Transocean Ltd (RIG) 2009 Q1 法說會逐字稿

Good day, everyone. Welcome to the first quarter 2009 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 call over to Mr. Gregory Panagos.

Thank you, Tom. Good morning, ladies and gentlemen, and welcome to Transocean's first-quarter 2009 earnings conference call. A copy of the first-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 five 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 Quarterly Toolkit. The quarterly toolkit also has six additional financial tables and are non-GAAP financial measures and reconciliations to assist you in evaluating our results.

Joining me on this morning's call are Bob Long, our Chief Executive Officer; Steven Newman, our Chief Operating Officer; Greg Cauthen, Senior Vice President and Chief Financial Officer; and Terry Bonno, Vice President Marketing.

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 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 at www.Deepwater.com under Investor Relations Non-GAAP Financial Measures and Reconciliations.

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. Finally, under News & Events and Webcast Presentations we posted slides detailing average contracted day rate by rig type, out of service rig months, operating maintenance costs trends, and contract backlog.

Finally, in order to give more people an opportunity to ask questions please limit your questions to one initial question and one follow-up. Thank you. That concludes the preliminary details and now I will turn the call over to Bob.

Thanks, Greg, and good morning, everyone. We had another good quarter despite the difficult market conditions earning $2.93 per share or after adjusting for the write-down of the Arctic II and Arctic IV and some other things, mostly discrete tax items, $3.75 per share. Greg will go into the financials in detail in a few minutes after which Terry will try to give you some color on the market.

Before we do that, I would like to give you my sense of what is happening in the business. First, I continue to be optimistic about the deepwater market. There have only been a few fixtures so far this year, but all three have been in the mid-$500,000 to low-$600,000 day rate range and for terms ranging from three to eight years. We are also still seeing continued interest on the part of operators both for additional capacity and renewal of existing capacity.

As most of you know, we are well-positioned in the deepwater market and expect to receive a substantial contribution from new rigs going forward. In Q2, we expect to benefit from the start up of the 706, a deepwater semi which has completed its upgrade and arrived in Brazil for a multi-year contract with Chevron, and also from the commencement of the operations of the [clear leader].

In Q3, we expect to benefit from the KG1 and the Development Driller III both commencing operations and in Q4 the Discover America should commence operations. Looking forward to 2010, all five of those newbuilds should contribute significantly to earnings and cash flow with another five newbuilds expected to start at various times in 2010.

There is some farm out interest developing in the deepwater business but not at discounted prices. During the first quarter, one of our deepwater rigs was farmed out from the original operator for a short-term program, but it was at the existing rate in excess of $600,000 a day.

The jackup market has been much weaker than the deepwater market and it appears that the jackup market is weakening at an accelerating pace, particularly in West Africa. We now have nine jackups stacked versus three stacked at the time of our last call. I expect you will see us stacking more jackups before the year is out.

However, we are not seeing jackup day rates drop dramatically. There has been some significant pullback in rates but rates remain reasonably good by historic standards.

The mid-water floater market is also experiencing some softness, particularly in the North Sea, but worldwide the mid-water does not appear to be as soft as the jackup market. We do have three mid-water rigs now stacked and some possibility of a fourth going idle in the next few months, but I will let Terry expand on that market.

As we go through this difficult period in the market we continue to focus on execution, safety, and cost control. We are continuing to pay down our debt, positioning ourselves to take advantage of opportunities that might present themselves while maximizing our ability to take advantage of the upturn when it comes. We remain confident that our contracts are secure and that our customers will honor those contracts.

Our current backlog of just under $36 billion coupled with our significant exposure to the deepwater market, which is clearly the strongest market at the present time, puts us in good position relative to the rest of the companies in our business. With that I will turn to Greg for the numbers.

Thanks, Bob. Good morning to everyone. In the first quarter of 2009, we had net income of $942 million or $2.93 per diluted share. This compares to net income of $754 million or $2.35 per diluted share in the fourth quarter of 2008 as adjusted for revised accounting for interest expense on our converts, which I will discuss in a few minutes.

First-quarter net income was adversely impacted on a net basis by certain items totaling $264 million or $0.82 per share. After adjusting for these items first-quarter net income was $1.206 billion or $3.75 per share as compared to fourth-quarter 2008 net income adjusted for similar items of $1.139 billion or $3.54 per share. Items adversely affecting first-quarter net income included $221 million for impairment of the Arctic II and the Arctic IV, $36 million of discrete tax items, and $7 million for GSF merger-related severance costs and losses on retirement of debt.

Fourth-quarter 2008 net income was adversely affected by similar items totaling $385 million or $1.19 per share.

Contract drilling revenues for the first quarter were $2.834 billion, essentially flat with the fourth quarter of 2008. During the first quarter we benefited from a previously anticipated reduction in shipyard projects and the commencement of higher day rate contracts, but these increases were mostly offset by the impact of additional out-of-service times due to rig stacking and mobilization.

Other revenues decreased in the first quarter to $180 million from $307 million in the fourth quarter. This decrease was primarily related to a reduction in drilling management services activity and lower commodity prices for our non-contract drilling segment. Contract drilling intangible revenues in the first quarter decreased to $104 million from $133 million in the fourth quarter. You can find a schedule detailing contract drilling and tangible revenues by quarter on our website.

Total revenues were $3.118 billion for the first quarter compared to $3.270 billion for the fourth quarter due to decreases in contract intangibles and other revenues. Contract drilling revenues for the full-year 2009 are expected 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 newbuilds and the upgraded Sedco 706.

Contract drilling revenues in 2009 are also expected to benefit from a decrease in loss revenues due to fewer net out-of-service days from shipyard projects and mobilization 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 mid-water floaters and jackups to experience significant idle stacking time during 2009. We currently have nine jackups and three mid-water floaters that are stacked and we expect to see more rigs stacked by the end of the year if the current economic environment continues.

Contract drilling and intangible revenues are expected to decline to $281 million in 2009 from $690 million in 2008 and to decline further to $98 million in 2010. The anticipated decline in non-cash contract and intangible revenues has no impact on our future cash flow.

We continue to expect our other revenues to decline from $1.228 billion in 2008 to a range of $725 million to $775 million in 2009 with approximately $400 million related to the non-drilling segment, approximately $200 million related to integrated services, and approximately $150 million related to recharge revenues. The expected decline in other revenues is primarily due to anticipated decrease in activity in our non-contract drilling segment caused by lower commodity prices and weak capital markets.

Due to the low-margin nature of this business, we expect any decrease in non-contract drilling revenues to be largely offset by a reduction in the related costs.

Operating and maintenance expenses in the first quarter were $1.171 billion versus $1.408 billion in the fourth quarter as shown on chart 3. The quarter-to-quarter reduction in operating maintenance costs was primarily attributable to a $92 million reduction in non-drilling costs consistent with a decrease in revenue, a $77 million decrease in maintenance and shipyard project costs with the remainder due to a variety of items including reduction in bad debt expense and reduced normal operating costs due to reduced rig activity.

We currently expect our 2009 operating and maintenance expenses to range between $4.9 billion and $5.2 billion, which includes roughly $675 million of expected costs related to our low-margin other revenue items. We expect operating maintenance costs in the second and third quarters to be higher than the first quarter due to increases in shipyard and maintenance activities.

Our actual operating and maintenance costs for 2009 remain uncertain given current economic and market uncertainty and could be significantly impacted by the actual level of activity, stacking of rigs, exchange rates, the level of inflation, and other factors. Rigs that are stacked continue to incur costs at operating levels for a period of time until crew and support costs are mostly eliminated.

Roughly 40% of any change in costs due to changes in exchange rates are expected to be offset by a corresponding change in revenues due to the portion of our costs that are denominated in local currency. We continue to monitor and manage our operating maintenance costs closely in the current uncertain environment.

General and administrative expenses were $56 million in the first quarter compared to $59 million in the fourth quarter. This decrease was primarily attributable to $4 million in one-time costs incurred in the fourth quarter related to our redomestication to Switzerland. We continue to expect general and administrative expenses for the full-year 2009 to be between $200 million and $210 million, which includes the ongoing impact of the redomestication.

Depreciation expense was $355 million in the first quarter compared to $396 million in the fourth quarter. The decrease is primarily due to a fourth-quarter purchase accounting adjustment and oil and gas property write-downs with no comparable items in the first quarter. We currently expect depreciation expense to be roughly $1.5 billion in 2009 with the increase over 2008 primarily related to the expected commencement of operations of five of our newbuilds in the upgraded Sedco 706 during 2009.

Capital expenditures in the first quarter of 2009 were $708 million versus $505 million in the fourth quarter with the change primarily related to the timing of shipyard payments on newbuilds and upgrades. We expect capital expenditures for the full-year 2009 to be roughly $3.9 billion. Of this total approximately $2.160 billion relates to cash construction costs on our newbuild rigs, $750 million is the non-cash capital expenditure related to the Petrobras capital lease, and the remainder primarily relates to sustaining capital expenditures, contractually required upgrades, newbuild mobilizations, and other capital expenditures.

For 2010 we expect to incur another $880 million in newbuild-related capital expenditures.

Interest expense net of amounts capitalized in interest income decreased to $135 million in the first quarter versus $165 million in the fourth quarter. The decrease was primarily related to an increase in capitalized interest and decreases in outstanding debt.

US GAAP rules have recently changed to require that accounting for convertible notes be split between their equity and debt components. This change was effective beginning in 2009 and required retroactive restatement of our prior year's financials. Our press release, as well as our Form 10-Q to be filed later today, were fully described to this change and the related effect on interest expense, property and equipment, debt, and equity.

We expect our interest expense net of amounts capitalized and interest income to be roughly $520 million for the full-year of 2009. This is net of an estimated $180 million of expected capitalized interest. This estimate assumes short-term interest rates remain at current levels, continued repayment of debt, no share repurchases, and no additional newbuild commitments.

For the first quarter of 2009, our annual effective tax rate was 15.2%. We expect our annual effective tax rate for the full-year of 2009 to between 14% and 16%. The increase in range of our estimate is due to the impact of reduced net income from stacking rigs that were expected to operate in low-tax jurisdictions.

Finally, I would like to briefly comment on our liquidity position. At March 31, 2009, we had $1.3 billion of cash. In addition we have a $2 billion revolving credit facility with roughly four years remaining and a $1.08 billion commercial paper backstop facility that was put in place in November of 2008. Today we have almost $200 million of our revolving supporting letters of credit and we have approximately $790 million in commercial paper outstanding.

Consequently we have over $2.2 billion of unused committed bank capacity. We also have generated more than $1.4 billion of operating cash flow in the first quarter of 2009 and we expect this quarterly operating cash flow to increase during 2009.

We continue to generate significant cash flow supported by our $35.8 billion of revenue backlog as shown on chart four. Our backlog has a very high credit quality with 60% attributable to A-rated customers and 95% attributable to customers with investment grade or better ratings.

Since our last call we have lost another roughly $150 million of backlog due to credit-related issues for a cumulative total of roughly $450 million of lost backlog since the credit crisis began. However, we appear to have only a small percentage of our remaining backlog with customers who may be in similar credit situations.

This backlog represents roughly $17.4 billion of free cash flow backlog versus almost $13.4 billion of face value of our debt. As you can see on chart five, the expected timing of our free cash flow from our backlog matches well with our debt maturities. Our revenue and free cash flow backlog have declined 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 are carefully monitoring this relationship as we continue to target a level of total debt that is approximately $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.

If the $3 billion share repurchase program is approved by our shareholders next week, our Board will consider when or whether we should begin using some of our free cash flow for share repurchases or whether we should continue to repay debt with the decision based on a various variety of factors including the relationship between our contractual backlog and debt, ongoing capital requirements, cash flow generation, general market conditions, regulatory and tax considerations, the price of our shares, and other factors.

For our past practice we will not provide at this time any advanced guidance regarding the anticipated timing or size of any future share repurchases, but we will report any repurchases that have occurred in our subsequent earnings calls and periodic SEC reports. With that I will turn it over to Terry.

Thanks, Greg, and good morning to everyone. I will move straight to the various markets, beginning with the deepwater market. While we did not contract any deepwater fixtures since our last earnings call, we are in discussions with clients about the existing fleet and participating in tendering opportunities in India, Brazil, West Africa, and Israel. Nevertheless the uncertainty of near-term commodity price stability, budget constraints for some clients, and competition from sublets may result in pricing pressure and challenge contracting opportunities in the near term.

We do, however, believe the long-term fundamentals of client demand for deepwater rigs remains strong. The execution of three long-term deepwater contracts in March 2009 and the tendering of two deepwater units in India, one deepwater unit in West Africa, and several deepwater units in Brazil further supports this long-term view.

We are also seeing a few more discoveries in frontier provinces such as Israel, Ghana, and Morocco while remaining optimistic that the emerging deepwater areas such as Mexico, Indonesia, [Black Sea], and Libya will provide incremental demand over the long term. Our significant exposure to the deepwater market, particularly in India, Brazil, and West Africa, positions us well to take advantage of the upcoming deepwater opportunities.

Turning now to the harsh environment market, we are continuing our focus on the Arctic design drill ship and are in discussions with clients in this technically demanding environment. We are also encouraged by the recent discoveries in the Flemish Pass in Eastern Canada, the UK and Norwegian North Sea, and the Barents Sea. Our strong presence in these markets and our excellent technical and engineering capabilities make us well-positioned to also capitalize on opportunities in these harsh environment markets.

Moving onto the mid-water floater market. We have experienced a drop off in activity in the North Sea, West Africa, and Australia due to subletting the failure of smaller players to attract funding, and changes in clients' budget priorities. Nevertheless most of our mid-water fleet is contracted into 2010 in the North Sea except for the Arctic II and Sedco 712, which went idle as a result of Oilexco going into administration in the UK.

We are currently participating in a few long-term tenders in India and West Africa. However, we do expect demand for mid-water floaters to continue to soften over the near term. We believe that unless oil prices rise significantly we are likely to see more stacked mid-water units by the end of the year.

Moving on to the jackup market. We have managed since our last earnings call to contract a few term fixtures despite the oversupply of jackups in the market as you can see in our latest status report. We are also in discussions with several clients to extend their current contract on a few of our jackups.

While the forthcoming Pemex jackup tender will add significant demand to the market, they will be highly competitive. Recent tendering has resulted in 10 to 12 competitive offers for each opportunity. We expect the overall jackup market to remain challenged for the near term, particularly in Southeast Asia, Middle East, and West Africa, where the lack of demand, access to capital, coupled with the increases in newbuild supply are expected to be the most pronounced.

That concludes my discussion on the markets so I will turn it back to you, Bob.

Thanks, Terry. Tom, I think we are done. We will open it up for questions.

(Operator Instructions) Angie Sedita, Macquarie.

Good morning, guys. Good numbers. Bob, you mentioned the farming out of a rig and I assumed it was an ultra-deepwater rig. Could you give us some details there, not specific, but general details? Is it a major oil company? Where is the rig? How much time they are looking to sublet out and what do you think -- what is the driver behind the sublet and are they seeing any interest in this rig?

It wasn't a major. It was in West Africa and it was for a short term, I forget whether it was one or two wells. If I recall the driver was the original operator had a problem with its concession and lost their concession so it just didn't have the opportunity to drill.

Okay. And are they seeing interest in this rig at this point or hard to tell?

Well, it has already been farmed out. The deal is done so it was farmed out to another operator.

Okay, okay. Fair enough. Obviously it's a difficult market today given commodity prices and just the overall tone of the market, but looking out the next 12 to 18 months do you still see Transocean building potentially additional rigs besides what is already under construction today?

I am not sure I would say that I see us doing it. We are in conversation with some operators about the potential to build additional newbuilds, but I can't handicap the probability for you that that will actually come about.

But still is interest by majors and others for additional rigs?

Yes, that is correct.

Okay. Then, finally, on the early termination, obviously a number of contracts have early termination. Is there early termination on ultra-deepwater rigs, deepwater rigs, is it case-by-case, or could you handicap the percentage there?

I can't think right now of any early termination provisions that our customers have. Terry, do you --?

Well, on the newbuild fleet the early termination provision we typically don't have. On other existing fleets any early termination has a different type of payout mechanisms, but there is a payout mechanism on different contracts but they are on a case-by-case basis. But the ultra-deepwater fleet those are no cut contracts.

Well, they can be terminated for lack of performance so that is the biggest risk. If a big rig were to have an unusual downtime event and be down for 90-plus days -- that doesn't happen very often. But other than that they are hard to cut.

Right. And on existing fifth-gen rigs, not necessarily the sixth gen?

That is true of the vast majority of our contracts, not just the newbuilds. The newbuilds are even tougher, but our normal contracts are very hard to early terminate either without compensation or unless there is a performance issue.

Okay, fair enough. Finally, on Brazil and the interest there in new construction. Are you having any conversation with Petrobras that you believe some of this demand for incremental new rigs, newbuilds could be met by US contractors or new construction outside of Brazil?

Angie, I think that is an evolving situation. Petrobras has significant additional capacity needs and right now it's difficult to see how those needs could be met entirely within Brazil. So we are hopeful that there will be some opportunities. We are also interested in participating in opportunities where we build in Brazil if we can find a way to do that that will satisfy our technical requirements. So hard to say what is going to happen down there.

But you would consider building in Brazil, if you found a shipyard, the full rig or a portion of the rig?

Right now I am not sure what capacity there is in Brazil to build a full rig, but if something develops where that could happen we would certainly look at it.

Right. Well, thank you.

Tom Curran, Wachovia.

Morning guys. Bob, you have been constructive for some time now on the long-term demand outlook for Arctic class floaters. As we stand today are there any potential opportunities out there to add to your fleet by buying either existing other Arctic class floaters or those that are currently under construction? And if so, are any of them currently, potentially up for sale and how attractive are the asking prices at this time?

I am not aware of any existing Arctic capacity that is up for sale. I think there is only one potential Arctic rig currently under construction and there has been no indication that it would be available.

We are working on our own design. We have spent a lot of time working on a design and we are working with some customers on it. So I think if you see us actually going forward here it will be with our own design and with a newbuild.

Okay. Conversely, turning to the potential divestiture front are you still seeing interest in those rigs that you have been looking to dispose of for some time now? Not (technical difficulty) just the Arctic II and IV semis, but even some of the jackups, are you still seeing interest in those rigs and it's just a question of waiting for the offering price to be right or have you just seen all potential buyers go away?

Well, I think that for the most part the buyers have gone away. There are a couple of potentially interested buyers in one or two of the jackups, but I am not sure how serious they are at this point. So I would not anticipate that you would see us selling very many or any rigs other than the Arctic II and IV.

Okay, thanks. Lastly, a follow-up to one of Angie's questions. If you were to take on a newbuild project in Brazil, would you be willing to do it with a stand-alone Brazilian shipyard or would you insist that there would be some form of involvement from one of the established Korean or Singaporean yards?

That is a little bit of a hypothetical question, it's difficult to answer. If there was a Brazilian shipyard that our technical people thought could build the rig to our specifications then I think that we would proceed on that basis. But right now I am not sure whether that capacity exists, so we will just have to look at it at the time.

Okay. Thanks for the color. I will turn it back.

Ian Macpherson, Simmons & Company.

Good morning. Bob, when you talk about the sublet market for ultra-deepwater not involving any discounted rates, do you have any comfort level as to how sustainable that condition is throughout the rest of this year? Do you think that we will see that stand up or would you say there is some risk to sublets becoming more visible as the year unfolds?

Hi, Ian, this is Terry. I will answer that. We do see some ultra-deepwater sublets but they are not the entire contract; they are only a couple of months here. We see a few slots that the operators are offering. We see some of the sublets going on in Brazil where Petrobras is certainly very happy to pick up these sublets.

But by and large the sublets that are out there they are being taken fairly quickly and at the same prices that they have been contracted for. So we are just watching, we are monitoring, just making sure that we know where we are in the market but it seems to be okay at the present.

Okay. My follow-up question would be on the jackup side. Could you build a case today for a recovery in the market by sometime in 2010 or would you be more cautious than that in your assessment of supply and demand as you see it?

I think it would be very difficult to build a compelling case for recovery in jackups as early as 2010. There is just too much new capacity coming on without contract. So you would have to have a significant recovery in demand not only to where demand used to be but above where demand used to be. And I personally don't see that happening as early as 2010.

Okay, thanks.

Andreas Stubsrud, Pareto.

Hello, good afternoon. Just a question on the Reliance sublets, have you -- had Reliance tried to renegotiate the terms in the contracts with you at all or is the sublets for those newbuilds just out in the market without any participation from your side?

If the question is has Reliance tried to renegotiate the terms of the contract with us, the answer is no. They have been negotiating, I understand, with ONGC. I am not sure they have had any discussions with anybody else, but I am not particularly privy to that.

Okay. On the Gulf of Mexico deepwater market we have heard some of your competitors talking about -- especially the third- and fourth-generation rigs having more pressure on day rates for those kind of rigs. Do you see a large difference in the interest from the old companies regarding the newbuild ultra-deepwater units compared to the fourth generations, more of the moored rigs from the '90s and '80s builds?

Andreas, we had a little bit of trouble hearing your question there. Could you summarize that again for us and then Terry will try and answer?

Okay. Just if you see any differences between the ultra-deepwater newbuilds and interest from the old companies compared to a fourth-generation, especially in Gulf of Mexico. Do you see that the pressure on day rates, especially with more sublets, are going to be much higher, the pressure on the day rates for the fourth generation compared to sixth-generation newbuilds?

Well, Andreas, it's going to be dependent upon the types of programs that the operators are looking for. We do have some capacity in 2010 from a lot of the fourth-generation units that are going to be coming on to the market. There is certainly going to be some pricing pressure there.

But there are some opportunities right now that are being tendered in West Africa and we are very optimistic about that. But you are talking about two different types of units where the operator would have specific needs for those particular areas. So the sixth-generation unit -- except for the few that are still uncontracted and on speculative build, it's just two different opportunities and two different areas by which the operators would use those units.

So when Petrobras is out in the market -- for example, for a rig on the Tupi Field -- do you get the sense that they would rather have a newbuild ultra-deepwater unit than a fourth-generation sublet from the Gulf of Mexico?

Well, the Tupi Field is a difficult field to be drilling in and a fourth-generation rig couldn't drill in it. So you would have to have a fifth- or sixth-generation rig to drill that opportunity.

Okay. So sublets from the Gulf of Mexico for lower spec rigs is not an option down in Brazil for some of the fields down there, is that what you are saying?

Well it could be -- not for the [pre-salt], but it could be in the [Javartu] Field, it could be in the other field where we do have fourth-generation, second-, third-, and fourth-generation rigs. So it's a big mid-water, deepwater market.

Okay, very good. Thank you so much.

Jeff Spittel, Natixis Bleichroeder.

Good morning, guys. Just one question with regard to sublets, wondering if you have seen any change thus far this year in the duration as you walk across the different asset classes. Appreciate the comments about the one deepwater rig being for a one- or two-well program, but could you just walk us through what you are seeing in general with regard to the duration of subletting?

Yes, we don't know about all the farm outs in the market. I think that there is just some of the things that we hear about and certainly when we are participating in farm out. The ones that we have been participating in, farm outs, have predominately been ultra-deepwater fleet.

And as I have previously stated, they have been at the same prices that we contracted the rigs for and we haven't seen any subsidies in the ultra-deepwater or the deepwater markets. We do hear that there is a few subsidies that may be going on in the mid-water market, but at this point I think that is pretty limited to the UK. But, again, those aren't our fleets so we can't substantiate that.

But there are farm outs going along across the different fleets. I think the majority of farm outs we hear about are in the segment above 5,000 feet to 7,500 feet so I can't be much more specific than that.

No, I appreciate that. Switching over to as you continue to evaluate stacking rigs, how long do you have to look out and say the market really doesn't show a lot of signs for improvement, particularly for jackups, before you start to consider using that as a window of opportunity for some more upgrades on those rigs?

Not sure I understand the question completely, Jeff. But to tell you our general philosophy here is that if the rig goes idle and we don't have a real opportunity for it in the near term, meaning either there is a bid outstanding that we are waiting to see the results of or we know of an opportunity to negotiate with a customer, we are going to stack the rig as quickly and expeditiously as we can.

We do have some rigs that have planned shipyards in our forecast. We will look at those depending on the technical specifications with the rigs and what needs to be done and decide whether or not we want to take advantage of the down time to put it in the yard and do a life extension or special survey or something that we already have identified through our asset organization that needs to be done.

But I suspect that those are going to be few and far between. I won't say we won't do any of them, but we are not going to do many of them.

Okay, thanks. That is helpful.

Dan Pickering, Tudor Pickering Holt.

Good morning. Bob, could you remind us again how many of your existing jackups will roll to new contracts during 2009?

I can't but Terry can. How many is it Terry?

There are 31 jackups that were available in 2009 and right now of the 31 we have 10 that are stacked.

Okay. So we have got 21 additional, potential opportunities to re-contract out there. I mean is the over/under half get stacked? Is it more than that? I am just trying to get a feel for the true level of demand and your confidence or lack thereof in the market.

Dan, it's a little bit difficult to say but I wouldn't be surprised. As indicated, we are going to almost certainly be stacking more rigs and I wouldn't be surprised if our 11 or nine jackups went to 15 or 20 by the end of the year.

Bob, your philosophy right now as the market leader is to stack assets. Day rates are holding up relatively well. The competitive dynamic -- if you don't think things get better in 2010, why not -- walk us through the decision of stacking versus taking a $30,000 or $40,000 a day hit and putting a rig together to work for a year and cash flowing on that rig instead of $0 cash flowing on the rig.

Well, it's a little bit difficult to come down to a black-and-white decision like that, Dan. First, I think we are seeing -- Terry can correct me if I am wrong -- but on any jackup opportunities out there we are seeing anywhere from eight to 10 to 12 different bids on it. So it's a very competitive market.

The rates are holding up exceptionally well, as you have indicated, but as soon as somebody starts to try and buy the contract and cut day rates by a significant amount we start a spiral down that might get us one or two rigs on contract earning a little bit of cash. But very quickly you would drive that market down towards cash breakeven. It's not something that we are inclined to want to do.

So the market has been fairly disciplined so far, I mean, surprisingly so I guess?

I would characterize it that way, yes.

Okay. I guess my other question then would be for Terry. Lots of us trying to understand the rate dynamic and the kind of fourth-gen market given there are several rigs being marketed there. Is the over/under here $400,000 a day? Is it less than that? Is it more than that? Everybody is grasping for information; help us out on the rate side.

Well, I would love to do that but we are in a competitive tender right now and that might tip my competitor's hand as to what I am thinking about. So wouldn't want to do that.

But you are right there is quite a bit of competition. In this current tender that we are in there is a lot of availability. It will be competitive and I think you will see the fourth-generation rates will decrease.

All right. Thank you.

Brian Uhlmer, Pritchard Capital.

Good morning. I have two quick follow-ups. First one, talking about Brazil, are there going to be opportunities similar to the deal you did with PVR Mitsui or deals where you operate these rigs? Are you guys interested in management contracts?

I would say we are not interested in management contracts. Whether or not we get an opportunity to do something like we did with Petrobras Mitsui in the future is a little bit difficult to say. If we had an opportunity to do something like that again we would clearly want to look at it, but I can't give you any feel one way or another whether those opportunities will come up again.

Okay. And the follow-up has to do with stacking rigs. When you say you stack them as quick as possible at what level are they stacked? How much crew is left on them and what kind of a cost are we looking at and how quickly do you think you can get there on those rigs?

In general it depends a little bit on where the rig is and what type of rig it is. But if we stack a jackup we probably will have near-full crews for approximately a month and then we will ramp down to whatever the stacking crew is going to be. I think generally, depending on the area, we would get down to a very small crew and basically just have insurance costs and whatever harbor fees we need, which may average on a jackup somewhere around $3,000 a day. But take that number carefully because it varies significantly or could depending on geographically where the rig is.

A mid-water floater is likely to be -- we take the same philosophy and take us at least a month with full crews as we go through the stacking process and then get down to a fairly small crew of key supervisory and technical people. I am not sure there again what the cost might be, but it would be higher than the jackup maybe in the $5,000 a day range or possibly a little higher. Again, depending on where it's stacked.

Okay, thank you.

Mike Urban, Deutsche Bank.

Thanks, good morning. Been asking this question on a lot of calls and people are probably sick of it at this point, but the responses have been interesting. So the question is a lot of folks have been saying that with oil prices around $50 a barrel plus or minus, you get a lot of projects out there especially once you get away from kind of the very high end of the market are not economical.

Would be interested in your take on that in a couple of different respects. One, is that a view of $50 oil relative to 2008 costs and as costs come down that changes? Or is it a confidence issue -- $50 is okay, it's just we need confidence on the part of the customers that it's sustainable?

Well, I am not sure that we can answer that question. You really need to be talking to our customers. When we talk to them you get varying answers, particularly in terms of what makes deepwater economical. We have got answers that range all the way from $40 a barrel all the way up to $60 or $65 a barrel depending on where the prospectivity or opportunity is. So I am not sure that I can give you any real insight into that.

And I know there is not really an easy answer to it or else we would obviously know. But maybe asked another way, do you have customers out there that would drill today if they felt like they were confident in sustainability of price, if they felt like they were confident in their ability to secure financing or access the credit markets?

Mike, I just don't know how to answer that question. In terms of the confidence in the price, there is a lot of operators out there that I think are deferring projects because of cash flow issues. Whether or not they have prospective opportunities that they would like to drill but just don't have the access to capital to do it is hard to say, but my sense is that there is certainly a lot of that out there right now.

Okay. That is helpful, thank you.

Dan Boyd, Goldman Sachs.

Thanks. I would like to follow up on the jackup market where as you mentioned you have seen much more discipline this cycle despite eight to 12 jackups bidding on each tender. What do you attribute that discipline to? Is it just the level of backlog out there and the lack of need to compete aggressively to keep the rigs working?

Then whether you can comment on did you have any level of confidence that this level of discipline can last?

I am not sure that I can give you any reason for why there is discipline out there, if in fact that is what is happening. In terms of how long it can last, that is difficult to say. I would have to say that I am surprised at this point that the rates haven't got a bit more competitive. As more and more of this capacity comes into the market without contracts you are going to start seeing even more rigs bid on every opportunity. And depending on the profile of the owner as these rigs come out you could see some people that get very aggressive.

To the extent that some of these are being built by speculators who are near 100% financed and need higher day rates to service their debt that may be instilling some of the discipline in the market. But, ultimately, as someone said before if you can get a job and generate some cash it's better than stacking the rigs. So it's hard to say if the discipline will break but if you look at history you would guess it's going to break at some point.

Yes. I guess the only difference is companies might not be as desperate this time around. They don't need the cash flow.

Then sticking with the jackup market, you mentioned unlikely to see a recovery in 2010. But let's look at when do you think we might see some stabilization in the jackup market as the decline starts to -- you actually start seeing rigs being re-contracted, some type of stabilization in day rates.

And then if you could put some type of oil price range around those comments that would be helpful as well. For example, if we are ending the year at $60 oil with an upward trajectory so there is actually confidence that we are not going to go below $50, would you expect a stabilization at some point early in 2010?

I just don't think I can answer that question. You have to remember that I have been fairly pessimistic about the jackup market for a long time and have been wrong for a long time about how good it got. So I am not sure that you are talking to the best guy to forecast what might happen in the jackup market.

Okay, fair enough. Thanks for your help.

Lee Cooperman, Omega Advisors.

I am going to be the (inaudible) addition in the crowd. I want to focus in on your dividend policy and your policy of returning money to shareholders. I am not quite sure how to read the decision to authorize $3 billion in buybacks as opposed to a dividend.

What I would like to do at the risk of being academic is read you something out of a 1999 annual report from Warren Buffett who is kind of the master of things. This is what he said in 1999 and I think he would say it today again, 'There is only one combination of facts that makes it advisable for a company to repurchase its shares. First a company has available funds, cash plus sensible borrowing capacity beyond the near-term needs of the business, and second, finds its stock selling in the market below its intrinsic value conservatively calculated.'

'To this we add a caveat, shareholders should have been supplied all the information they need for estimating that value. Otherwise insiders could take advantage of their uninformed partners and buy out their interest at a fraction of true worth. We have on rare occasions seen that happen.'

I guess I am worried about the reverse. That we are going through a down cycle now and I think there is as much of a chance here that you guys have not wanted to pay recurring dividend because of the uncertain outlook and that we are going to put this buyback on the shelf and not do anything with it until we assess the outlook. I am wondering whether the shareholders would have been better served if, just to pick a number, we went to, say, a $4 dividend, which is a fraction of what you are earning, and put a nice yield in the stock to pay us while we are waiting for the outlook to clarify.

So I would like with as much specificity as you can to explain the Board's decision to not pay a cash dividend, to authorize a buyback, are we going to buy back stock, and are we convinced that if we are buying back stock that we are selling significantly below the intrinsic value of the business. That is a mouthful.

Yes, it is. I am not sure that I can do justice to answering the question.

I am going to see you next week, I think, or this week I don't know. Maybe I can give you time to think about it.

Okay.

You are coming to New York aren't you?

Two weeks. As we have said before, Lee, the Board has considered a lot of different factors here and whether or not and when we would execute on the stock repurchase, assuming the shareholders authorize it, is subject to all of the factors that Greg mentioned in his opening remarks. So we will just have to wait and see what results here in the future.

But in all likelihood is this authorization likely not to be used given the uncertainty of the environment for now? I mean, I am not advocating you use it. I want to make it very clear. I only want to buy back dollar bills for $0.50, $0.60, $0.70. If it's not clear that we are significantly undervalued, my preference would be to hedge our bets and pay out a third of the cash flow in the form of recurring dividend. Because at the end of the cycle I don't want to find out that we have bought back stock at inappropriate prices and I got no return.

I understand what you are saying but I don't think we can add anything to what Greg said in terms of all of the factors that we will consider. And it's difficult to say whether we will execute on the program, as you put it, in the near term or not depending on how we come out on all of those different factors.

Got you. Okay. I missed the beginning of the call so I will get a transcript and find out what I missed. Thank you.

Ian Macpherson, Simmons & Co.

I hate to follow that up with a something more mundane but, Terry, the Cajun Express I think now the first available ultra-deepwater rig in the market. Can you talk about how the opportunities are for that rig in terms of the competitive bidding environment and how rare that timing is for that rig and what value there is for that early availability? Because the Clyde Boudreaux was available before but then Noble swapped it out for a fourth-gen contract. So I am grappling with how valuable it is to have ultra-deepwater capacity early as opposed to later now?

Right now, Ian, the Cajun Express is in play. It's the first one up as you know now that the Boudreaux has swapped the rig out. We are in discussions with several clients and they are serious discussions. We like one of the positions that we have; we are very encouraged. We will have to wait and see how it plays out, but I believe that we will have some positive news here shortly. But it is being discussed with several clients so it's not just one opportunity.

The early availability is very attractive for Brazil; it's very attractive for West Africa. And then also we have just seen a new tender come up with Nigeria, looks to be almost a four-year program. So the opportunities are starting to certainly appear and like I said the horizon for this rig looks very good.

Okay, sounds good. Then, lastly, are you prepared to give us tighter start dates for the newbuilds coming into the fleet this year or should we assume the most conservative timing parameters relative to the guidance you have given?

We will continue during the year to show the newbuild start dates in our fleet status report. So certainly as we get closer if there are any changes we will make those changes in our fleet status report. But right now our fleet status report is all [staying].

Okay. Thanks a lot.

Ladies and gentlemen, that does conclude today's conference call. We appreciate your participation and you may disconnect at this time.