Transocean Ltd (RIG) 2009 Q2 法說會逐字稿

Good day and welcome, everyone to the second-quarter 2009 results conference call for Transocean. Today's conference is being recorded. At this time for opening remarks and introductions, I would like to turn the program over to Mr. Greg Panagos, Vice President of Investor Relations and Communications. Please go ahead, sir.

Thank you, Kelly. Good morning and welcome to Transocean's second-quarter 2009 earnings conference call. A copy of the second-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, Quarterly Toolkit and then PowerPoint Charts. The charts included cover average contracted day rate by rig type, out-of-service rig months, operating and maintenance cost trends, contract backlog by client rating and free cash flow backlog and debt maturities.

The quarterly toolkit also has six additional financial tables for your convenience covering revenue efficiency, deferred costs, deferred revenue, other revenue, operating and maintenance costs by rig type and contract intangible revenue.

Joining me on this morning's call are Bob Long, our Chief Financial Officer; Greg Cauthen, Senior Vice President and Chief Financial Officer; Terry Bonno, Vice President, Marketing; and Steven Newman, Chief Operating 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 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, please note that we may use various numerical measures on the call today that are or may be considered non-GAAP financial measures under Regulation G.

As I indicated earlier, you will find the required supplemental financial disclosures for these measures, including the most directly comparable GAAP measure and an associated reconciliation on our website at www.deepwater.com under Investor Relations, Quarterly Toolkit and Non-GAAP Financial Measures and Reconciliations.

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. Now I will turn the call over to Bob.

Thanks, Greg. Good morning, everyone and thank you for joining us on the call. As you saw from our press release, we reported earnings of $2.79 per share after adjusting for asset impairments, discrete tax items and several other items, which Greg Cauthen will cover in his report.

We continued to experience difficult market conditions, particularly in the jackup business where demand has declined and supply just keeps increasing. We currently have 18 jackups idle or stacked, plus one that is just about to come off contract and will stack making it 19. That is up from nine at our last call and three at our year-end call. And as I think I mentioned last time, we expect to see more stacked before the year is out resulting in as many as 25 or 26 jackups stacked by year-end and maybe a bit more. As rigs roll off contract without follow-on prospects, we are approached continuously to cold stack them as efficiently as possible to get costs down quickly.

In the mid-water market and conventional deepwater market, we have seen a slowdown in bid activity. We had four mid-water floaters stacked at the end of the quarter and the fifth has just come down as moving to a stacking location. We have another three mid-water rigs coming available shortly and could see some of those stack also. I will let Terry Bonno gives some thoughts on the prospects for these rigs and on the two deepwater rigs we have coming available in 2009 -- Sedco 709 and the Rather.

We have concluded a sales agreement with the purchaser of the Arctic II and IV. Those are the two mid-water rigs in the North Sea, which we are required to divest as part of the merger. The sale is subject to the OFT approval and once we have this, we hope to close the transaction in the third quarter.

The good news is the continuing strength of the ultra-deepwater market. We remain very optimistic about both the near-term and long-term outlook for this market. We saw an announcement of the contract with Petrobras for the Cajun Express, an 8500 foot capable rig, at over $500,000 per day starting early next year for three years. We have eight other ultra-deepwater rigs coming available between now and the first quarter of 2012 and we are already in discussions with customers on opportunities for most of these rigs.

Our deepwater newbuild program continues to go extremely well. We have taken delivery of the KG1, the clear leader, and the Petrobras 10000, all of which are now earning day rate. We have also taken delivery of the Development Driller III, which is in route to the Gulf of Mexico from Singapore and the Discoverer Americas in Korea. All of our projects are close to on time and all are on or under budget. At this point, I will turn it over to Greg for some detail on the numbers.

Thanks, Bob and good morning to everyone. In the second quarter of 2009, we had net income of $806 million, or $2.49 per diluted share. This compares to net income of $942 million, or $2.93 per diluted share in the first quarter of 2009.

Second-quarter net income was adversely impacted on a net basis by certain items totaling $96 million, or $0.30 per share. After adjusting for these items, second-quarter net income was $902 million or $2.79 per share as compared to the first-quarter net income adjusted for similar items of $1.206 billion or $3.75 per share.

Our second-quarter adjusted earnings per share of $2.79 was below the street due to a variety of revenue and cost factors. During the quarter, we had an unusual number of major operational incidents, mostly with respect to deepwater rigs, which resulted in a $30 million increase in lost revenue. We also made a decision during the quarter to swap the Legend for the Sedco 703, which resulted in another $22 million of lost revenue in the quarter, but better positions us for future work with the Legend.

Although we also missed the street's estimate of cost, this was related to timing of shipyard and maintenance activities in the quarter with our current estimate of full-year cost actually below our previous average guidance.

Discrete items adversely affecting second-quarter net income included $58 million for the impairment of the Arctic II and Arctic IV, $15 million of discrete tax items, $23 million for impairment of intangible assets related to drilling management services, net losses primarily related to retirement of debt and the divestitures of certain joint venture interests and finally the GSF merger-related severance costs.

First-quarter 2009 net income was adversely impacted by similar items totaling $264 million, or $0.82 per share. Compared to the first quarter of 2009, contract drilling revenues for the second quarter were down $209 million. Second-quarter revenues were negatively impacted by $88 million due to an increase in planned out-of-service time for shipyard projects, $141 million due to stacking of rigs and $30 million due to lower revenue efficiency caused by major operational incidents, all partially offset by the planned commitment of higher day rate contracts and various other items.

Revenue efficiency for our fleet dropped to approximately 93% versus 94.4% in the first quarter, reflecting disappointing performance in our deepwater fleet. Contract drilling intangible revenue for the second quarter decreased to $75 million from $104 million in the first quarter. You can find a schedule detailing contract drilling intangible revenues by quarter on our website.

Total revenues were $2.882 billion through the second quarter compared to $3.118 billion for the first quarter due to the previously discussed increased stacking of rigs, out-of-service time for shipyards and unplanned downtime.

Contract drilling revenues for the remainder of 2009 are expected to benefit from the commencement of higher day rate contracts as shown on chart one, as well as the commencement of operations of five of our ultra-deepwater newbuilds planned to begin operations in the third and fourth quarter and to upgrade to Sedco 706, which commenced operations in the second quarter.

These expected increases in contract drilling revenues for the remainder of 2009 are expected to be offset by a decrease in rates on some jackups and mid-water floaters as they roll to new contracts in 2009, an increase in net out-of-service days from shipyards and mobilizations as shown on chart two and an increase in stacking time on additional jackups and mid-water floaters. For the remainder of 2009, we expect out-of-service time for stacked rigs to increase significantly in our jackup and mid-water fleets as Terry will discuss in our marketing comments.

In our fleet status reports, we distinguish between stacked rigs, which represent rigs that we have started or completed the process of removing most of the crew and reducing other costs and are generally not available to go back to work quickly. In idle rigs, which are without a contract and although costs may have been temporarily reduced, the rigs can quickly return to work. We currently have 15 jackups, four mid-water floaters and one barge rig that are stacked and three jackups and one mid-water floater that are idle and we expect to see more rigs stacked or idled by the end of the year.

Contract drilling 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 intangible revenue has no impact on our future cash flow.

We expect our other revenues for 2009 to range between $700 million and $750 million with approximately $375 million related to the non-drilling operation, approximately $200 million related to integrated services and approximately $150 million related to recharge revenue. Due to the low-margin nature of this business, we expect any changes in noncontract drilling revenues to be largely offset by a change in the related costs.

Operating and maintenance expenses in the second quarter were $1.277 billion versus $1.171 billion in the first quarter as shown on chart three. The quarter-to-quarter increase in operating maintenance costs was primarily attributable to $87 million of expected increases in shipyard and maintenance costs, as well as $20 million in increased costs related to our newbuild rigs that are about to commence operation, partially offset by reduced operating costs from stacked rigs. We currently expect our 2009 operating and maintenance expenses to range between $4.9 billion and $5.1 billion, which includes roughly $650 million of expected costs related to our low-margin other revenue items.

The guidance range average is lower than last quarter's as we now expect to see more stacking of our rigs than previously anticipated, partially offset by a weakening US dollar. We expect operating and maintenance costs in the third quarter to be slightly higher than the second quarter due to increased shipyard activity with fourth-quarter costs then falling lower due to expected decreases in shipyard activity and reduced operating costs from stacking of rigs, partially offset by additional costs as we begin operations at five of our newbuild rigs.

General and administrative expenses were $53 million in the second quarter compared to $56 million in the first quarter. This decrease was primarily attributable to reduced severance costs related to the GSF merger. We expect general administrative expenses for the full year 2009 to be between $205 million and $215 million.

Depreciation expense was $360 million in the second quarter compared to $355 million in the first quarter. The increase is primarily due to the completion of the Sedco 706 upgrade in the second quarter and placing the rig into service. We continue to expect depreciation expense to be roughly $1.5 billion in 2009 with the increase over 2008 primarily related to the expected commencement of operations at five of our newbuilds in the Sedco 706 upgrade.

Capital expenditures in the second quarter of 2009 were $947 million versus $708 million in the first 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 $3.8 billion. Of this total, approximately $3.1 billion relates primarily to construction costs, including mobilizations of our 10 newbuild rigs, of which $750 million is the non-cash capital commitment related to the Petrobras capital lease. The remaining $700 million primarily relates to contractually required upgrades and sustaining capital expenditures. For 2010, we expect to incur an additional $930 million in newbuild-related capital expenditures.

Interest expense net of amounts capitalized and interest income decreased to $114 million in the second quarter versus $136 million in the first quarter. The decrease was primarily related to decreases in outstanding debt and an increase in capitalized interest. We expect our 2009 interest expense net of amounts capitalized and interest income to be roughly $485 million for the full year of 2009. This is net of an estimated $190 million of expected capitalized interest.

Our interest expense guidance is $35 million lower than previous guidance primarily due to delays in the Petrobras capital lease, increased estimated capitalized interest and improved working capital. 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 second quarter and first half of 2009, our annual effective tax rate was 15.7% and 15.4% respectively versus 15.2% in the first quarter. We expect our annual effective tax rate for the second half of 2009 to be between 15% and 16%. The increase in the range of our estimate is due to the impact of reduced net income from stacking rigs previously expected to operate in relatively low tax jurisdictions.

Finally, I would like to briefly comment on our liquidity position. At June 30, 2009, we had $900 million of cash. In addition, we have a $2 billion revolving credit facility with more than three years remaining and a $1.08 billion, 364-day commercial paper backstop facility that was put in place in November of 2008. Today, we have almost $152 million of our revolver supporting letters of credit and we have approximately $300 million in commercial paper outstanding. Consequently, we have almost $2.600 billion of unused committed bank capacity. We also generated almost $1.6 billion of operating cash flow in the second quarter of 2009 and we expect this quarterly operating cash flow to continue at meaningful levels for the remainder of 2009.

We continue to generate significant cash flow supported by our $33.7 billion of revenue backlog as shown on chart four. Our backlog has a very high credit quality with almost 60% attributable to A-rated customers and about 95% attributable to customers with investment-grade or better ratings. Since the credit crisis began, we have lost only about $600 million of our backlog due to customer credit-related issues and we continue to believe we have only a small percentage of our remaining backlog with customers who may be in similar credit situations.

This backlog represents roughly $17 billion of free cash flow backlog versus almost $12.6 billion of face value of our debt. As you can see on chart five, the expected timing of the free cash flow from our backlog matches well with our debt maturity.

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 used our free cash flow to repay outstanding debt as we continue to have more than $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.

In May, our shareholders approved a roughly $3 billion share repurchase program that is subject to Board approval before execution. Our Board is monitoring our liquidity and market conditions and will consider when or whether we should begin using some of our free cash flows for share repurchases or whether we should continue to repay debt with a decision based on a variety of factors, including the relationship between our contractual backlog and debt, our ongoing capital requirement, cash flow generation, general market conditions, regulatory and tax considerations, the price of our shares and other factors.

From our past practice, we will not provide at this time any advanced disclosure 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 and we will begin with a discussion on the deepwater market. We continue to be optimistic on the deepwater opportunity in the near and long term with Petrobras leading the charge as they continue to contract deepwater units to meet their immediate demand.

The Cajun Express contract for three years convertible to five years strengthens our position and relationship with Petrobras in Brazil. And it is further evidence of the long-term strength of the deepwater market. We expect to see more contracts for existing rigs executed in Brazil over the next several months. We are already in discussions with multiple clients about the units that come available in 2010 and '11.

West Africa tendering has been very active with a total of 36 rig years of actual tenders and pre-qualification with start dates commencing in 2010 and '11. Additionally, ONGC has come to tender with another deepwater rig need in 12,000 foot water depths with a recently closed 10,000 foot tender yet to be awarded.

With the relative stability of the oil price since our last conference call we have seen some optimism on the part of our customers and the conversations we are having with them regarding our available ultra-deepwater unit in '10 and '11 are gaining momentum. Unfortunately, we have experienced a gap in demand for capable units in 5000 foot water depths as the majority of the current deepwater tenders have requirements greater than 5000 feet.

We had two deepwater units available in 2009, specifically the Rather and the Sedco 709, and follow-on work is not obvious for either unit. While the Rather does have several potential opportunities in the North Sea, none are firm and delays in commencement of these programs could result in some idle time. We do believe that the Sedco 709 will have future opportunities in West Africa and Brazil, but at the moment, the near-term opportunities in those areas are all in deeper waters.

We are also encouraged by drilling and tendering activity in frontier and emerging provinces such as Israel, Mexico, Indonesia, Black Sea and Libya and believe incremental demand will result from these activities over the long term.

Now turning to the harsh environment market. We are working to complete our Arctic design drillship and finalize shipyard pricing in order to continue to progress our discussions with our customers in this technically demanding environment. We continue to be encouraged with the discoveries in the UK and Norwegian North Sea since our last call.

Additionally, the outlook in Eastern Canada remains strong for our continuing operations in mid-water. And we see a renewal of deepwater interest with the latest deepwater licensing offshore in Nova Scotia.

Moving on to the mid-water floater market, we see the remainder of 2009 soft in this market except in Norway, Eastern Canada and Brazil with seven units already stacked and 12 more becoming available before 2010 in the worldwide fleet. With the lack of demand, the additional effective supply due to subletting and our customers' budget priorities, we see the remainder of 2009 as challenging for opportunities.

While we are in discussions on extensions for a few of the 2009 available units, we do not see an uptick in demand for the remainder of the year even with the relative stability in oil prices. We expect that this softness in demand will lead to additional rigs being stacked between now and year-end 2009.

Moving to the jackup market, we have some good news in this very difficult market environment in that we have executed a long-term contract in the Trident 20 since our last earnings call as detailed in our fleet status report. We are also in discussions with a few clients on extensions for 2009. However, with 14 jackups rolling off contract before the end of 2009, as Bob stated, we expect to stack around eight more units.

With the relative stability of oil prices, we have seen a few more tenders coming forward and more confidence from the operators. However, we do not expect this to materially change the overall fundamentals of the jackup market for the next several months due to the continuing increase in supply as newbuilds are delivered.

The best opportunities going forward will be Pemex, ONGC, Saudi Aramco and also in Nigeria. Nigeria alone has 11 open tenders representing 25 rig years that are overdue to be awarded. However, we expect that this will take some additional time to get to the finish line.

The potential Pemex jackup tenders if and when they happen will require as many as six incremental 300 foot rigs from Mexico. With an overhang of supply, any tender like this will be highly competitive. We expect the overall jackup market to remain challenged in the near term, especially with the influx of 15 uncontracted newbuilds in 2009 and 25 more in 2010. That concludes my discussion on the market, so I will turn it back to you, Bob.

Thanks, Terry. Operator, I think we're ready to open up for questions at this point.

(Operator Instructions). Arun Jayaram, Credit Suisse.

Yes, good morning. Bob, I was wondering if you could comment a little bit, at least in this quarter, about the deepwater revenue efficiency. The utilization, I guess, for all three segments was below my expectations. I was wondered if you can comment if there is any quarter-specific items that led to the lower unexpected utilization?

I will let Steven handle that question.

Good morning, Arun, how are you? The deepwater segment of the fleet, which is the 4500 to 7500 foot segment, 16 rigs in that fleet was the largest underperformer in the second quarter. We had a couple of human error incidents on drill floors on a couple of those rigs and we had a handful of BOP problems. Nothing that I would characterize as systemic or quarter-specific. We did a deep dive on each one of those incidents. We have identified the root causes. We are going back to address them in our management system so they don't happen again. It is uncharacteristic in the second quarter. They were anomalies and I think I would just leave it at that.

Steven, any of those issues, could they impact Q3, these BOP issues that you're citing?

No, no, no. They have all been resolved and BOP operations are a complex part of our business. It is something we pay a lot of attention to. All of the BOP incidents that occurred in the second quarter have been resolved and we will continue to keep our eye closely on the performance of our subsea equipment.

Okay. My follow-up is, in West Africa, Terry, we have seen, obviously, some pretty good things on the deepwater side; yet, the shallow water market, particularly in Nigeria, has been weak. Can you comment on those divergent trends?

We are not seeing, at the moment, a whole lot of mid-water tendering in West Africa. We do, at the moment, have some discussions ongoing on some extensions of our mid-water fleet, but it has slowed down a bit and our main deepwater -- I'm sorry -- our main mid-water focus has been -- our operations has been with Chevron, obviously, in Angola and then we have also worked offshore at EG and Congo. And we believe that, in some instances, the budget money has just not come for the mid-water and the jackup for particular clients and it is being pushed toward the deepwater. So our experience is offshore West Africa with those clients. We are in discussions on some extensions and we are hopeful that we will be able to continue operations with the mid-water fleet there.

Okay, thank you.

Jim Crandell, Barclays.

Good morning. My first question is about Brazil. Can you give me your opinion on whether the first round of the dozen rigs or so in Brazil, the rigs that have not yet gotten financing, do you think they will eventually be built and then what are you looking for for the second round coming from Brazil in terms of timing and in terms of sort of restrictions relative to maybe local content?

Jim, I will let Terry answer the second part of that question. On the first part, I am not sure that we can be very definitive with the answer. Our understanding is that -- well, we know that at least one of those rigs has already been canceled and won't be delivered. Another one is in financial difficulty and whether or not the contract will actually stay in place is unknown. And I think there are five or six where construction has not even started yet and the winning bidder has not arranged financing and actually firmed up a shipyard order. So whether or not some or all of those five or six will also drop by the wayside is hard to tell at this point. So that is about all we can say. There are certainly going to be significant delays on the deliveries of most of those 12 rigs and a number of them will probably never show up. Terry, do you want to talk about the upcoming tenders?

Sure, Bob. Hi, Jim. What we hear out of Brazil is that the next tranche of tenders will be -- one will be coming from engineering and we believe that that is going to be around seven units and those are going to be placed directly with a shipyard from Petrobras and they will be Petrobras-owned units.

The next tender will be from E&P and we expect that that will be four or more units. Let's not forget that they currently also have the expression of interest ongoing. That is with existing fleets. They are looking for as early of availability as they can. We believe that there will be two more or more taken from that expression of interest.

Okay, good. And do you think this will be -- this will be decided and the bid request will go out before year-end?

Yes, we believe that the bid request will go out before year-end. Decisions being made, I would have to take a wait-and-see.

Okay. And just as a follow-up, Bob, can you address Transocean's interest in bidding on both new floaters and jackups that are under construction, but let's say, for financial reasons, cannot be completed with the existing owners?

Jim, we certainly have interest, particularly in some of the ultra-deepwater rigs that have been ordered and may or may not get into financial difficulties. I am not particularly interested in committing a lot of capital on speculation unless we can get a real bargain purchase. So I suspect it is going to be difficult for us to be successful in acquiring some of those current newbuilds that are deepwater-capable because it seems like everybody is just as optimistic about the outlook for that market as we are. Hence, there doesn't seem to be a lot of appetite to discount the prices very much. The jackup prices, that's where we are going to get into a market where there will be significant discounts on the jackups. I guess that we could be interested if the discounts are great enough, but there the discounts would have to be significantly more even than what we would hope to get on the deepwater floaters. So while we are interested and we continue to monitor it, I wouldn't give you a high probability we are going to be successful in very many of those possibilities.

Okay, thank you.

Roger Read, Natixis Bleichroeder.

Good morning, gentlemen or afternoon in your case. A specific question on the jackups. I mean I understand you don't expect any real clarity in the second half of this year. Can you give us an idea of what you think may be required to get any improvement in the jackup visibility, customer demand, etc. as we enter 2010 and look forward from there?

I am not sure we can give you any real insight into that market. The problem with the jackup market is the classic contract drilling cycle where, at the same time as demand has pulled back significantly, we have significantly overbuilt. With the number of new jackups still coming in and many of them I think are over 40 that don't have contracts, you would have to postulate something that would cause a significant increase in demand. And frankly, I don't see that anytime in the near future. The near future being well past 2010. So I don't see any signals out there or I can't give you anything that would suggest that that market is going to improve in the near term.

Okay. And as a contrast on that, can you talk about maybe more of that mid-water market, maybe even the 3000 and under area? I mean a lot of that North Sea market is that way or kind of core North Sea. What do you need to see there? Is that as simple as an oil price call it rebound stability or is there something else that needs to go on in the UK sector, in the Norwegian sectors?

My guess is that, if you look at the mid-water market from a 50,000 foot level, the dynamics there are significantly different than in the jackup market. That market is impacted by a downturn in demand, but not by a supply side issue. Nobody has really built any mid-water rigs other than a couple that I think that are targeted for Norway and I don't expect anybody to build any mid-water rigs in the future. So if the oil prices stabilize at $70, $75, $80 or more, my guess is most of what people were drilling for in the mid-water a year ago when demand was high is likely to come back.

We also need to get a little bit of confidence in the capital markets because so many of the players in the mid-water business are independents who need to have access to capital in order to drill once the prospects become economical. I could see that if the oil prices stabilize and stay up that, next year, the demand ought to start going back towards where it was and with no increase in supply.

In fact, if we end up stacking as an industry a number of these mid-water rigs and have significant cost to bring them out, we might effectively have reduced supply. So I am fairly optimistic on a longer-term outlook for the mid-water market. I can't point to any specific areas where significant demand increase will occur, but I don't think we need that. I think we just need demand to go back to where it was about a year ago.

Thank you.

Brian Uhlmer, Pritchard Capital.

Hey, good morning, how are you guys doing? I have a couple of questions. I wanted to talk about ONGC and their tender requirements. They have gone with some spec builders and it looks like one of those rigs may or may not be delivered as that company makes a decision on which contract it goes for. Do you feel that they will still contract to spec builders or do you feel that the qualified contractors like yourself have better odds of winning right now or is it still just a pricing game?

Terry?

Well, we all know that ONGC has to abide by the contract protocol. So they do have the rig that is currently saying that they are going to build the rig and the rig is going to arrive in India, so they are bound by the contract until the rig actually does not show up. So again, we have the 10,000 foot tender that is open. It hasn't been awarded. We don't know exactly where that stands as of today. And then we hear the 12,000 foot tender is out. So that is pretty much what we see with ONGC at the moment.

Okay, have they changed the tendering documents to request for qualified or qualifications for experienced bidders or have you seen a change in that in the last few tenders?

No.

No? Okay. And could you give an update, if possible, on -- at some point, you were working on an Arctic vessel. Do you have any update on that?

Yes, Brian, we have been working on our Arctic design for a couple of years now. We have progressed it to quite far. We are in fairly substantive discussions with the shipyard and with the equipment suppliers in order to finalize the design and hopefully get to a point where we have economics that we can go back to our customer with. We're, at the same time, having very substantive conversations with customers about interest in that design and interest in pursuing Arctic drilling opportunities.

Good deal. Thank you.

Collin Gerry, Raymond James.

Good morning, guys. Regarding the jackups, obviously, very hazy crystal ball as we look out to 2010 and beyond, but it sounds to me like your message is still pretty clear that we don't see rates coming back to the shrink that we recently saw. In that light, you mentioned you might stack, update more rigs this year. How many of those jackups would you characterize as jackups that don't really come back into your fleet? Or are they going to be cold-stacked and ready to come right back if we do see rates come back?

Well, one of the factors in this industry you always have to remember is that, if the market recovers, then it is just a question of time before the assets come back in. It's a question of how much the market recovers. So I don't think that you can count on any significant number of jackups in the worldwide fleet, whether ours or anybody else's, permanently leaving the fleet just because they are stacked. Depending on how long this downturn in the jackup market lasts, they could be stacked for two or three years or more. But don't think that that means they will never come back out and compete again because that is probably not right.

Okay. That is really helpful. And just honing in a little bit more on the jackup side, I guess we are all trying to make our estimates for next year and we have heard some of your competitors be a little bit more optimistic in terms of more bid and more opportunities coming up on the jackup side, recognizing that it is competitive. Have you seen any kind of divergence between the higher spec, call it, heavy-duty harsh environment type rigs versus, say, some of the just the older 250 foot IC rigs out there? I think we saw one of your North Sea [HDH] rigs go cold-stacked here recently. So I guess that might speak to it a little bit, but I was wondering if you could give a little color.

I will let Terry tackle that one.

Okay, well, I would say that we have certainly seen more interest. There is more traffic from the demand side. I think Bob articulated quite well the supply side in the issue space there and the onslaught of the newbuilds that are coming onto the market. We have seen many more bids. We have seen in basic -- quite frankly, in the UK and in Southeast Asia. So we do have -- we do see some good opportunities. ONGC is coming out with some -- certainly some long-term tenders. We know Pemex is coming out with some long-term tenders. It is just basically a wait-and-see.

We believe that the rest of '09 though we are not going to see a lot of pick up in activity and we do see that some of these decisions will be made in 2010. Again, we have all that pent-up demand in Nigeria, which we think solves a lot of the issues that we are seeing in West Africa where we are a bit overweight in jackups.

So basically, we do see demand coming back and I think our competitors all acknowledge that and I would say that they all acknowledge too that we have got a supply side problem.

Right. And then just in terms of kind of high grading, do you see -- utilization for the higher spec, that's kind of the common rule of thumb or what people say at least is that you will see higher spec hold up better than some of the 250 foot ICs. I guess how do you see the high spec side of the jackup market today?

Well, right now, we are not seeing a big divergence just because the high specs that are located in the UK, it is a bit of a closed market. Again, we are seeing that the activity is going to pick up in 2010, so those high spec units -- we believe it is a more positive picture. But we don't have a lot of visibility other than we do know that demand is there.

It is going to be dependent on the clients' programs. It is going to be dependent on the area that we are working in. So we haven't really seen a huge difference between the 250s and the 300s versus a newbuild. Right now, it is a pricing exercise.

I think the question is not so much specifically aimed at high spec markets like the North Sea, but whether or not some of the newbuild higher spec rigs will displace the older rigs simply because of technical capabilities. In general, we don't anticipate that is going to happen. We have not seen it happen in the past to any significant extent. In most markets, and particularly markets like this, the operators will take -- keep this rig that can do the job. They won't pay extra just to get a bigger or newer rig. So I don't think that we are going to see much of that.

That is exactly what I was looking for. All right, thanks a bunch.

Leon Cooperman, Omega Advisers.

I have made this point before and I am not going to dwell on it, but it seems to be an ideal company to be paying a significant dividend to your shareholders, but let's not dwell on that.

I just want to make sure I understand the comments on the repurchase program. The shareholders approved it, the Board has the authorization and your guys' philosophy is, if the Board elects to activate it, that is not a disclosable event. We will find out about it if you buy some stock back in your report the next quarter after you bought it back. Is that kind of what you said?

No, Lee, that is not right. When the Board or if the Board authorized the program, we will immediately announce that the program has been authorized. Once the program is authorized at the Board level, I think Greg's comment was more aimed at we won't be then advising when or if we will be specifically in the market at any time.

I understand that. So you will make an announcement when the Board approves it?

Yes, we will.

All right. And I would suggest that maybe at your next annual meeting, since this is all water under the bridge, that you somehow get authority to pay dividends, as well as stock repurchases because I respect the fact that we have not activated the repurchase program because of uncertainty, but when you look at your cash flow and you look at the interest rate environment that we are in, it would seem to me if you were paying a $4 dividend your stock wouldn't be trading as volatile as it is and wouldn't be selling at the present price that it is and that would be a fair way to deal with your shareholders. But I have made this point before and I won't monopolize it, but I do find it kind of interesting that we just don't seem to think that dividends are important.

We appreciate the input, Lee. And as we approach the next shareholder meeting, we will certainly consider all of the alternatives, including a dividend. Whether we come to the same conclusion or not is difficult to tell, but we will certainly get a headache about it.

Thanks.

[Nate Barnes], Edward Jones.

I was just wanting to know about your strategy going forward. You said before that you would like to concentrate more on the deepwater and going forward, this seems like a perfect time with the jackups being stacked that you -- maybe further divestitures or how much you would like to increase revenues in the ultra-deepwater where you have your advantages? I guess just a little bit on -- are you going to -- would you prefer to have a higher percentage of revenues coming from the ultra-deepwater?

Well, we are clearly focused primarily on the high spec floater business, but we have always considered jackups and continue to consider jackups to be strategic for us for a number of reasons -- a lot of them around infrastructure in areas that we expect to be future floater markets, particularly deepwater markets.

Now having said that, we are the biggest jackup player in the world with 65 jackups. I think we have consistently said we don't need a bigger [basis]. We don't need to have 65 and in fact, had divested -- I think we sold three last year and were close to selling a few more this year before the financial markets contracted and the buyers had to pull out of the deal because they couldn't get their money.

So you shouldn't be surprised to see us sell some of the older, lower spec jackups in the future. However, I would say this he environment is not a particularly good one to sell if you expect to get a reasonably good price. So you could see some sales going forward, but not anything on a wholesale type basis.

And more on the ultra-deepwater, is the competition that you are seeing there increasing or are you pretty confident going forward that you are so far ahead of everyone else in technology that you are not going to see a whole lot of increased competition in the near term?

Well, unfortunately, the competition comes from the fact that the rigs exist. And we haven't seen a significant increase in competition in the last six months because when we have got into the downturn here, one of the positives is that all newbuild orders kind of ground to a halt. There has been a significant proliferation of new players in the deepwater business. A number of them have not yet had their rigs come out and get delivered, and there is an open question on how they will operate some of those rigs.

But one of the characteristics of this business is that if the iron exists and the demand is there, somebody is going to figure out how to make it work. So I think by virtue of just looking at the number of newbuilds out there, you would have to say that the competitive environment has increased.

Thank you. You guys are doing great.

Andre [Skubschred] with Pareto.

Hi, good afternoon. My first question is related to the deepwater category. The incidents you saw in the low utilization, is that related to the fact that this category has a pretty old fleet?

I am sorry to interrupt, but you are coming across way too soft. We can't really hear your question.

Okay. Can you hear me better now?

A little better. If you get closer to your phone, it would help.

Okay, I will try again. The deepwater category where you have the low utilization, was that a reflection of the old fleet?

Was it a reflection of the old fleet?

Yes, that the fleet is quite old.

Yes, there are some older rigs in that fleet, but it is not really a reflection of the age of the fleet. The BOP problems we had were on combination of modern generation and older systems. The human error -- the couple of human error issues we had were really completely unrelated to the age of the rigs those guys were working on. So it doesn't have a lot to do with the age of the fleet.

Okay. My other question was in terms of the Brazil tenders or the activity in the ultra-deepwater down there, did I understand you right that there will be seven units from the engineering department, so they are going to order them from the shipyard directly? And then the E&P with the four units are going to be ordered through drilling companies?

That's correct. They are going to -- engineering will place a tender with the shipyards for seven units, and then E&P will contract with or send tenders for the contract drillers for the four or more.

And those four, do they have to be built with the local [competence] down in Brazil?

They have to be built in Brazil, but we have not -- the tender obviously has not come out, and we do not know the specifics of the local content percentages or requirements.

And my last question is related to Arctic II and IV. Can you say anything about the price, the sales price of those two units?

We would rather not comment on the sales price, but you saw we had another impairment. So based upon the anticipated deal, the value of the two rigs has been written down to just a little below $200 million. So that is a reflection of our current deal, but that is all the information we can give at this time.

Okay. So a little bit less than $200 million each?

Well, for both rigs.

For both rigs. Oh, okay. If I have time for one more question. If day rates in the mid-water market is 250 and say you're making 150 a day, and say you are making $50 million a year, if you suddenly have to do an upgrade for $100 million would you do that upgrade and maintain the rig, an old rig like 30 years old? Or would you kind of try to scrap it or stack it until the market comes back again? So my question is do you think the mid-water fleet will be scrapped if the mid-water rates are at 250?

I don't think there is a chance of scrapping the mid-water rig if rates are 250. And I would frankly say I would not expect to see anybody scrap a mid-water rig even if the market got a lot worse than that. There is tremendous option value in these rigs if this market improves and goes back anywhere near what it was a year ago.

As I mentioned before, there is no supply increase seen on the horizon for these rigs. So unless you get concerned about the deepwater fleet starting to compete down against the mid-water fleet, which given our optimism on the deepwater we are not particularly concerned about, then I think that even if the market temporarily got worse than 250,000 a day, you would have tremendous option value that the rates would go back to what they were 12 months ago where we started to see mid-water rates go to $400,000 a day give or take. So I just don't see anybody scrapping, certainly not us scrapping mid-water floaters.

But my point is that we have seen, I would say, almost a trend that you have some erosion on some of the rigs, especially the rigs that are 30 years old. And if you are making $50 in EBITDA and suddenly have to upgrade it for $100 million, you need an extremely long-term contract to actually make that investment for me to call that fair investment. Or do you think that you should make that $100 million upgrade because rates could later go up to $350,000 for example. Is that your thinking?

I think that is exactly right. If you think that there is any possibility that rates could move back towards $350,000 or $400,000, you cash flow $100 million to $150 million a year off of a mid-water floater. That would easily pay for the upgrade and you would presumably, in that kind of a market, be able to get more than a one-year contract. So I think there is just too much potential option value there.

We need to move on to the next caller please.

Lukas Daul, Enskilda.

Thank you, good morning. I noticed that this is the first time where you are sort of seeing some softness in the deepwater market and you, of course, are limited to the segment of 5000 feet water depth. But given that there are 20 ultra-deepwater floaters becoming available in 2011, and if Petrobras gets enough with the seven by the end of this year, do you think it is just a matter of time and six months from now, you would be seeing the same softness in the ultra-deepwater segment as well? Or are the other guys big enough or are their requirements big enough to fill in the demand?

This is Terry. As we discussed, or as I discussed in my notes, we felt like it is a gap. The current tendering does not have anything for the 5000 foot level. We don't see this as a softness in the deepwater market nor the ultra-deepwater market. That is not really what we indicated. We were just giving a bit of guidance that we may see some idle time in the near term for these two units. We believe these two units have very good opportunities on the go forward.

Okay, fair enough, thanks.

Mike Urban, Deutsche Bank.

Thanks, good morning. The only question I had left was -- I was wondering if you could follow up on your comment on frontier markets and when we might expect to see some meaningful incremental demand out of some of those markets given the timing on that and what the potential might be there in terms of rig demand?

The question is about the frontier markets, some of the emerging deepwater provinces perhaps. I will let Terry comment on that.

Okay. We are very hopeful and certainly our clients are also very interested in the Black Sea. We have several clients that are going to be motoring rigs up there shortly. In fact, one of our clients with the Deepwater Champion will be taking that rig to the Black Sea. So we have a lot of optimism that that certainly is going to be an interesting emerging market.

Also we have seen, with the recent discovery off of Israel with Noble Energy, that is going to be a big development and there is a current open tender for that and we hope that that decision is made shortly and that certainly turned into a deepwater province.

We also know there is a lot of deepwater drilling going on right now offshore Indonesia and our clients are hopeful there. We have one of our rigs that is headed that way on the GSF Explorer as soon as it completes with BP in Angola. So there is a lot of opportunity. There is some current drilling going on that we are hopeful for good results and then within the next couple of years, other markets we believe will be opening up.

Great. Thank you.

We have time for one more question.

Jud Bailey, Jefferies & Co.

Thanks, good morning. I wanted to circle back on some of the commentary on mid-water versus jackup and clarify, understanding there is different supply dynamics for each segment. Terry, at this point in time, is it fair to say that you have seen a bit more of a pickup in demand so far for the jackups relative to what you are seeing on the mid-water side?

I would say that we are seeing a little bit more demand certainly for the jackup, but we are also seeing some tendering for the mid-waters. There were two active tenders actually out in India. One was delayed and the other one is still open. Again, we don't see this as something that could continue. We're waiting to see and hopeful that certainly more demand comes to the market. But right now, the sheer numbers are not equal to the jackup tenders that are coming out.

Okay, that's helpful. And then my last question is for Greg. You took, I guess, another write-down for the Arctic II and IV and you say you are going to have the sale in hand here shortly. Are you going to have to write down some of the other mid-water rigs going forward as that rig gets sold to kind of mark to market or how is that going to work as far as where your mid-water rigs are on your books currently?

Not at all. We actually do our impairment analysis, other than for rigs held for sale, by asset class. So for the mid-water class in its entirety and those rigs are a special situation. They had to be sold in compliance with OFT instructions and they had just been marked up at the merger. But if you look at our class of mid-water rigs, we are nowhere close to having any impairment on average across that class.

Okay, great. Thank you.

Due to time constraints, --.

Okay. I'm sorry, operator. Go ahead.

That will conclude our question-and-answer session. I would like to turn the program back to our speakers for any additional or closing comments.

Okay, I would just like to thank everyone for joining us on the conference and we will do it again next quarter. Thank you very much.

Thank you, everyone, for your participation. You may now disconnect.