petronas is expanding outside of Malaysia fairly aggressively. Clearly, when you talk to them, they have got aggressive exploration plans, but it is tough to be as precise on the long-term as you can with people like PEMEX and Petrobras and Statoil and ONGC, all of whom clearly have very, very big programs now and are ramping up those programs in the future.

So it is clear to say that those established players are going to be much bigger and more active in the future. The others, it is a little bit tougher to be precise on their activity if you go out a couple of years.

Yes, I agreed and I just mentioned them because I had the sense that they're ramping up discussions on really ramping up their activity and trying to secure more resources abroad for themselves. KNOC, in particular, we saw recently, but I am only asking because I had the sense that the NOC activity is less sensitive to the commodity price fluctuations, at least that is historically how it's been in the jackup market, and I did not know if that meshed with your experience.

I think that we would probably conclude that statement is correct. The national oil companies tend to be somewhat less price sensitive than the international oil companies, but I would not suggest that they are not somewhat price sensitive.

Great. Well, thank you very much.

Wolf [Tavite], [FTB] Securities.

I have got a couple of questions. I would like to start with the midwater market, maybe looking on -- especially at UK sector, but we have seen recently pretty much sublet activity and I just wonder how you see this sublet activity, why we are actually seeing so much sublet activity these days and what do you project for, let's say, the second and third-generation rigs on the UK sector going forward.

At the UK sector, there has always been the reasonable amount of sublet activity, especially for those operators who take a relatively long position. It comes and goes and the recent sublet activity has essentially dried up right now. We've seen that there has been a number of fixtures from operator to operator. We did a recent survey of all the operators' activity in the UK and we see that most of that demand has been absorbed.

I think you are always going to see a reasonable amount of sublet activity, especially in the UK sector of the North Sea. You do not see it in Norway. Demand in Norway is on a much more long-term-visibility basis and larger development projects. A lot of the demand in the UK is driven by relatively short-term programs, redevelopment more than development.

What about sublet activity outside the North Sea?

We see very -- we see little sublet activity outside of North Sea. A little bit in Africa, but really not material. And we are not seeing any evidence of sublet activity in Southeast Asia.

One question regarding consolidation. It has been some consolidation among the smaller companies if you look on the guys building new assets, but not on a really big acquisition yet. Last few months, we have seen that the U.S. companies have seen share prices appreciate a lot and the Norwegian has actually [thrived] a little bit. You mentioned in your presentation that you are maybe interested to acquire newbuild companies with assets under construction. Has this been -- is this point getting closer and closer that we could expect the industry to be more active, or would you still like to see the asset being delivered to market before you would dare to do something?

Well, I would not say that I consider us any closer today than we were three months or six months ago. We are interested, but we have never been able to make the economics work based on where the valuations for the newbuild speculators are. I think we're still in that mode.

My last question relates to the jackup market, because I totally agree with you the deepwater market looks tremendously sound and robust and to some extent, also the midwater market, but looking on the jackup market, the recent rates for premium jackup rigs, as we see it, we see that rates have come a little bit down the last few months. We are also seeing that the contract lengths are coming down and also the time from the newbuild are being delivered to the market and the actual award are getting smaller and smaller. I am looking on all the assets to be delivered the next couple of years. Are you saying that you are still very comfortable for the development in 2008? Do you agree that rate is somewhat coming down? I am just a little bit puzzled about your about your being so comfortable for 2008.

I think what we said was we're comfortable for the first half of 2008. We are uncomfortable with the amount of newbuild capacity that is under construction without contracts, but I have been uncomfortable with the jackup market for two years because of the amount of capacity coming in and I've been consistently wrong because we have underestimated the growth in demand. Right now, we see, as David said, a lot of growth and demand still out there over the next six months or so and we think that that is going to be enough to meet the supply additions over that six-month period.

Beyond that, as David said, it is a little bit tough to see, particularly on the demand-side, while you can clearly see there is a lot of new capacity coming in. That has to be a little bit worrisome.

On the rates, some of the big rates that were signed on the jackup market over the last year or so have been newbuilds and we have not been in that market, so it is tough for us to comment on the high end of the range, whether or not that has mitigated. In the category of rigs that we have -- and you have to be careful with jackups because there is such a range of capabilities, ranging from the capabilities of our rigs in Egypt, which are four-legged jackups which generally do not compete outside of Egypt, so those are older, limited-capability rigs in one market, to some of the better 300-foot jackups that we have. If you look at our standard 300-foot jackups, those rates, as David said, we're looking at rates in the 170, 180 range, which I would say is fairly consistent with what we have been seeing for the last six months or so.

So I would not -- based on our fleet, it is tough to say that we're seeing any significant pull-back in rates. We've been saying for a longtime now we have not been able to push rates any higher, and I think that that continues to be true. Whether or not with all the newbuilds coming in over the next six months we start to see some impact on the rates is tough to say.

Thank you very much and good luck.

Waqar Syed, Tristone Capital.

My question is on some of your contracts in the UK North Sea where you have some arrangement on foreign currency that the data gets adjusted. Could you shed some light on how those contracts work and if the U.S. dollar continues to depreciate, what impact does that have on the [fleet status] report?

Well, it varies from contract to contract, customer to customer. But in general, we structure our contracts, both in the UK and Norway, so that in aggregate we are receiving foreign currency that covers our foreign currency cost in those markets. So we create a natural hedge and so you will see from time to time, as the dollar changes against those currencies that we will adjust the dayrates we show in our fleet status report. Now, we're not going to get into all the details exactly what those changes are, but when you see those dayrate changes, they are just offsetting cost changes. So economically, there is little impact on the bottom line.

Okay, great. On your joint ventures with Pacific Drilling, my understanding is that -- well, I want to understand how does -- they have the option to sell the remaining 50% that they own until October of, lets say, 2010. Has the price already been decided for that remaining 50% or is that going to be decided at a later stage? How does that work?

There is a formula that is a function of market price that is already agreed, so it is not a set price, but it is -- there is a process and a formula that is already agreed.

It is a function of the value of the rigs at the time.

Okay, but could you give us to any idea on what you think right now what you're thinking is the final price for those rigs would be?

You mean the build price?

No, the total cost to you for those rigs.

You mean if they exercise that put right? We're not prepared talk about that right now.

Okay, thank you very much. That's all I had.

Ben Dell, Sanford Bernstein.

I just had a sort of hypothetical question. If in 2008 after the GlobalSantaFe merger is complete, if you saw jackup dayrates going down and deepwater rates staying where they are or accelerating up, would that make the proposition of an IPO of the jackup business appealing?

I am not sure how to answer a hypothetical question like that, so I think we would just stay away from it.

Okay, that's all right. Thank you.

Robin Shoemaker, Bear Stearns.

I wanted to ask you just one question relating to Greg's cost escalation guidance for '08. We continue to hear anecdotes about the luring away of key rig personnel from Transocean by the Norwegian contractors and you are obviously in a much better position to assess how serious an issue that is. But when I look at the 11 to 13% cost escalation guidance, I wonder if is that sufficient to fend off the poachers, so to speak, and to retain the key people that Transocean needs for its own rigs and for the newbuilds that are coming out in '09 and '10.

We're doing a lot. I guess I would have to say the Greg's estimate right now is our best guess and that we hope that that is enough to retain the talent that we need. We are doing a tremendous number of things and putting a lot of cost into hiring and training our people and developing our people. We have got a lot of opportunities for our people with all of the newbuilds and upgrades that we have in the fleet and we have got a significant number of programs going on right now.

So the compensation part is only one aspect and we think with all of the efforts that we are undertaking here that we offer some pretty attractive opportunities for our people. And we have seen some of our people that have gone to the competition come back to us, so we are going to lose some people because we have very good people and we have got more of the people experienced in deepwater, so we are a natural target. But we're doing everything we can to make sure that we retain our good people and I think that we're going to be successful.

Okay, that's all have got, Bob. Thanks.

I think that we have time for just one more question, here.

Ian McPherson, Simmons & Co.

David, could you maybe compare your newbuild drillships with what GlobalSantaFe is doing? They've described theirs as a notch above typical sixth-generation, if you will, drillships. Are we going to see different types of rates for different types of new generation rigs or do you see them as being fairly comparable?

This is Bob Long. We do not really -- we have not been able to discuss anything with GlobalSantaFe in terms of the market, so I am not sure that we are in a position to make much of a comparison of the capabilities between the rigs. My sense would be, without knowing the capabilities of their rig, that there is not going to be much of a difference in the rate structure for all of the existing newbuild capacities coming out, the sixth generation rigs, if you will, unless there are some specific requirements that the customer wants you to build into the rig and then that becomes something that you get additional compensation for. But we're just not in a position to make any specific comparisons since we do not really know much about their rig.

Okay. And then just a quick follow-up for Greg. Did you quantify or could you the component of the incremental cost delta in your '08 cost guidance that is offset by revenues?

It is probably about one-third of the increase. If you look at the midpoint, there is a one-percentage-point increase and about one-third of that is offset by revenue. Another one-third is actually related to additional investment in people development that we decided to make proactively during our budget process. The other one-third is to adjust our shipyard inflation assumptions.

Very helpful, thank you very much.

Okay. Thank you, everybody. We appreciate you joining us on the call and we will look forward to doing it again next quarter.

Thank you. That concludes today's conference. We appreciate your participation. You may now disconnect.