Transocean Ltd (RIG) 2007 Q4 法說會逐字稿

Good day, everyone. Welcome to the fourth-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. Please go ahead, sir.

Thank you, Cynthia. Good morning, ladies and gentlemen and welcome to Transocean's fourth-quarter 2007 earnings conference call. A copy of the fourth-quarter press release covering our financial results, along with supporting statements and schedules is posted on the Company's website 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 on the Company's website by selecting Investor Relations, followed by News and Events and Webcasts and Presentations.

With me this morning -- or excuse me -- with me on this morning's call are Bob Long, our Chief Executive Officer; Jon Marshall, Chief Operating Officer; Jean Cahuzak, Executive Vice President, Assets; Steven Newman, Executive Vice President, Performance; Greg Cauthen, Senior Vice President and Chief Financial Officer and David Mullen, Senior Vice President, Marketing and Planning.

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 relating to our (technical difficulty) 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 US 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 on the call today that 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, www.deepwater.com under Investor Relations Non-GAAP Financial Measures and Reconciliations. And for your convenience, non-GAAP financial measures and reconciliation tables are included with today's press release.

Our website also includes schedules detailing operating and maintenance costs, other revenue, deferred revenue and revenue efficiency and investor relations financial reports. Finally, under News and Events and Webcasts and Presentations, we posted slides detailing average contracted day rate by rig type, out-of-service rig months, operating and maintenance costs, trends and contract backlog. That concludes the preliminary details. I will now turn the call over to Bob.

Thanks, Greg. Good morning and welcome to our first earnings call following the merger. We will follow our standard format, so after a few overview comments from me, Greg will give you some more insight into the numbers and then David Mullen will give you a bit of color on the markets.

I think we had a very good quarter; although any kind of comparisons are difficult to make because of the accounting required by the merger. Greg will give you some insight into the numbers in a minute and I will apologize in advance for the length of his remarks, but I think you will appreciate his explanations and the guidance he will give you for 2008.

I am happy to be able to report that our merger integration efforts are proceeding very well. Jon Marshall and I, together with others in senior management, recently completed the long trip to visit each of our business units and division management and it is clear that there is a lot of respect from everyone for the expertise, experience and capability that all hands from both legacy companies are bringing to the table. I don't think the dynamics could be any better. We also seem to be on track to achieve our goal of systems conversions by midyear and are slightly ahead of our original targets on synergy savings.

Looking at the market, we continue to enjoy excellent fundamentals. The deepwater market in particular remains substantially supply-constrained. We spent some time in India during our recent travels and it is clear from both the government and customers that there is an urgent requirement for more deepwater rigs in India.

In Brazil, all of you are aware of the recent announced discoveries in Tupi and Jupiter and the tremendous prospective demand that could be generated. Petrobras is currently out for bids for four deepwater rigs in addition to negotiating renewals on most of their currently contracted rigs. Many of those rigs won't be available until 2010 and the extensions are generally for four years, so those renewals will tie up capacity out to around 2014, if not longer.

Together with the backlog of development projects and continued exploration success in West Africa, growing demand in Asia and the huge potential in the Gulf of Mexico, particularly on the Mexican side, we think the deepwater market will remain supply-constrained for a long time.

I mentioned in our last call that we started to see some interest from clients in contracting existing rigs starting in 2010. In fact, we reported an extension of the Polar Pioneer from 2010 to 2014. Recently, we announced term contracts on two of our deepwater rigs -- the Explorer and Millennium -- starting in late 2009 and mid 2010 respectively. The rates were in excess of $500,000 a day. We are currently in discussions for a contract on additional rigs with availability in 2010. This interest in existing rigs with availability in 2010 has developed a bit faster than I expected and I think will accelerate as we get a little further into the year and we start to see some more of this capacity committed.

The jackup market continues to be good with a lot of demand, but a lot of new capacity coming into the market over the next 12 months. Market rates cover a wide range depending on the capability of the rigs and its location. We are currently bidding rates from the low 100s to the high 200s, but I am going to let David give you more details on that market.

We do continue to get a lot of questions about our future plans regarding our jackup fleet. As we said before, our present intention is to remain a major player in the jackup business. You are likely to see us sell some jackups, but those will be limited sales similar to what we have done in the past with some of our less capable floaters as we've continued to focus the Company on the higher end of the market and reduce our position in niche markets.

Along that line, you will have seen the announcement that we have entered into an agreement to sell our last three remaining jackups in the Gulf of Mexico, so we will be effectively out of the shallow water market in the U.S. Gulf. With that, I'll ask Greg to talk a little bit more about the numbers.

Thanks, Bob and good morning to everyone. On November 27, we closed the merger with GlobalSantaFe and the reclassification of Transocean shares and in the process, distributed approximately $15 billion to the GlobalSantaFe and Transocean shareholders. These transactions make understanding our results for the fourth quarter complicated and as a result, my comments will first focus on reconciling our results to Street estimates; second, provide additional insight into the results for the quarter and finally, provide you with our outlook for 2008.

In the fourth quarter of 2007, we had net income of $1.056 billion or $4.17 per diluted share. This compares to net income of $973 million or $4.63 per diluted share as restated in the third quarter of 2007. Net income for the fourth quarter of 2007 includes the following -- approximately one month of operations of GlobalSantaFe, the impact of reporting GlobalSantaFe's assets and liabilities at fair market value as required by US GAAP, interest expense related to debt used to fund the merger and reclassification, and various merger-related costs, primarily related to legacy Transocean employees.

In addition, diluted EPS for the fourth quarter includes the impacts of the shares issued in the merger and reclassification. As the reclassification is treated as a reverse stock split under US GAAP, all historical shares for purposes of calculating EPS are restated by applying the 0.6996 reclassification exchange factor.

Thus, the historical weighted average diluted shares in October and November for purposes of calculating fourth-quarter EPS in all other historical periods have now been restated. This results in an average diluted share count in the fourth quarter of 254 million shares. Alternatively, if the reclassification had been treated as a share buyback, the non-restated average share count would have been 309 million shares in the fourth quarter with this appearing to be the basis used for the reported Street estimates of our EPS.

We expect the basic and diluted share count for 2008 to be approximately 318 million and 323 million shares respectively. This is the same whether you consider the reclassification to be a reverse stock split or a share buyback with the actual number of shares dependent on exercised or conversions of various equity-linked instruments and the impacts on the dilution calculation of our actual share price in 2008.

As detailed in our earnings release, net income for the fourth quarter also includes the gain from the sale of the Peregrine I, additional merger-related costs, certain discrete tax items and losses from the retirement of debt. These items have a total net positive after-tax effect on income of $194 million. Diluted EPS would have been $2.79 per share without regard to these items and assuming the reclassification was accounted for as a share buyback, i.e., historical share averages were not restated.

This compares favorably with reported Street estimates for the quarter, which appeared to have been calculated on a similar basis and also compares favorably to the originally reported third-quarter diluted EPS of $2.12 per share, which was calculated with the exclusion of similar items and with no share restatement for the reclassification.

I will now focus on reported results for the fourth quarter and guidance for 2008. Contract drilling revenues for the fourth quarter improved to $1.860 billion from $1.455 billion in the third quarter. $344 million of this increase in revenues is related to the inclusion of one-month revenues from GlobalSantaFe operations as shown on the supplemental analysis of operating income attached to the earnings release. The remainder of the increase was composed of $47 million from the commencement of higher day rate legacy Transocean contracts and $51 million from increased activity, primarily from the Discoverer 534, Sedco 704 and the C Kirk Rhein.

These increases were partially offset by $24 million of decreased activity on the Shelf Explorer and Falcon 100, a $5 million increase in lost revenue from an operational incident on the Jack Bates and $17 million in revenue reductions related to changes in estimates regarding various indemnified tax items. The $17 million revenue reduction is fully offset by a related tax benefit reflected in the fourth-quarter tax expense.

Our revenue efficiency for the quarter at 95.3% was lower than the third quarter, but our full-year 2007 efficiency of 95.9% is a full percentage point higher than 2006.

Contract intangible revenues for the fourth quarter were $88 million with no comparable amount in the third quarter. The purchase accounting valuation of the GlobalSantaFe drilling contracts resulted in the recording of a net liability of approximately $1.2 billion, which is amortized in the revenue as contract intangible revenues over the lives of each contract. This non-cash amortization to revenue effectively marks up to market value all of the GlobalSantaFe day rate revenue.

Other revenues increased to $129 million from $83 million in the third quarter. $49 million of the $129 million related to the inclusion of GlobalSantaFe operations in the fourth quarter including, ADTI and CMI, which we refer to as drilling management services in oil and gas operations, as well as from recharge revenues.

In total, revenues increased to $2.077 billion for the fourth quarter compared to $1.538 billion for the third quarter with $481 million of the increase related to the inclusion of approximately one-month revenues from GlobalSantaFe operations.

As we look forward to 2008, we expect to experience a significant increase in contract drilling revenue from the inclusion of the full year of GlobalSantaFe operations in 2008 versus only one month of GlobalSantaFe operations in 2007. We also expect day rate revenue increases from the commencement of higher day rate contracts to be meaningful as shown on chart one.

Finally, 2008 contract drilling revenues from items not reflected in our fleet status report, including the amortization of deferred mobilization and contract prep revenues, are expected to be relatively flat with the $170 million seen in [2006].

With the inclusion of GlobalSantaFe operations, we expect planned out-of-service time in 2008 to increase compared to the level we experienced in 2007 prior to the merger as shown on chart two. Expected lost revenue due to the planned out-of-service time in 2008 should also increase due to the higher day rates associated with the out-of-service time on the legacy Transocean operations.

Contract intangible revenues in 2008 should increase to approximately $690 million versus $88 million in 2007, again due to the inclusion of a full year of GlobalSantaFe operations in 2008 versus only one month in 2007. We have included on our website a schedule showing the expected quarterly amortization of contract intangible revenues.

We expect other revenues in 2008 to increase to roughly $1.2 billion from $341 million in 2007. The drilling management and oil and gas segment revenues and recharge revenues are expected to increase significantly from the comparable 2007 amount due to the full year of GlobalSantaFe operations versus only one month of operations in 2007. Roughly $800 million of the expected $1.2 billion of other revenues for 2008 relates to the drilling management and oil and gas segment; $190 million relates to integrated services; and $200 million relates to recharge revenues.

Operating maintenance expense in the fourth quarter were approximately $923 million versus $663 million in the third quarter as shown on chart three. On our last earnings call, we guided our operating maintenance expenses to a range of $660 million to $690 million. Our operating and maintenance expenses for the fourth quarter exceeded our guidance due to the inclusion of $151 million from GlobalSantaFe operations and $59 million of merger-related costs included in the quarter.

The remainder of the excess of our guidance related to $12 million from an operational incident on the MG Hulme shipyard, $5 million from additional repair costs related to an incident on the Jack Bates and $6 million from the impact of the weakening US dollar with that last item largely offset by the increase in revenues.

We currently expect our total operating maintenance cost for 2008 to be between $5.15 billion and $5.3 billion. This includes over $1.1 billion of costs related to our low-margin other revenue, including drilling management services, oil and gas, property, integrated services and recharge revenues.

We expect our operating and maintenance costs in the first quarter of 2008 to be significantly higher than the fourth quarter of 2007, primarily due to the inclusion of a full quarter of GlobalSantaFe operation. For the rest of the year, the level of cost each quarter will vary and is expected to be driven primarily by the amount of shipyard immobilization activity in a given quarter and the timing of various maintenance projects on the rigs. We expect the second quarter to be an especially heavy shipyard and maintenance quarter.

The expected increase in 2008 full-year operating maintenance costs versus 2007 actual costs is driven by several significant factors. $2.2 billion related to the inclusion of a full year of GlobalSantaFe operations versus just one month in 2007, a $50 million expected increase in our labor pool costs, which we believe is necessary to satisfy our newbuild crew requirements and limit the impact of an anticipated increase in attrition, $35 million of merger integration costs related to training costs, information system conversions, severance and other merger-related costs. $25 million related to an expected increase in legacy Transocean operating days with the expected commencement of the Sedco 702 contract in March of 2008 following its upgrade and the completion of the Sedco 706 upgrade in the fourth quarter of 2008, and a $25 million increase in integrated services costs in 2008, which is in line with our previously noted expected increases in integrated services revenue.

We expect that these cost increases will be partially offset by $70 million of lower costs due to merger-related synergies from insurance and personnel compensation, and $30 million of lower costs due to the sale of the Peregrine I in the fourth quarter of 2007. The remainder of the expected increase of operating maintenance cost is due to core cost inflation. Compared to our 2007 pro forma combined operating maintenance expense, all of these items should result in an overall year-over-year increase of 8% to 10%.

I would continue to caution you, however, that these estimates can be affected by a number of factors, including, among others, the amount, scope, duration and timing of shipyard immobilization activity, the actual level of equipment, labor and shipyard inflation, and the performance of foreign currencies against the US dollar.

General and administrative expenses were $60 million in the fourth quarter compared to $27 million in the third quarter. $23 million of this $33 million increase was for merger-related compensation costs; $4 million was related to the inclusion of one month of GlobalSantaFe operations; $2 million was related to an increase in legal fees, primarily related to FCPA investigations; $1 million was related to normal fourth-quarter increase in accounting fees; and $1 million was related to our scheduled semiannual compensation increases. We expect general and administrative costs in 2008 to be roughly $45 million per quarter, which includes $20 million per quarter related to the GlobalSantaFe operations, partially offset by $5 million per quarter of merger-related personnel synergies.

Depreciation expense was $195 million in the fourth quarter compared to $103 million in the third quarter with the inclusion of GlobalSantaFe operations accounting for all of the increase. In 2008, we expect depreciation expense to average roughly $380 million per quarter.

Capital expenditures in the fourth quarter of 2007 were $320 million versus $305 million in the third quarter. Fourth-quarter capital expenditures include $38 million related to the legacy GlobalSantaFe operations. Approximately $87 million of our fourth-quarter capital expenditures related to our eight ultra-deepwater floaters under construction; roughly $114 million related to the two 700 series upgrades; and the remaining roughly $119 million relates to contractually required upgrades, fleet care and normal operations. We expect capital expenditures for the full year 2008 to increase from $1.4 billion in 2007 to roughly $2.5 billion in 2008. Of the expected $2.5 billion, $1.4 billion relates to our eight newbuild rigs and roughly $200 million relates to our two upgrades, all including capitalized interest.

Interest expense, net of interest income, increased to $66 million in the fourth quarter versus $16 million in the third quarter. The increase was primarily related to the borrowings used to fund the roughly $15 million in cash payments related to the merger and reclassification. The increase was partially offset by an increase in capitalized interest from $19 million in the third quarter to $29 million in the fourth quarter, as well as due to the conversion and redemption of legacy Transocean convertible debt. We expect our interest expense, net of interest income, to increase in 2008 to roughly $125 million in the first quarter, falling to approximately $75 million in the fourth quarter, assuming no additional newbuild commitments or asset sales and assuming our free cash flow continues to be used to pay down debt.

For the full year of 2007, our annual effective tax rate was 12.5%. This excludes the impact on income before tax related to gains from the rig sales and the TODCO tax sharing agreement and also excludes various discrete tax items from income tax expense related to changes in estimates and resolution of prior years' tax disputes in various jurisdictions. During the fourth quarter a favorable tax ruling was issued in one of the jurisdictions in which we operate and income tax expense decreased by approximately $36 million due to changes in tax estimates for prior years and decreased by an additional approximately $43 million related to bringing the full year effective tax rate down to 12.5%. $17 million of the $43 million related to amounts which were indemnified by a customer and thus there is an offsetting $17 million of revenue. We expect our effective tax rate for 2008 to between 12% and 14%, this is higher than our 2007 annual effective tax rate due to the impact of the expected increase in 2008 interest expense for which we will get no tax benefit. Finally I would like to highlight our record $31 billion of revenue backlog based on our February 1 fleet status report as shown on chart four. Since February 1, we have signed nine contracts, adding $1.2 billion in additional revenue backlog as shown in the fleet status report we filed this morning. And with that, I would like to turn it over to David for the marketing outlook.

Thanks, Greg and good morning to everybody. We had a very busy period in contract activity since the last earnings call with a number of contract commitments on the existing fleet with start dates in 2010. We continue to see a lot of customer interest in newbuild opportunities and I expect in the coming quarter that a number of these will translate into commitments.

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 Discoverer Spirit contract was extended for an additional three years with Anadarko with a forward start date of 2010 extending the contract till late 2013 at a day rate of $520,000 per day.

The GSF Explorer was awarded a two-year contract with a consortium of operators in Southeast Asia at a rate of $510,000 per day with an expected contract commencement in late 2009. And the deepwater Millennium contract was extended for an additional three years with Anadarko at a rate of $535,000 per day with a start date of mid 2010, extending the contract commitment until 2013.

The six years I have just mentioned support the view of an extended upcycle for high-specification units where we continue to see unsatisfied demand in the mature deepwater petroleum basins. We see substantial incremental demand growth for appraisal and subsequent development work following some very significant discoveries such as the subsalt in Brazil, the lower tertiary system in the Gulf of Mexico, the deepwater offshore eastern India and a number of discoveries in the subsalt and Block 31 in Angola.

All these serve to demonstrate the huge upside potential of these deepwater basins. The recent subsalt discoveries in Brazil and the lower tertiary discovery in the Gulf of Mexico are characterized by ultra-deepwater, very difficult drilling conditions and ultra-deep wells, which will require the most highly capable ultra-deepwater rigs.

We also see significant demand growth in exploration activity in the unexplored deepwater areas as operators look more and more to deepwater to offset production decline and in general replace producing reserves.

We continue to see strong demand in the midwater floater market sector. In the UK sector of the North Sea, we are on the brink of tying up all remaining units with time available in 2008. We also achieved some term fixtures in Libya and Canada at very favorable rates. Providence Resources have contracted the Arctic II for three wells starting in June 2008 at a rate of $400,000 per day for operations offshore Ireland.

Nexen have contracted the Transocean Prospect for two years starting in late 2008 at $365,000 per day for operations in the UK North Sea. The Grand Banks has been awarded a three-year contract with Husky to work offshore Canada commencing early 2008 at a day rate of $353,000 per day. The Arctic III was awarded a firm commitment with ENI in Libya at a rate of $453,000 per day for a period of one year.

Once again, we had an active quarter in the jackup sector with a number of term fixtures at attractive rates and short-term fixtures at very strong rates. For example, as far as the short-term fixtures are concerned, we contracted the Shelf Explorer with Lam Son in Vietnam for three wells at $174,000 per day followed by two additional wells at $184,000 a day, the Adriatic VI with Vaalco for two wells at $218,000 per day in Gabon. The Trident IV was awarded one well at $219,000 per day with BowLeven in Cameroon and the Transocean Nordic was awarded a contract with [Infinineft] in Russia for approximately 150 days at $185,000 per day.

As for some of the longer-term fixtures, the Transocean Mercury and the rig 105, two low specification jackup units, were awarded a two and three-year contract extension with Petrobel at $110,000 and $112,000 per day respectively for operations in the Gulf of Suez. The Galveston Key was contracted to Cuu Long for two years in Vietnam at an initial day rate of $178,000 per day.

Consistent with the comments on the last earnings call, demand remains strong for the international jackup market and the additional supply continues to be absorbed in the market. We anticipate that this supply/demand balance will continue through the first half of 2008 and beyond that, we just don't have the visibility on the demand side, but remain cautious on the supply additions anticipated through 2008 and 2009.

Consistent with our strategy of upgrading our overall fleet quality through newbuilds, selective upgrades and non-core asset dispositions, we have entered into a definitive agreement to sell three jackups currently located in the Gulf of Mexico -- the Adriatic III, High Island I, High Island VIII for $320 million. This sale also marks our exit from the shallow water area of the Gulf of Mexico. That concludes my marketing comments, so I will turn it back to you, Bob.

Thanks, David. With that, I think we're finally ready to entertain some questions.

(OPERATOR INSTRUCTIONS). Kurt Hallead, RBC Capital Markets.

Good morning. Thanks for all the detail; it would be really helpful. I just wanted to follow up initially, Greg, you had referenced your interest expense start and end kind of ranges, just I think I might have misheard. You are starting at what? You said 175 and ending at -- or excuse me -- 125 and ending at 75? Is that what you said?

Yes.

That is on a net interest basis?

That is net of interest income and also net of capitalized interest, which will grow slightly during the year as we continue to invest in newbuilds. Now realize that with our converts, which are very low coupon and also at the beginning of the year, about $7 billion of our debt is floating-rate debt and LIBOR has really come down here lately, so we are just assuming sort of a flat LIBOR. So it will be dependent on what LIBOR actually does with that much floating-rate debt.

Okay. And then did you reference your depreciation for the year?

Yes, we did. It should be roughly $380 million for the year. It will go up a little bit -- per quarter. It will go up a little bit naturally and then come down a little bit as the rig sales occur during the year. So it will start and end the year at the same quarterly run rate.

Okay, great and then from a market standpoint, I think the deepwater market, the strength there is pretty self-evident. On the jackup market, I think, over the last nine or 12 months, we have seen the rate range kind of decline here. I just want to get a sense of what I am hearing is that '08 should be fine from a supply/demand balance standpoint. Still question marks remain on '09. So do you get the sense that the market is getting more sensitive to maybe taking rates down another leg here to secure work through '09 and kind of avoid the next wave of supply or are you guys getting a sense that '09 could surprise people and be stronger than expected?

David will just try and answer that.

We continue to be positively surprised with the jackup market. It is -- in terms of what we see with fixtures in the past quarter, what we see coming up in the near term. We see a combination of long-term fixtures at good day rates. We see some short-term fixtures, which we have anchored in the past quarter at very good day rates. So I would say that we continue to be positively surprised by this market. I would caveat it by saying we have never had long-term visibility on the jackup demand side. The visibility we do have is typically six months and that remains positive.

I would say, Kurt, that I don't think we are seeing any reductions in day rates. I don't think we have seen any significant increases in day rates. Although some of these short-term contracts might actually be a bit higher than I would have expected, but we're not seeing any general overall push to lower jackup rates.

Okay. And then I guess there was a recent transaction here. Scorpion going for $228 million a rig and I am sure that was above most of the US publicly traded companies' price range, but is there a recognition now maybe here in the marketplace or a recognition maybe on your front that maybe a $200 million plus price tag for a new jackup rig is now feasible?

I am not sure that I can comment really on that. We haven't been in the market for new jackups, so I guess I just couldn't answer your question really.

I guess along the lines of what you referenced earlier, Bob, about the fact that you may be -- you're focused on the high end of the jackup market and a lot of these new rigs are kind of at that high end. I was just curious as to whether or not you may look to high grade it that way?

I guess we are always looking at opportunities, but I think we would be careful of the prices that seem to be out there for jackups today. So that is not a priority for us at the present time.

Angie Sedita, Lehman Brothers.

Thanks. Good morning, guys. Nice quarter out of the gate, a nice solid quarter. The first question I have for you guys is we obviously saw a nice contract signing by Ocean Rig recently with a $600,000 plus rig contract, big rig, but for a three-year term. Given the availability you have on the Nautilus and the DD I, do you think we are going to see more of these types of rates not just for short-term contracts, but more term here?

David?

Yes, it demonstrates the value that the market places on early availability. So I think, yes, it is a market rate.

Do you see any advantage in keeping some of your rigs free, high-spec rigs free closer to those dates or would you be willing to contract them at today's prices?

At the right day rate and for the right term, we are very happy to continue to contract our rigs.

Okay, great. On the Galaxy II, I saw that it took a short-term contract, went from 300 to 200 and then into the shipyard. Has the tightness in the North Sea market changed at all and would you expect that rig to go back to a similar rate?

Yes, this was a question of filling the gap. We are talking to an operator on a long-term opportunity there. So it has an SPS scheduled and I would anticipate that you will see something come out on that fairly soon.

And then finally, you already have between the two companies a pretty impressive newbuild construction program underway. Are you still seeking out additional contracts for construction or are you happy at today's program level?

We are in advanced discussions on the second joint venture rig. We have the rig at the HHI yard and yes, we continue to dialogue with customers and we see very strong interest in newbuilds. So I wouldn't be surprised if you saw something happen there in the next -- within the next year.

Great, thanks, guys. That's all I have.

Waqar Syed, Tristone Capital.

Thank you. Bob, could you quantify the incremental demand that could come in from the Tupi Jupiter discoveries in offshore Brazil and then are you seeing any interest in your clients drilling for similar kind of prospects offshore West Africa?

I think lots of different people have come out with efforts to project the number of rig that could be required to develop Tupi and it depends on what is finally resolved in terms of what those reserves actually are, but numbers really spread all over the map on that. I am not sure that we are any better at trying to really estimate how many rigs might be needed to develop it. It depends on how quickly Petrobras wants to develop it. I think it is clear that it could generate a significant increase in demand and increase in interest in that whole play, but trying to quantify the number of rigs is probably just a numbers game and I am not sure it would tell you anything. As far as West Africa, I will let David comment on that.

There have been a number of discovery subsalt in West Africa. There is not an awful lot released with respect to the geology, so I don't know how the geology mirrors West Africa and Brazil. Ostensibly, it is the same sedimentary system, so it should be -- there should be some similarities there. Clearly, all this subsalt is unfolding a totally new petroleum system and just gives greater weight to the deepwater basins. We see the lower tertiary system in Gulf of Mexico, the subsalt in Brazil and now subsalt in Angola, which I am sure will extend to greater areas in West Africa.

Good. And just the last question is on the shipyards. Are you hearing, not just for your own rigs, but industrywide, are you hearing of any delays or any issues with the shipyards that are building quite a few rigs over the next couple of years?

Jean Cahuzak will give you an answer to that.

I mean talking first about Transocean rigs, we are building eight rigs --one in Singapore and seven in Korea. And as you can imagine, we have assigned dedicated teams to monitor the progress of this new construction.

At this stage, all projects are on time and on budget as far as the Transocean rigs are concerned. We would like to highlight, however, that the most challenging part of any project remains the integration and commissioning of equipment, which has not yet started. The approach that we have taken is based on the past experience we acquired with the last round of newbuilds in the late '90s and based on this experience, we have assigned full-time Transocean people in all our main vendor facilities to monitor the manufacturing of major components and systems and we have established regular visits to all critical vendor shops. This seems to work pretty well as we have been able to correct at an early stage a few issues, which would have had a negative impact if not identified on time.

So in summary, at this stage, I'm confident that we have assigned adequate technical resources to these projects and that with the right management focus, we should deliver these rigs on time and on budget. I am cautiously optimistic on that.

Regarding our competitors, you have seen some announcements of delays, mainly related to commissioning and I can't really comment on where they are exactly. As I mentioned before, commissioning is key and having the right resources to monitor the commissioning is absolutely required for success.

Great. Thank you very much. Thanks for your answer.

Rob Mackenzie, FBR.

Hi, guys. I wanted to touch on Angie's question a little bit more with the recent fixture of a competitive rig well over 600,000 a day for three years. Do you think that sets a new market for your big rigs?

Well, we would like to think so, but I wouldn't get too optimistic about that. There is a lot of different dynamics and really, as David indicated, there is a very significant premium in the market for prompt delivery. So you can't really use that as a marker necessarily to say what rates on newbuilds are going to be or what rates on rigs that are available in 2010 type time horizon are going to be. It is certainly a marker I think that most of the industry is going to be looking at on any capacity that is available with prompt delivery and those would be the few rigs that might be available in late 2008. But beyond that, I think you need to be careful. We can hope, but we will have to see how things develop in the later years.

Well, in the context of that then, Bob, you mentioned you're seeing demand for rigs with availability in 2010 faster and sooner than you had expected. What percentage of your fleet might you consider deferring contracts on in an attempt to get perhaps better returns at a later date?

Well, you need to be careful with the dynamics of the market. If you hold a lot of rigs off the market hoping that things will get better then you are going to have a lot of capacity available and nothing is going to drive it to get better. What is going to drive the rates on the long forward start contracts higher is eventually getting a lot of that capacity contracted and if you don't do that, then my guess would be that there is not going to be a catalyst to drive the rates higher. So there is not really a crisp way to answer your question. We monitor this market and we look at opportunities and frankly, it is difficult to turn down day rates on these rigs for three or four-year type contracts starting in 2010 at rates that are substantially in excess of $500,000 a day providing pretty significant returns. So there is a lot of different dynamics there.

Okay, thanks.

Jud Bailey, Jefferies & Co.

Thank you, good morning. Bob, could you comment on -- actually I was going to circle back on the newbuild question, but could you comment on availability in the yards, what is the earliest slot you have available and do you have any remaining options -- I can't remember -- from the various contracts you have gotten into, if you have any remaining options for an earlier delivery? And then could you maybe comment on the cost of building one of your Discoverer class drillships today?

I think on the cost front, we are estimating that a new rig ordered today would be around $725 million to $750 million. Deliveries I expect would be probably close to first quarter 2011 and not sure where we stand on options. Jean?

When you look at yard availability, it is not only the shipyard availability which needs to be considered, but also the delivery time for drilling equipment and other components of the rig. So I would say that in short term, we would have some possibility to secure some slots for delivery early Q1 2011 and then it is a question of monitoring the situation and see what is available on a continuous basis.

Okay. And one last question, maybe for Greg. You gave a number for EPS for the fourth quarter, taking out kind of the one-time items of 279. What tax rate were you using for that? I didn't catch that.

Well, it is a little complicated. That takes out the prior year's discrete tax items, but does include in the quarterly tax rate the unusual items in the quarter. So the normal effective tax rate is 12.5%, but then there is another $26 million odd in the quarter that relates -- that as a cash item relates to '07, but you could argue whether it all relates to the quarter or not. So that is still in there, but -- so it is a combination of that 12.5% less the $26 million net and that is net of the $17 million revenue adjustment I talked about. A little complicated quarter on taxes.

A little bit, yes. Thank you.

Dan Pickering, Tudor, Pickering, Holt.

Good morning, guys. Bob, I wanted to come back to the newbuild question. In your earlier comments, you talked about a supply-constrained market and it's going to be that way for a long time. Historically, you have been a new builder with contracts in hand. I think the GlobalSantaFe folks were a little more willing to invest without a contract. Given such a strong market and the fact that it seems like speculators will soak up those shipyard slots, I mean does it push you to consider speculative new building or new building without a contract?

No. I still have no appetite at all for ordering new rigs on speculation with a 3 or 3.5 year delivery despite how good we think the market is going to be. Adding capacity to this market, particularly right now while we have some discussions going on with some customers about potential newbuilds, both on the current ones we have under construction without contracts and on additional ones, we are -- preferably, we are trying to interest customers in first contracting the existing capacity that we have coming available in 2010 and 2011. In some instances just because of their requirements, they prefer to look at a newbuild and I think we are going to get some opportunities to add additional newbuilds with contracts. So I have no interest at all in building on speculation.

Good answer, I like that. And the interest in the newbuilds with contracts, is that coming from publicly traded companies? Are they national oil companies, where is that demand showing up?

I will just let you see that once we announce the contracts if we get it, Dan.

Okay. And then jumping over and talking a little bit about the jackup rigs that you just sold. I think the buyer is talking about putting some money in these rigs and taking them to international market, so you have talked about your exiting the shallow water Gulf, but they are talking about international demand with spending a little bit of money. Just can you reconcile for us -- you didn't want to spend that money on these rigs. Why does it work for them, but doesn't work for you?

Well, I am not sure. There could be a lot of factors there, Dan, in terms of outlook and risk profile on the market, but we look out there and while we see a good jackup market today and continuing increases in demand, everybody is aware of all of the new capacity that is going to be coming into the market, if you take a look at what we got for a sales price and look at what we think it would cost to make those rigs really competitive in an international market, you wind up with a cost basis for those rigs that is almost comparable to a newbuild and it is a 25 or 30-year-old rig, so we just concluded that that didn't seem to particularly make sense, particularly given the fact that we would prefer to have a focus on the high end of the market and completely fully competitive rigs. So kind of put all of that into the pot and decided it was a fair price.

And last question for Greg, you gave a fair amount of detail on the cost side with relationship to the various business segments. Is that something that we are going to see going forward or is that just the help you are giving us as we transition from the two separate companies to the one company?

We will do that going forward. We will try to make my comments a little brief, more shorter in the future, but we will try to give that same level of guidance because we understand our cost structure is complicated and that guidance is helpful.

Great. Thank you. I appreciated the detail.

Ian Macpherson, Simmons & Co.

Hi, good morning. Bob, my first question would really just be on a conceptual level for deepwater day rates. Newbuild costs are going higher; steel price is higher; no relief in shipyard deliveries; your operating costs are going way higher. What would prevent day rate -- leading-edge bid day rates for deepwater rigs to go higher from your perspective in connection with all of those factors?

Well, that's a little bit difficult question to answer in terms of what really drives the day rates, but when we -- from our perspective on a newbuild since we don't build on speculation and we generally have a criteria that says we want a certain amount of sure payback in an initial five-year contract, if you accept all of your assumptions about increasing cost to build, then that would clearly drive an increased day rate requirement in order to meet our payback criteria. So from our perspective, building to a contract, your conclusion is probably accurate, assuming that your assumptions about all those costs going up are accurate. But beyond that, I am not sure I could comment much.

I think the cost assumptions I am talking about are fairly empirical. That being said, newbuilds aren't really setting the leading-edge rates. It is the warm rigs with earlier availability that are. So I am just wondering if the newbuild costs and the industry level operating cost squeeze is influencing the way you're bidding leading-edge day rates for existing rigs or if those factors are really detached?

Well, one thing when you think about the existing rigs and bidding rates for a forward start contract, we are generally requiring cost escalation protection from today. So the rates that we bid aren't particularly influenced by our view of future costs for most of the cases when we are bidding these forward start contracts because we are putting in the contract to get protection. That probably means that the day rate when the contract commences is going to be significantly above what the headline day rate is at the time we sign it, but we will just have to wait and see what cost actually does in order to see what that day rate is going to effectively be at the time the contract starts.

Really? Okay, thanks. And then I guess just a quick follow-up for Greg. I am sorry if I missed this in your remarks. With respect to the O&M cost guidance for the year, 5.1 to 5.3, did you break out what's for CMI and ADTI?

All I broke out is that for all of our low-margin activities, CMI, ADTI, are legacy Transocean integrated services and then the recharge revenues, reimbursables from customers, that is about $1.1 billion of revenue we expect for 2008 and a little over $1 billion for costs for all that.

Okay, got it. Thank you.

Roger Read, Natixis Bleichroeder.

Good morning, gentlemen. A quick question following up on the disposal of the three jackups and kind of your talk about the cost to upgrade those rigs. Clearly there must be other jackup rigs in your fleet that are going to meet that sort of same hurdles ultimately as they face significant upgrades, your need to mobilize to a different market. What do you do down the road about either building or buying additional jackups -- and I'm going to assume you're probably going to buy -- and are there any floating rigs in your fleet on that other deepwater category that kind meets a similar situation to the jackups where you might be facing a near-term question about significant capital expenditures to keep those rigs in the market?

I don't think that there is any extraordinary situations in terms of our floating fleet. You probably are aware that over the past few years, we have sold a fair number of our really lower end, less competitive floating rigs.

In terms of what we do with the jackups, whether we buy or build, it is extremely unlikely that we would build a new jackup because we would apply our same criteria of needing a contract to build it and since so many other people are willing to build jackups on speculation and there is so much capacity coming in the market, there aren't really any operators out there that are willing to give us a term contract that meets our payback criteria for a newbuild jackup. Whether we ultimately buy some existing newer jackups is an open question. We are always looking at opportunities right now. We don't particularly see any, but it is hard to say what the future is going to bring.

That is fair. And Greg, one question for you and thanks for the specificity on the guidance, but did you give us an idea of what capitalized interest ought to be? I am assuming the interest expense you gave us was a net number Q1 through Q4.

Yes, it should range at the beginning of the year from about $30 million and then by the end of the year, about $35 million a quarter.

All right, thank you.

[Jean Capoteleo], Lehman Brothers.

Good morning, gentlemen. Thanks for taking my call. My question is to Greg. Greg, I was hoping you could provide some color as to trends to repay debt maturing in 2008, as well as refinance your outstanding bridge loans.

As we have talked about when we launched the merger transaction, our strategy, our capital structure guidelines going forward are going to be pegged off of our backlog and our target or guideline debt is to have our total debt $5 billion less than our free cash flow backlog. Today, our free cash flow backlog is roughly $16 billion. Our debt as of the end of '07 was $17 billion. So we are going to focus our free cash flow for '08 and most of '09 on paying down that debt until we get within that guideline.

Now that guideline is flexible, so over the next couple of years if our backlog increases, we may be able to consider pausing that debt reduction earlier. If the backlog decreases, we may continue applying cash flow to reducing debt. So we have deliberately made that a flexible guideline to take into account the backlog.

In terms of the bridge, we are in the process of refinancing about another $1.5 billion of the bridge into a term bank loan and then the remaining $1.5 billion of the bridge will pay off out of cash flows primarily in the second and third quarter of this year. So by the third quarter, the bridge will be totally paid off.

Okay, great. Thanks a lot.

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

Ted Izatt, Bear Stearns.

Yes, hi. Thanks for your earnings and congratulations. My question was really just related to the last question actually and I guess you're basically saying then you won't need to come to the capital markets this year, is that correct?

That's correct.

Okay, that's my question. Thank you.

Okay, well, I would like to thank everybody for joining us on this our first call after the merger and we appreciate the interest in the Company. Thank you very much.

Ladies and gentlemen, this will conclude today's conference call. We do thank you for your participation and you may disconnect at this time.