Transocean Ltd (RIG) 2008 Q4 法說會逐字稿

Good day, everyone. Welcome to the fourth quarter and full year 2008 results conference call for Transocean Limited. Today's conference is being recorded.

At this time 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, Anthony. Good morning and welcome to Transocean's fourth quarter 2008 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 www.deepwater.com. We also posted a file containing four charts that will be discussed during this morning's call. I think that is six charts now. That file can be found on the company's website by selecting Investor Relations followed by Quarterly Tool Kit. Joining me on this morning's call from Geneva are Bob Long, Chief Executive Officer; Steven Newman, Chief Operating Officer; and Terry Bonno, Vice President of Marketing. With me here in Houston this morning is Greg Cauthen, our Senior Vice President and Chief Financial Officer.

Before I turn the call over to Bob, 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 financial performance, operating results, and the prospects for the current current 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 under the Investor Relations Non-GAAP Financial Measures and Reconciliations tab. 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 Webcast 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. Now I will turn the call over to Bob.

Thanks, Greg. Good morning, everyone and thanks for joining us on the call. As you saw from our press release, we earned $2.50 per share with a number of items including goodwill impairment, asset impairments, and bad debts having a significant impact. Adjusting for these items, we earned $3.69 per share, pretty much in line with expectations. Greg is going to give you detail on the quarter in just a few minutes.

Most of you will also have seen our recent press release announcing the Board's intent at our next annual meeting to recommend to shareholders a CHF3.5 billion share repurchase program. That's approximately $3 billion at today's exchange rates. Just to remind everyone, as a Swiss company, we need shareholder approval before we can undertake either a dividend or a share repurchase program. As the press release indicates, if shareholders approve the repurchase program, we may or may not be in the market in the near term to repurchase shares, but did want to have the flexibility to do so over the coming year. Hence our intent to get such approval in May.

Turning to the markets and general business conditions, we continue to enjoy the benefits of a very significant backlog. The backlog has decreased from last quarter and now stands at just under $39 billion. The decrease is a result of our high revenue run rate and a slowdown in new contracting activity. The two areas of our business which have been impacted the most negatively by continuing economic slowdown and low commodity prices are the North Sea floater market and the Gulf of Mexico turnkey business. In the North Sea, we now have two mid-water floaters stacked and have had a letter of intent canceled and also a number of rigs which are available for farmout from various operators. In the Gulf of Mexico, ADTI has only one turnkey operation currently going. That's down from a high of 11 at one time last year.

We're also seeing a slowdown in the jackup market. We currently have three jackups idle with the prospect several others will become idle over the next few months. The slowdown is apparent across the world, particularly in Africa, the Far East, and the Middle East. The turnkey and mid-water floater markets are primarily driven at the margin by smaller independents that may be having liquidity issues caused by low commodity prices and the difficult credit markets. I think we will see a further weakening in these markets until the price of oil gets well above its current level.

The deepwater market, however, continues to be encouraging. We still have operators talking about requirements for additional rigs. It's certainly true that urgency to sign [forward] start contracts immediately is no longer present, with the exceptions of Brazil and India, but we believe the demand is still there. There's just so much uncertainty in the minds of operators that most are unwilling to make a lot of commitments in the near term. Petrobras and ONGC are, however, currently in the market for multiple deepwater rigs each. Longer term, I think the market for deepwater rigs will be even stronger than we expected a year ago. The demand has not gone away, and with continuing exploratory success in Brazil, has almost certainly increased. New orders for occasional new builds have dried up and we hope some of the existing orders will be canceled with a number of others delayed in their delivery. With a significant majority of our high specification fleet contracted into 2011 and beyond, I think Transocean is in an excellent position to do well in the downturn and well placed to enjoy the significant upturn which should eventually come.

With that, I will ask Greg to give you the details on our financials and a few comments on expectations for 2009. Because of the number of unusual items in the financials, Greg's remarks will be a little longer than normal. In the interest of time, we'll go straight to questions when Greg finishes. Terry Bonno is here and will be happy to provide further background on the markets if anyone has any questions. Greg, over to you.

Thanks, Bob. Good morning to everyone. In the fourth quarter 2008, we had net income of $800 million or $2.50 per diluted share. This compares to net income of $1.106 billion or $3.44 per diluted share in the third quarter of 2008. Fourth quarter net income was adversely affected on a net basis by certain items totaling $385 million or $1.19 per share. After adjusting for these items, fourth quarter net income was $1.185 billion or $3.69 per share as compared to third quarter 2008 net income adjusted for similar items of $1.091 billion or $3.39 per share. The $3.69 per share was slightly below Street estimates primarily due to higher annual effective tax rate than expected.

Items adversely affecting fourth quarter net income included $208 million of ADTI goodwill and intangible impairments; $97 million for impairment of the Arctic II and Arctic IV; $20 million of discrete tax items, C&I impairments, and costs related to the GSF merger; $46 million of incremental depreciation related to the final GSF merger purchase accounting; $17 million of Oilexco bad debts; $18 million of material and supply obsolescence; and finally, partially offsetting these charges were $21 million of income related to the sales contract termination fee on the Transocean Nordic and income from the TODCO tax sharing agreement. Similarly, third quarter 2008 net income was adversely impacted by similar items totaling $15 million or $0.05 per share.

Contract drilling revenues for the fourth quarter were $2.830 billion as compared to $2.699 billion in the third quarter. The increase was primarily related to previously anticipated reduction in shipyard projects and the commencement of higher day rate contracts. Revenue efficiency was basically flat between the quarters. Other revenues decreased in the fourth quarter to $307 million from $350 million in the third quarter. This decrease was primarily related to a decrease in activity and lower commodity prices for our noncontract drilling segment. Contract intangible revenues in the fourth quarter decreased $133 million from $143 million in the third quarter. The decrease was due to the previously anticipated reduction in amortization each quarter since the merger.

Total revenues were $3.270 billion for the fourth quarter compared to $3.192 billion for the third quarter, with the increase in contract drilling revenues partially offset by the decreases in contract intangible and other revenues. Contract drilling revenues for the full year 2009 are expected to continue to benefit from the commencement of higher day rate contracts, as shown on chart 1, as well as the commencement of operations of five of our ultra deepwater new builds and the Sedco 706 after completion of its deepwater upgrade. Contract drilling revenues are also expected to benefit from a decrease in loss revenue due to fewer net out of service days from shipyard projects and mobilizations as shown on chart 2. These expected increases in contract drilling revenues in 2009 may be partially offset by a decrease in rates on some jackups and mid-water floaters as they roll to new contracts in 2009. We also expect some jackups and mid-water floaters to experience significant idle and stacking times during 2009.

Contract intangible revenues are expected to to decline to $281 million in 2009 from $690 million in 2008 and to decline further to $98 million in 2010. The detail by quarter and for all future years of our expected contract drilling intangible revenues are available on our website. The anticipated decline in noncash contract intangible revenues has no impact on our future cash flow. We expect our other revenues to decline from $1.228 billion in 2008 to roughly $775 million to $825 million in 2009, with approximately $450 million related to the noncontract drilling segment, approximately $200 million related to integrated services, and approximately $150 million related to recharge revenues. This expected decline in other revenue is primarily due to anticipated decrease in activity in our noncontract drilling segment caused by lower commodity prices and weak capital markets. As discussed below, due to the low margin nature of this business, we expect any decrease in noncontract drilling revenue to be largely offset by reduction in the related costs.

Operating maintenance expenses in the fourth quarter were $1.408 billion versus $1.426 billion in the third quarter as shown on chart 3. The quarter to quarter reduction in operating maintenance costs was primarily attributable to a $46 million reduction in non-drilling costs consistent with the decrease in revenue and the $17 million decrease in maintenance and shipyard project costs. These reductions were partially offset by the $23 million in Oilexco bad debt expense and $21 million in increased obsolescence of inventory. Adjusting for these last two items, operating and maintenance expense would have been roughly in the middle of our guidance range from the last earnings call.

We currently expect our 2009 operating and maintenance expenses to range between $5 billion and $5.3 billion, which includes roughly $715 million of expected costs related to our low margin other revenue items. This cost guidance is lower than the $5.45 billion to $5.7 billion range we provided during the third call for the following reasons, not necessarily in order of size -- a continued strengthening of the US dollar since our prior call; an expected decrease in industry inflation; an expected decrease in recruiting costs due to easing attrition; an expected decrease in non-drilling activity; various overhead cost reduction initiatives; and finally, an expected reduction in operating costs associated with the number of jackups and mid-water floater that may be cold stacked during 2009. We currently have three jackups and two mid-water floaters that are either idle or stacked and would expect to see more rigs stacked by the end of the year if the current economic environment continues.

Our actual costs for 2009 remain uncertain given current economic and market uncertainty and can be significantly impacted by the actual level of activity, cold stacking, warm stacking, exchange rates, the level of inflation, et cetera. For example, the low end of our cost guidance range assumes today's exchange rates continue throughout 2009 and more rigs are stacked, while the high end of the range assumes the exchange rate in 2009 reverts back to the summer of 2008 levels and fewer rigs are stacked. Roughly 40% of any change in costs due to changes in exchange rates is expected to be offset by a corresponding change in revenues due to the portion of our contracts that are denominated in local currency.

General administrative expenses were $59 million in the fourth quarter compared to $46 million in the third quarter. This increase was primarily attributable to $4 million in one-time costs related to the redomestication and $4 million of one-time GSF merger related costs. We expect general and administrative expenses for the full year 2009 to be between $200 million and $210 million, which includes the impact of the redomestication.

Depreciation expense was $396 million in the fourth quarter compared to $336 million in the third quarter. The $60 million quarter to quarter increase includes $46 million for purchase accounting adjustments to [depreciabilize] certain rigs acquired in the GSF merger and $6 million writedown of oil and gas properties. We currently expect depreciation expense to increase from $1.436 billion in 2008 to roughly $1.48 billion in 2009, with the increase primarily related to the expected commencement of operations of five of our new builds and the second deepwater upgrade during 2009.

Capital expenditures in the fourth quarter of 2008 were $505 million versus $514 million in the third quarter, with the change primarily related to the timing of shipyard payments on new builds and upgrades. Capital expenditures were below our estimates of the fourth quarter due to delays in new build milestone payments. We expect capital expenditures for the full year 2009 to be roughly $3.95 billion, with $3.05 billion related to construction of our ten new builds, of which $750 million is the Petrobras capital lease and the remaining $900 million primarily related to contractually acquired upgrades and sustaining capital expenditures. For 2010, we expect another $770 million in new build related capital expenditures.

Interest expense net of amounts capitalized in interest income increased $119 million in the fourth quarter versus $93 million in the third quarter. The increase was primarily related to increases in the cost of our short-term debt and a reduction in capitalized interest, all partially offset by declining debt outstanding.

As we previously discussed, US GAAP rules have recently changed to require that accounting for convertible notes be split between their equity and debt components. This change will be effective in 2009 and will require retroactive restatement of our prior year's financials. If this change were in effect for 2008, our interest expense net of amounts capitalized for the full year 2008 would have increased by roughly $170 million to $610 million and our total debt and total equity at December 31, 2008 would have decreased and increased respectively by roughly $630 million. We expect our interest expense net of amounts capitalized and interest income to be roughly $530 million for the full year 2009, which includes approximately $195 million of noncash adjustments related to our converts and is net of an estimated $130 million of expected capitalized interest. This estimate assumes short-term interest rates remain at current levels, continued repayment of debt, no share repurchases, the accounting change for our converts, and no additional new build commitments.

For each of the fourth quarter and the full year 2008, our annual effective tax rate was 15.8% and 14% respectively. We expect our annual effective tax rate for the full year 2009 to be between 13% and 15%.

Finally, I would like to briefly comment on our liquidity position. At December 31, 2008, we had $963 million of cash. In addition, at this time we had investments in two money market funds at the reserve funds, totaling $333 million net of estimated losses. These funds are now in liquidation and thus are classified as short-term investments in our financial statements. In January of 2009, we collected approximately $216 million of our reserve fund balances and expect to collect the remaining roughly $117 million before the end of 2009. In addition, we have a $2 billion revolving credit facility with roughly four years remaining and a $1.8 billion, 364 day commercial paper backstop facility which was just put in place in November of 2008. Today we have almost $200 million of revolver supporting letter of credits and we have approximately $400 million in commercial paper outstanding. Consequently, we have almost $2.5 billion of unused committed bank capacity. We also generated roughly $1.2 billion of operating cash flow in the fourth quarter of 2008, and we expect this quarterly operating cash flow to increase during 2009.

We continue to generate significant cash flows supported by our $38.7 billion of revenue backlog as shown on chart 4. Our backlog has a very high credit quality, with roughly 60% related to A rated customers and more than 90% investment grade or better. Although we have recently lost roughly $300 million of our backlog due to credit related terminations, we appear to have only a small percentage of our total backlog with customers who may be in a similar credit situation. Most importantly, this backlog represents roughly $17.6 billion of free cash flow backlog versus almost $13.8 billion of total debt.

As you can see on chart 5, the expected timing and the free cash flow from our backlog matches well with our debt maturities. Our contract revenue and free cash flow backlogs have declined by roughly $2.5 billion and $1 billion respectively since the last call, with current market conditions slowing the pace of new rig contract signings. However, our level of debt has also continued to fall as we use our free cash flow to repay outstanding debt. Thus we still have a $4 billion excess of free cash flow backlog over gross debt. We're carefully monitoring this relationship as we continue to target a level of total debt that is no more than $5 billion less than our free cash flow backlog. Given current economic conditions, it is unclear when or whether we will actually meet our target during 2009. For the near term we expect to continue to use our free cash flow to reduce our debt. If the $3 billion share repurchase program is approved by our shareholders in May, we will consider when or whether we should begin using some of our free cash flow for share repurchases, with the decision based on a variety of factors including our view of the general economic and market conditions and whether or not we have met our free cash flow versus debt target. With that, I will turn it back to Bob.

Thanks, Greg. Before I open it up for questions, I just want to clarify one thing. I think Greg meant to say $1.08 billion commercial paper backstop, and I think I heard him say $1.8 billion.

Correct, it is $1.08 billion.

Okay. With that, we'll open it up for questions.

(Operator Instructions). We'll take our first question from Angie Sedita at Macquarie Securities.

Hi, Bob. First question I have is regarding considering cold jacking rigs, whether it's jackup or semi, and you're looking at the Kirk Rhein that's down already and potentially the 703. What is the thought process as to whether you warm stack the rig, cold stack the rig? Obviously it depends on demand, and clearly in this market we're not seeing a lot for either category?

Angie, that's kind of a complex question. We look at a lot of things, including the near term prospects for the rig and factors like what money we might have to put in the rig to keep it operating. If a rig has a significant special survey or shipyard maintenance project coming up that will require to us spend a lot of money on it, and the prospects look dim in the near term, we're more likely to make a decision to cold stack it. If the rig is in excellent condition, and we're in a market where we see a number of prospects when we'll keep it warm stacked as we try to capture those opportunities. So not a simple answer to that question.

I guess give me a little tone then on what you thought about the market, where you think about the market on the mid-water side specifically? Certainly the jackup market appears to be weaker and more likely to see some cold stacked rigs versus the mid-water market. Seems to be the same, but could you give us your thoughts?

I will let Terry answer that for me.

Hi, Angie, just a few thoughts on the difference between how we see the mid-water and the jackups. The jackups we're certainly seeing significant exposure here with a lack of tendering. The mid-water floaters -- we had seen some markets slow down a bit, but we're having not a significant exposure to that. We have over 80% of our fleet contracted and only about a little over 15% that's available. So we have seen the slowdown in the UK market. We do see some steadiness in some extensions in West Africa. So we do see the mid-water market just a little bit different than the jackup, but certainly with both the lack of tendering in the near term is causing concern.

Okay. And then as a follow-up to that, a little bit of demand you indicated on the mid-water market -- outside of Pemex are you seeing any incremental demand on the jackup side?

I think we're currently in discussions for some extensions with our current clients, but [open] tendering, no, we're not seeing a whole lot of activity at the moment.

And then the final question is -- certainly an increase in sublets in the North Sea and other areas. Are you seeing or hearing any prices that are being offered or are they being offered at significant discounts? What are you hearing?

We're not hearing any pricing of what the sublets are being offered at this time, Angie.

Okay. Great. Thanks, guys.

We'll take our next question from Dan Boyd at Goldman Sachs.

Hi. Thanks. If my question was going to relate to the sublet market, it doesn't seem like you're seeing anything there. Do you see any near term prospects at all for the current rigs that are stacked or that you're thinking about warm stacking? Or basically are there any bids that you submitted those rigs for?

We have had a couple of tenders we submitted for. We just noticed that one in India was canceled. Again, we're certainly looking at the prospective markets, but just again a little bit of pause in the market and not a lot of tenders.

Okay. Thanks. I will turn it back over.

We'll take our next question from Ian Macpherson at Simmons and Company.

Hi. I thought you made the comment in your opening remarks you actually see the deepwater market stronger today than you saw it a year ago. Is that correct?

No, not quite, Ian. What I said was I anticipate the deepwater market to being stronger in the future, maybe that's 2011 or 2012. And I would have anticipated it to be a year ago as I looked forward. And that's primarily because I think the supply of deepwater rigs is going to be lower, one because nobody is ordering any additional new builds, and two I think we have seen one or two rigs canceled already, and maybe we'll see some more and we're certainly seeing delays in deliveries for a number of the deepwater rigs. So there is going to be less supply, and I think the demand is going to be even more robust than I would have thought a year ago, particularly coming out of Brazil. But we continue to see exploratory success in West Africa and growing demand in India, Black Sea. The long-term fundamental story for deepwater to me still remains exceptionally good.

Okay. Got that. Thanks. Greg, I wonder if you could help us talk about a little more detail your assumptions in your cost guidance as it relates to stacked rigs? And you said your cost guidance assumes more rigs are stacked. Can you give us a ballpark sense of what that is and the timing, or any help there?

Not really. That's as you can understand our actual views on the market and the stacked rigs is pretty sensitive, but the low end of the cost would assume significantly more stacked rigs than what we're seeing today. The high-end of the cost still assumes more stacked rigs than what we're seeing today, but not as significant as the low end.

Would it be fair to assume if you do go to cold stacked rigs, the first ones that would be cold stacked are the one that is are warm stacked today?

Steven, why don't you answer that question?

The [idle] rig in the Far East and Nordic is already well on its way to being cold stacked. We have agreements surrounding the two midwater floaters in the North Sea that have allowed us to reduce costs, but we maintain those rigs in a ready to go condition. So there is a variety of factors that affect our ability to execute a stacking program in a timely manner.

Okay. I will turn it over. Thank you.

We'll take our next question from Dan Pickering at Tudor Pickering Holt.

Good morning. Bob or Greg, I was wondering if you can walk us through the logistics around the share repurchase. You've got a vote and then at your discretion you can enter the market. Remind us again on the timing of these items?

Dan, the shareholder vote will take place at our annual meeting, which will be in May. Assuming shareholders approve the repurchase program, then it will be up to the board to decide when and if we're going to go into the market. And there are all kinds of different considerations, obviously, which we'll be looking at as we decide when and if to execute on that program. So not sure there are any more logistics to it than that.

I guess what I am wondering -- is this strictly for share repurchase? Does it give you the leeway to do a special dividend instead of a share repurchase? Is that something you considered and eliminated?

We did consider all alternatives including special dividends, but this -- the recommendation that we're going to make to shareholders will be for approval of the repurchase program only. It would not authorize any kind of dividend with a recurring special, because we're not asking for that. It's primarily in terms of maintaining our flexibility in this market that we decided to go with a share repurchase program instead of a special dividend. Once the shareholders approve a dividend, they approve specific amounts and specific dates and we don't have much leeway in terms of deviating from that depending on the situation at the time, whereas obviously we do with a stock repurchase program. So we decided with the conditions in the market, the general economy, and the credit markets that it would be more prudent to maintain as much flexibility as we could.

Okay. That's a helpful answer. Then as we look at the market out there, your deepwater commentary, positive outlook. We know that there are rigs out there. Pertamina has a $550 million offer for one of the rigs they're constructing. How do you think about new build opportunities, $550 million -- that seems like a distressed sale. Is it distressed enough? How does this all fit into your thinking about the longer term?

In terms of availability of opportunities or the opportunity advantage of some favorable acquisitions in this difficult market, we are interested. But frankly I don't view a $580 million purchase as a particularly good discount price in a market like this. So we're going to continue to monitor the market, but my idea of what a good discount would be hasn't quite been met yet.

Too early there, it sounds like. Thank you.

Okay.

We'll take our next question from Kurt Hallead at RBC Capital Markets.

Good morning.

Good morning.

As we go into this slowdown mode and we now talk about stacking costs, can you give us some general sense as to what the per day rate is for a warm stack versus cold stacked rig? And if you can break that out for us by the classification -- whether it is jackup, mid-water?

Talking about per day stacking costs?

Things have changed over many, many years, and we haven't had to think about what the per day cost is for stacking a rig now. And so I just to want get an update on that.

I would ask Steven to excellent on that. But really pretty complex issue there, Kurt, and I am not sure that we could give you a very crisp answer. It depends a lot on the type of rig, where it is, how cold we want to stack it, the condition of the rig as we go into stack, but it is just a lot of variables there. Steven, got anything to add to that?

Typically what would happen, Kurt, is from a labor perspective you let your unskilled labor go first. And so the labor costs that would remain on a warm stacked rig would be proportionately higher than simply cutting it in half or something like that. Your maintenance costs would go down, but typically what we would do is try to take advantage of the idle time to catch up on some of the maintenance we would normally do in an out of service type situation. So your maintenance costs don't necessarily go down dramatically either. As Bob says, it is just a lot of factors that would play into that and make it really difficult for to us give you any meaningful rule of thumb.

Okay. And as things slow down here at -- I understand it's region by region and rig specific, but is it that you're holding out hope that things will get better? Or do you think it might take a little more aggressive approach here with the fact that industry cash flows are going to be down about 50% year-on-year, so your customers have less money to spend on all projects on a global basis? So not sure -- I guess my question is trying to get a gauge from you guys how quickly you guys can move from a working mode to warm stack mode to a cold stack mode. Any additional information on that?

Kurt, I think we're going to be fairly aggressive in moving down the ladder there. It is pretty easy to go to a warm stack mode very quickly. The difficult decision is to go to cold stack. But if we don't have a firm opportunity that is staring us in the face, probably means we already bid it or we're in negotiations with a customer. We're not going to keep the rig warm stacked with just a hope and prayer. We're going to go quickly to cold stack.

And you think you see how the market evolved here, can you talk a little bit about the acquisition opportunities and whether or not the bid ask spread has narrowed? And if so, are we getting how close are we getting to seeing some acquisitions be done here?

I don't detect much of a market out there right now for opportunities to acquire rigs of any class, whether they're jackups or floaters. I expect some of those opportunities will develop, but there aren't very many being discussed right now. So I don't think I can give you an indication because there is not really a willing seller, willing buyer market at the moment.

Even despite this downtick, nobody is really on their knees begging you to take assets off their hands yet?

No. I think as this downturn started, people clearly had interest -- particularly speculators with the new rigs had interest in perhaps being taken out. But the price expectations were not what I would consider to be a discount at all, and just hasn't been much movement there. So nothing much has developed.

Okay. Great. Thanks.

We'll take our next question from Robin Shoemaker at Citigroup.

Yes, thank you. I wanted to ask about the CapEx outlook. Greg, I think you mentioned that the new build, the ten new build programs dropped from $3 billion CapEx in '09 to something like $770 million in 2010.

That's correct. Of that $3 billion, $750 million is noncash. It relates to the Petrobras capital lease -- we will capitalize that capital lease and show $750 million of rig investment and debt. So the cash is about $2.25 billion, then going down to the $775 million in 2010, and that should complete the program.

Okay. So clearly then the free cash flow would be significantly improved in 2010 even if the overall earnings were a little lower. But the $3 billion -- my point is the $3 billion in share repurchase authorization seems to be considerably less than the free cash flow that you would anticipate generating in the course of 2009 and 2010. So is the balance -- can we assume that the balance of that difference between those two is pure debt reduction?

Greg, go ahead and answer that.

Well, as we tried to make clear, we have actually not made any decisions on the execution of the $3 billion program. And any share repurchase program or other decisions we need take to the shareholders can be updated, revised, increased, whatever, in May of 2010. So the math isn't necessarily as simple as what you implied, even if we had made a decision. I would point out, though, in 2010 we have $4 billion of maturing debt. So we've got about $2 billion related to our bank term loan that matures in the first quarter, and $2.2 billion of the convert, the 2010 convert that we currently expect would get put back to us, and so effectively mature in the fourth quarter. So that's a lot of debt maturing debt that we're looking at. Now clearly as we get to 2010, we may decide to refinance some of that debt. There's all sorts of decisions that we should make. So don't draw any conclusions from the fact we have only asked for $3 billion.

Okay. My other question then had to do with the goodwill impairment. Could you comment as to whether that impairment you took on ADTI was the full amount of goodwill associated with that company? And in terms of the remaining $8 billion of goodwill, you obviously had an impairment test at the end of '08, and are you -- with regard to the rig fleet are you continuing in '09 to have that kind of periodic test?

The goodwill impairment on ADTI took out most of the goodwill -- all the goodwill of ADTI and most of the other intangibles. We had some other intangibles trade name, customer relationships and everything. So there is still some of that left on ADTI. We of course did as you said do an impairment of valuation of all of our drilling rigs. The only drilling rigs that we ended up impairing were the two that were held for sale, the Arctic II and Arctic IV. The rest of the rigs under the way the US GAAP rules work are evaluated by asset class, so by jackups, deepwater, et cetera. And so based on that we didn't see an impairment. And then we evaluated the goodwill of the contract drilling segment, and based upon our analysis there was no impairment. But you're exactly right. As the year progresses we'll continue to do those evaluations on the same basis, and depending on how the market develops and everything, we may or may not have additional impairments in our contract drilling segment.

Okay. Thank you.

We'll take our next question from Roger Read at Natixis Bleichroeder.

Good morning, gentlemen.

Good morning.

Quick question for you on the subletting, I guess, getting back to that topic. Is there a typical sublet out there? In other words, are people are trying to fill a one well program or more of a I have got nine months left on the contract and I just want to get it out of my hair, and so I will sublet the whole thing? And does that differ by region?

Terry.

We've had a mixed bag. We have seen some well to well sublets to fill gaps, and then we have also seen some operators potentially saying that they do not have programs to finish, and then they will send out some questionnaires to see who would be interested. So we have seen a bit of both at the moment.

Okay. And then my other question unrelated to that, just from a strategic situation here, you start stacking rigs that you put or I guess not necessarily put but would require more capital going forward. So your more expensive rigs go down from both -- maybe not so much of an operating standpoint, from a capital standpoint. If these rigs cold stack for say two years, do they move more to an ultimate disposal situation? And if the market stays tougher longer, you're in a pretty good cash position to use this to upgrade your fleet from an overall standpoint?

No. The two years -- stacking a rig for two years and then what you do to bring it out -- depends on the condition of the rig and how you stack it, how much it costs you to bring it out, but it doesn't really fundamentally change the situation with the rig. The economics at the time, the market, will determine whether the economics justify you bringing it out. And this industry tends not to have rigs disappear very easily in regards to how long they're stacked. Ultimately rigs that have been stacked for five to six to 10 years get refurbished and brought back into the fleet. So I don't think you can draw any conclusions about what might happen to the rigs based on the fact that they're stacked.

Is it safe so assume you would stack rigs by a cash capital cost estimate in there, not just whether or not a particular rig has a firm contract in front of it?

Well, we don't really get much choice in terms of the rigs we stack. It is not like we decide on the condition of a rig and then decide whether we stack that one or not. It is determined by the market. If the rig does not have a contract and does not have a good opportunity for it, then it is likely to get stacked. So I am not sure that -- your question implies that you think that we can swap and play among the rigs and decide which ones will stack and which ones we'll keep working, but the market really is the biggest factor in making that decision for us.

And then how you stack it in terms of how cold or how warm is the determination that -- of where you think that rig is in your overall hierarchy?

No. I think that is again dictated by the market and the outlook. A warm stacked rig is we keep in a situation where we can respond to bids and get it back on contract very quickly. Once we decide to cold stack a rig, then we'll take a disciplined approach following a pretty set procedure that would apply to any rig. It varies slightly by class, but it involves getting the crew complement down as low as possible, in some cases down to zero, and preserving all of the equipment so we can have as an efficient as possible start up later, on whenever later on is.

Okay. Thank you.

We'll take our next question with Arun Jarayam with Credit Suisse.

Good morning, guys. Good afternoon in Switzerland. Steven, I was wondering if you can give us an update on the new build program and how confident you are in the delivery schedule versus what's out there?

I would be happy to give you an update on that because I think things are going very well. The Clear Leader is the first one on the block to be delivered, and the rig has been out and done basic marine sea trials and performed extremely well. We're now in the process of finalizing rig floor commissioning, and anticipate that we'll have the rig on contract in the second quarter as we indicated in our fleet status report. The KG1 is at Samsung, slightly behind the Clear Leader, but again she has been out and done the marine trials and performed extremely well. So there again we're in the process of finalizing rig floor commissioning, and we anticipate we'll have that rig on contract on schedule. And the third one would be the DD3, which is at Keppel FELS in Singapore, a little behind the other two, but again in line with the schedule we published in the fleet status report. So I think our new build program is proceeding extremely well. The team that we have and the team that we have assembled with vendors and suppliers is doing a very good job of putting the equipment together, assembling it in a real professional manner and then getting it working efficiently and ready to go to work for our clients.

That's good to hear. Terry, I was wondering if you can comment a little bit on West Africa. There are now six jackups idle today and obviously this is a very important market for you guys. What are your near term prospects? Because you do have a lot of rig that is come up for renewal in the second and third quarter. And in particular I wanted to get your thoughts on what you're seeing from Cabinda Gulf who has a tender out there as well?

Well, like I've spoken to at the West Africa market a little earlier was the fact that we are in discussions a few of the rigs with the existing client, which would include our rigs in Cabinda. So we certainly can't discuss what the particulars are, but we can say that we are in discussions. We're hopeful on a few of those rigs, but again the tendering pace in West Africa has been challenging. Nigeria with the approval process has also been a bit challenging. So we're still just on a wait and see and certainly waiting for tenders to become more prevalent. And at the moment it has been a bit short on that effort.

Terry, would it be your expectations for some of the rigs to continue, but some could be stacked?

I think that's a good expectation.

Thanks. Last question, Bob, can you talk about what your strategy is regarding Brazil and what you think Petrobras will do regarding current and future rig needs? And is there a bigger opportunity for incumbent rigs versus new builds given the issues in the credit environment?

I think Brazil is clearly going to be a very, very big and growing market for deepwater rigs for a long time. I think there is a market down there for any rigs that have availability. Petrobras is currently out with a request for expression of interest for a number of deepwater rigs -- I think they termed it one or more, and our impression is, depending on the [race], they could take as many as four or even more. While they talk about new builds for the additional 28 rigs that ultimately they want to order, my sense is that if they could get access to a deepwater fifth or sixth generation rig that exists and had availability, they would be very interested. So I think that we're going to continue to look at capturing as much opportunity down there as we can. It is a big market for us. Petrobras is one of our biggest customers, and we see that continuing for a long time.

Any sense of the timing on this indication of interest?

Terry, do you know when it is due in?

They're going through the process now as we understand it, and we hope to hear very soon. There wasn't really a timeframe. It is the normal expression of interest process.

Thanks a lot, guys.

We'll take our next question from Tom Curran at Wachovia.

Good morning, guys. Given the likely timing of the vote on the requested $3 billion authorization, your stock's current valuation, and your free cash flow outlook, it looks as if you could burn through that fairly quickly. First, you wouldn't have to wait until May 2010 to request a renewed authorization or increase? And then second, should we assume that buybacks will remain your preferred use of surplus cash flow going forward?

On your first point, when you say we wouldn't have to wait until May of 2010 to renew -- or reup authorization, that is technically correct if we wanted to call a special shareholders' meeting as that's something that we could always consider doing. But the more likely outcome would be that we consider this annually at our normal shareholder meetings. And in terms of whether or not we used share repurchase as our preferred method to return cash time for time immemorial here, I would not assume that. One of the big considerations that was on our mind this time was the flexibility that we have through a share repurchase program versus the more rigid timing requirements, particularly under Swiss law and rules with a dividend. In the US, a Board of Directors couldn't change its mind about a dividend, but under Swiss law once the shareholders have decided on the [imbalance] and the timing, absence some special circumstances, it is something that we would have to follow through on. So there is a lot less flexibility there. So don't assume that just because we elected share repurchase this time it means we won't at some time in the future consider a dividend whether it is recurring or special.

Okay. But presumably your own assessment of your stock, the attractiveness of your stock's current valuation would remain the primary determinant of whether or not you decide on a buyback as opposed to special dividend? Fair?

It is clearly a big factor in terms of our considerations and in terms of whether or not we actually go into the market. We currently continue to feel that the stock is significantly undervalued.

Great. I would definitely agree. Bob, going back to 2005, at different points throughout the up cycle you would occasionally share your best guesstimate as to how many prospects were remaining in the North Sea mid-water market at a prevailing oil price assumption. Given an oil price range of $40 to $50, what would be your best guess at this time?

Don't think that I could give you a guess at this time. We haven't done a significant canvassing of the operators in a while, and the cost structure clearly has changed dramatically since several years ago when we were talking to the operators about opportunities out there, many of which are small. With the higher cost environment, not quite sure where that threshold would be, but we'll try and renew our conversations with the operators and see if we can't get some better insights. Right now I just can't give you much.

Okay. Would you assume that given the changes in economics and the drilling that's taken place since the last time oil prices were expected to remain in a $40 to $50 range, that that overall pool has likely shrunk?

Well, I would guess that some of those opportunities have been tapped and produced, but I am not sure how many more have come on the radar screen and how much more potential activity is out there that can be created by operators trying to increase the production from the existing reserves and increase recoverability from 30% to 40%, to 40% to 50%. So not sure that we can really comment intelligently on what might drive the activity at what oil price is up there.

That makes sense. Thanks for the answers. Very helpful. I will turn it back.

Operator, we have time for one more question.

Absolutely. We'll take our final question from Lee Cooperman at Omega Advisors.

Thanks. I guess -- I don't know, probably a better question offline, but I asked myself if you announced this morning that you were seeking shareholder approval to pay $1 a quarter dividend, that your stock wouldn't be down $2.50. And given the amount of free cash flow that we have and the outlook that you portray, I don't quite understand this lack of willingness to enter into a recurring quarterly dividend. Now, maybe you can explain to me how rigid this Swiss law is? In other words, if you announced intention of paying a dividend and circumstances radically changed, you could not eliminate the dividend -- you legally have to pay it?

Lee, I think that under the Swiss rules that we have to follow through unless we have worked into the program some specific guidelines or criteria which says if this happens then the dividend would be suspended or we could avoid the payment, and very difficult to do. Now, I assume that we could call a special shareholder meeting and see about getting shareholder approval to terminate the previously approved program, but it is not anywhere near as simple as what you can do in the United States.

We'll take this up offline, but the question I am trying to figure out is what is the right corporate financial policy? Given the amount of free cash flow you generate, if you paid $4 let's say a year dividend, I don't think the stock would trade at $57, and $4 is about $1.2 billion a year, so it would take you three years to spend the same amount of money you would on your repurchase program. So I don't know whether the repurchase program is more a function of the uncertainty because you don't have to execute on it or because you think the stock is so darn undervalued that you would rather buy back stock. And we could do this offline, and I appreciate whatever thoughts you have.

Okay. I guess we can take it up offline, but as I said before, flexibility is a big issue. I would also say it has been our sense that part of the concern about from a number of investors and it is having an impact on the stock is the level of our debt. We detect from a lot of investors that there is a significant amount of concern about the level of debt, which is why we've been concentrating on paying down our debt as quickly as we can, and the flexibility to continue paying down that debt is something that is important to us and a factor in our consideration. But as we discussed before, there are a lot of different considerations in this.

I observe $4 dividend is $1.2 billion a year, which takes you almost three years to spend the same amount of money on the repurchase program, and the question really is which is going to have a more salutary effect on your stock price? My guess is with the dividend of $4, your stock wouldn't be trading at $57. But we can do this offline. I know you're trying to do the right thing for shareholders, and you guys have done a very good job over the years.

Okay. Thanks, Lee.

You're welcome.

I guess that's all the time we have, and we appreciate everybody's interest and we'll look forward to talking to you again in the future.

This does conclude today's presentation. We thank everyone for their participation. You may disconnect your lines at any time.