Transocean Ltd (RIG) 2010 Q1 法說會逐字稿

Good day, everyone, and welcome to the first-quarter 2010 results conference call for Transocean Limited. Today's call is being recorded.

At this time for opening remarks and introductions, I would like to turn the conference over to Mr. Greg Panagos, Vice President Investor Relations and Communications. Please go ahead, sir.

Thank you, John. Good morning and welcome to Transocean's first-quarter 2010 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've also posted a file containing four charts that will be discussed during this morning's call. That file can be found on the Company's website by selecting Investor Relations 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; and free cash flow backlog and debt maturities.

The Quarterly Toolkit also has four additional financial tables for your convenience. These tables cover revenue efficiency; other revenue details; daily operating and maintenance costs by rig type; and contract intangible revenues.

Joining me on this morning's call are Steven Newman, Chief Executive Officer; Ricardo Rosa, Senior Vice President and Chief Financial Officer; Ihab Toma, Senior Vice President of Marketing and Planning; and Terry Bonno, Vice President of Marketing.

Before I turn the call over to Steven, 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 may use various numerical measures on the call today that may be considered non-GAAP financial measures under Regulation G. As I indicated earlier, 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, 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 Steven.

Thank you, Greg. Good morning, everyone and thank you for joining us this morning.

Before making any comments about our first-quarter results, I want to say a few words about the Deepwater Horizon incident. I know you are all concerned about the incident and its aftermath. Many of you have sent condolences and messages of support; and all of us at Transocean appreciate your concern very much.

On the evening of April 20 at around 10 p.m., the semisubmersible Deepwater Horizon experienced an explosion and catastrophic fire. The rig had a crew of 126 people; and through the quick actions in courage of many onboard, 115 people were safely evacuated.

Tragically, however, we lost 11 of the Horizon's crew, nine of whom were Transocean employees. At this point, we do not know the cause of the fire and explosion. We are working to support BP in containing the well; and we are conducting an investigation to determine the cause of this tragic accident.

We will be dealing with the emotional consequences for some time to come. We are deeply saddened by the loss of our team members, and we are working closely with their families to assist them through this difficult period.

Before I close my comments on this tragic incident I want everyone to know the following. We are determined to find out what caused this incident which resulted in the loss of 11 lives, but believe that it is inappropriate to speculate on what may have caused the catastrophic failure of a cased and cemented well in advance of that investigation.

We are determined to appropriately honor the 11 individuals who lost their lives in this incident. We will continue to live by the core values of Transocean, particularly the values of integrity and honesty, respect for our customers, our fellow employees, and our suppliers, and safety.

On safety we remain deeply committed to our Company's vision of an incident-free workplace all the time everywhere. We will continue to cooperate fully with BP and the government agencies to stem the flow of hydrocarbons from the well.

The loss of revenue from the Deepwater Horizon will have an impact on our earnings beginning in the second quarter. The Company does carry a comprehensive insurance program that will help us address the financial impact of the incident. In fact, coverage is in excess of the book value of the rig; and we have already received a significant portion of the insurance reimbursements.

Ricardo will provide you with more details on the financial impact of this incident based on what we know today.

Our first-quarter earnings came in at $2.09 per diluted share, or $2.22 per diluted share after adjusting for the loss on the sale of two North Sea Midwater Floaters, an impairment charge for our oil and gas operations, and some discrete tax items. Following a few remarks from me on the state of the markets, Ricardo will comment in detail on the results.

We continue to see signs of stabilization and potential recovery in the jackup market, with increases in tendering and contracting activity by our customers. The incremental growth in demand has allowed us to bring a couple of our idle rigs back to work, though we also stacked a couple of units since our last call, keeping the total number of idle Transocean jackups at 27, two of which are preparing to commence contracts.

We remain cautious about any meaningful day rate recovery in this market in the near term given the amount of idle existing capacity, plus the uncontracted newbuilds set to enter the market over the next several months.

Turning to the Midwater, the number of stacked Transocean rigs decreased to five as we secured a contract to reactivate the Arctic III for Exxon Mobil in the North Sea. We continue to see opportunities in the marketplace, though generally short-term in nature, with leading-edge day rates holding in the mid-200s.

The Deepwater market remains an area of concern. The absence of tendering activity in 5,000-foot water depths has created the potential for short-term oversupply in this market. I continue to believe that we are well placed to secure work for the marketed Transocean units, evidenced by our recent contract on the Henry Goodrich in Canada.

Our recent fleet status report showed that we have substituted the idled Transocean Rather for the Jim Cunningham in Angola, driven by the significant shipyard required on the Cunningham. And we will now coldstack that unit until market conditions justify that major shipyard project.

Concluding with the Ultra-Deepwater market, this area of our business remains strong, demonstrated by the Deepwater Frontier contract which commences in late 2011 at a day rate of $475,000. As we continue to take additional 2011 capacity off the market, this part of our business will remain extremely healthy.

I think we should now turn to the numbers and let Ricardo take you through some of the details. After that, Ihab will talk a bit more about what is going on in the market, including some details on the more than $1.5 billion in contracts we've executed since our last conference call.

Thank you, Steven, and good morning, everyone. In the first quarter of 2010, we generated net income of $677 million or $2.09 per diluted share. This compares to net income of $723 million or $2.24 per diluted share in the fourth quarter of 2009.

First-quarter net income was unfavorably impacted by certain items highlighted in our press release totaling on a net basis $42 million or $0.13 per share. After adjusting for these items, first-quarter net income was $719 million or $2.22 per diluted share.

First-quarter contract drilling revenues were down $105 million, compared to the fourth-quarter of 2009 due to two main factors amounting to a total of $156 million. The first was incremental off contract time from stacked rigs, with an adverse revenue impact of $78 million. The second was increases in shipyard and mobilization time, which resulted in a further reduction in revenue of $78 million.

Our accounting policies provide that precontract commencement mobilization revenues and associated operating costs are deferred and then amortized to income from the start of drilling operations.

In addition, our fleet's revenue efficiency was 93.2% in the first quarter, marginally lower than the 93.5% achieved in the previous quarter. The decline, primarily due to startup-related unplanned downtime affecting certain newbuild rigs, as well as extended unplanned downtime affecting two Deepwater rigs operating in India. These reductions were partly offset by a $49 million increase in revenue from newbuild rigs commencing or continuing operations in the quarter.

Contract drilling revenues for the full-year 2010 are expected to benefit from the start of higher day rate contracts for Floaters, as shown on the average contracted day rate chart posted on our website. We will also benefit from the commencement of operations in 2010 of four additional Ultra-Deepwater newbuilds, as well as the full year's activity of five newbuilds and the upgraded Sedco 706, which all commenced operations during 2009.

However, these projected increases in contract drilling revenue in 2010 are expected to be more than offset by the effect of rigs stacked during 2009, the impact of the loss of the Deepwater Horizon of approximately $130 million, and a decrease in rates on some jackups and Midwater Floaters as they commence new contracts.

2010 will also be negatively impacted by out of service time more heavily weighted toward our High-Specification Floaters, mainly due to the timing of the 10-year special periodic survey required by certain units. A chart summarizing our expected 2010 out of service rig months can be found on our website.

Operating and maintenance expenses in the first quarter were $1.196 billion versus $1.296 billion in the fourth quarter. The quarter-to-quarter decrease in operating and maintenance costs of $100 million was primarily attributable to a $123 million impact in the first quarter from reduced maintenance costs. The reduction is primarily a result of $28 million of nonrecurring costs recognized in the fourth quarter related to the storm-damaged Trident XVII and $71 million in lower non-shipyard maintenance expenditures resulting from project postponement.

In addition, we benefited from a $21 million decrease in operating and maintenance costs related to stacked rigs. These reductions were partially offset by a $24 million net favorable impact in the fourth-quarter 2009 from litigation settlements, and in the first-quarter 2010 of $17 million of after-sale chartering expenses of the GlobalSantaFe Arctic IV and the $15 million in operating costs for newbuild rigs starting operations during the two quarters.

We currently expect our full-year 2010 operating and maintenance expenses to range between $5.2 billion and $5.5 billion, roughly in line with 2009. This range includes about $630 million of expected costs related to our low-margin other revenue items, and an estimate of $200 million for additional expenses associated with the Deepwater Horizon that I will address separately.

Relative to 2009, operating and maintenance expense levels will be significantly affected by the increased operating time of our newbuild units, higher maintenance expenses resulting from the increased number of shipyard days expected to be incurred by our higher High-Specification Floaters, and additional costs resulting from the Deepwater Horizon incident.

The main factors that we believe will impact our cost levels within the range that I have indicated are rig reactivation expenses, potential inflationary pressures, and the strength of the US dollar as we respond to increased demand for our rigs. We expect our full-year costs to be at the low end of the range if rig reactivations are limited to those we have already announced; the dollar parity against the currencies of our key markets -- for instance the UK, Norway, and Brazil -- remains at current levels; and if there are no significant inflationary pressures affecting our personnel and maintenance costs.

Our expenses will trend toward the upper end of the range if the recovery in the jackup market is sustained and further reactivations occur; if inflationary pressures increase, in particular due to demand for experienced personnel; and if the US dollar weakens by up to 10% from its current levels.

In establishing the range, we have assumed up to $80 million in potential additional reactivation costs; up to $100 million as a result of potential inflation; and up to $90 million for adverse currency movements.

We are still assessing the impact of the Deepwater Horizon incident on our costs for 2010. Based on the information we have available at this time, which assumes all environmental exposures related to the hydrocarbons released from the well are the responsibility of BP, we expect an increase of approximately $200 million in operating and maintenance expenses in 2010 comprised primarily of insurance deductibles, higher insurance premiums, and additional legal expenses.

I must emphasize that this estimate is preliminary and is subject to changes in regulations, operating requirements, and additional information that may become available after today.

General and administrative expenses were $63 million in the first quarter compared to $46 million in the prior quarter. The increase was primarily due to share-based compensation costs, in part associated with the retirement of our former Chief Executive Officer. We expect general and administrative expenses for 2010 to be between $240 million and $250 million.

Capital expenditures in the first quarter of 2010 were $379 million versus $857 million in the fourth quarter with the decrease primarily due to the reduced payments related to our newbuild program, which is nearing completion. We expect capital expenditures for the full-year 2010 to drop significantly to about $1.4 billion, including capitalized interest, with $940 million relating to newbuilds and $430 million primarily related to upgrades and sustaining capital expenditures of the existing fleet.

Interest expense net of amounts capitalized and interest income was $127 million in the first quarter. We continue to expect our full-year 2010 interest expense, net of amounts capitalized and interest income, to be about $540 million.

This is net of an estimated $90 million in expected capitalized interest. This assumes repayment of debt at maturity, no additional newbuild commitments, and short-term interest rates remaining at current levels.

For the first quarter, our annual effective tax rate was 15%. We expect our annual effective tax rate for the full-year 2010 to be between 15% and 17% after taking into account the estimated $200 million cost increase projected for the Deepwater Horizon incident.

The lowering of the estimated range compared to our previous guidance is based on changes in our assumptions of the mix of income that will be generated in various tax jurisdictions.

To give you as complete a financial picture as possible regarding the Deepwater Horizon incident, let me provide you some additional information based on what we know today. In the current quarter, we expect to receive approximately $560 million in insurance proceeds and record an accounting gain of approximately $270 million for the total loss of the rig.

Of the $560 million in expected insurance proceeds, we have already received $481 million, including amounts received to date. We have incurred costs in the current quarter related to the incident; and we will provide an update on them during our second-quarter call, including commentary on provisions for contingent liabilities.

Our Form 10-Q for March 2010 outlines our insurance program which, in addition to hull and machinery coverage, generally provides excess liability coverage up to $1 billion, subject to deductibles and self-insured retentions of up to $65 million on claims related to personal injury, wreck removal, and other third-party claims.

The consequences of this incident continue to evolve, and this initial assessment of their financial impact is likely to be incomplete. We will not speculate on matters that are still evolving or on the possible impact of future events. We will, however, provide material information as it becomes available.

Lastly, during the first quarter and through Wednesday, May 5, we have acquired approximately 2,450,000 Treasury shares for approximately $210 million at an average price of around $86 per share as part of our CHF3.5 billion share repurchase program that the Board authorized us to commence in February.

We successfully listed our shares on the SIX Swiss Exchange effective April 20 under the ticker RIGN; and in compliance with Swiss regulations we now provide a weekly report on our website showing the number of shares repurchased during the previous five trading days.

I will now hand over to Ihab to provide some comments on the market.

Thanks, Ricardo. Good morning to everyone. I will move straight to the various markets.

The Ultra-Deepwater fleet utilization has improved for 2011 as a result of the contracting of two of our drillships, the Deepwater Frontier for two years in Australia at $475,000, and extending the Enterprise for 18 months in the US Gulf of Mexico at $435,000.

Both of these contracts are very encouraging given the small number of fixtures reported for ultra-deepwater market during the first quarter. We remain confident that we will extend our last three Ultra-Deepwater units available in 2011 despite a number of competing units in the market.

The ongoing inquiries and tendering in the US Gulf of Mexico and West Africa for ultra-deep rigs could result in five to seven contracts, thereby further tightening the ultra-deepwater market for 2010 and early 2011.

Incremental demand is also expected from Brazil, as Petrobras will look to bridge the gap to the anticipated delivery of any Brazilian newbuilds.

Future ultra-deepwater demand will continue to grow based on the recent drilling success in the US Gulf of Mexico, Brazil, Angola, Mozambique, and Ghana and new areas of opportunity coming to market in the Red Sea and East Africa.

With a solid worldwide resource base, we remain optimistic about the healthy future of the ultra-deepwater market. Our focus on growth opportunities in the ultra-deepwater continues with the Petrobras newbuild tender in addition to the Voyager and Arctic designed vessels.

The Brazil tender process has been extended due to the complexity of restarting the Brazilian shipyard industry. Additionally, Petrobras has changed the requirement of the Petrobras built units to or a possibility of up to 28 units, giving Petrobras maximum contracting flexibility.

Turning to the deepwater market, we followed through on our previous comments of capitalizing on the available opportunities in the market with the following fixtures. Henry Goodrich extended for three years at $335,000 in Eastern Canada. Jack Bates extended for 225 days at $420,00 in Australia. Dublin Explorer extended through year-end 2010 at $250,000 with a water depth restriction of 2,000 feet.

Our only two remaining deepwater units available in 2010 are already the subject of advanced discussions, and we expect to capitalize on these opportunities shortly.

Moving on to the worldwide midwater floater market, the tendering and contracting activity remains steady supporting healthy midwater pricing. However, the contract terms are short in duration and often on well-to-well basis.

The increased activity over the previous month has resulted in a number of fixtures as follows. Reactivation of the Arctic III for five wells at $250,000 in the UK. Extension of the J.W. McLean for two wells at $260,000 in the UK. Extension of the Grand Banks for two years at $295,000 in Eastern Canada. Extension of the Sedneth 701 for one well at $265,000 in Angola. Extension of the Rig 135 for six months at $250,000 in the Congo. Extension of the Arctic I for eight months at $250,000 in Brazil.

Our 2010 availability consists of five active units, with five additional units currently coldstacked. We are optimistic the continuing commodity price stability will fuel more projects, and we remain well positioned to take advantage of these additional opportunities.

Moving to the jackup market, much like the midwater market, the increased tendering activity has resulted in a significant number of fixtures, largely due to commodity price stability. These fixtures resulted in the reactivation of the Key Hawaii in Qatar; the Trident IX in Indonesia; and the Trident VIII in Gabon; in addition to 11 other contracts for various rigs with day rates ranging from $50,000 in niche low-spec markets like the Gulf of Suez to $115,000 for high-end equipment.

We are optimistic about the sustained tendering activity and expect more fixtures are on the way. However, we remain cautious about the supply overhang from the newbuild entries.

Market utilization and day rate pricing remain steady. We expect this to continue through 2010.

This concludes my discussion of the market, so I will turn it back to you, Steven.

Thank you and we will now be happy to take your questions.

(Operator Instructions) Angie Sedita, UBS.

Great. Thank you, guys. Steven, I certainly respect your request not to speculate on the cause of the accident. But if you could talk a little bit about in general how you see the industry could change as far as what could be asked on the safety side.

There has been commentary on the acoustic system, whether they are reliable or not reliable. So any thoughts there, just what you see going forward as possible changes, besides obviously the insurance side for the industry.

Thanks, Angie. I will qualify any comments I make with respect to your question on the basis that we are looking forward and speculating on the impact. There has been a lot of conversation in the media regarding acoustic control systems. That acoustic control system is just one more alternative means of functioning the BOP in addition to the many means that already exist for functioning the BOP. So in terms of adding additional flexibility or redundancy, I am not sure that once you consider all of the redundancy and flexibility that already exists, that adding an acoustic control system changes that picture meaningfully.

With respect to the other additional safety regulations or operational procedures or policies that might come into play, knowing what we know today and in the very early stages of our investigation, I think it is just far too premature to speculate on what might come about as a result of what we learn during the investigation.

Okay. Fair enough. Then you also may -- or in the Q at least, there was a comment, if it could be clarified, somewhat of vague comment. It may -- you can give me the details.

That it could be -- you could be subject to various claims, costs, penalties for which we would not be indemnified. Could you give us an idea of what this could possibly be?

Well, in terms of the specific situation we're talking about here, with respect to our contractual relationship with BP, under our drilling contract for the Horizon BP has agreed to assume full responsibility for the costs and the liability of pollution and contamination. And we believe that contract is clear.

There is a long history of contract sanctity in our industry; and we expect that BP will honor that contract. There is a tremendous amount of investigation and scrutiny being paid to this particular incident, as it should be, by both ourselves and the governmental agencies.

What remains to be seen is the root cause of why a cased and cemented hole would have failed so catastrophically. So trying to speculate on that root cause I think is premature.

And consequently, trying to draw any conclusions about what impact that root cause might have I think is very, very early.

Okay, great. Thank you; I will turn it over.

Scott Gruber, Bernstein.

Good morning, gentlemen. I want to turn to the jackup fleet. I realize there is a wide range of incremental investment needed to reactivate the idled rigs. But could you estimate for us the threshold level of investment beyond which most of the rigs can return to service? Meaning that most of the jackups need less than X amount to be reactivated.

Yes, I can give you a fairly good breakdown of that, Scott. In our fleet of stacked rigs, there are eight of those that are still stacked that would require reactivation investment less than $10 million. $10 million or less.

At the other end of the spectrum there are a handful, five of them, that will require reactivation expenditure in excess of $40 million. And the remaining 12 are in between that amount. So the remaining 12 would be somewhere between $10 million and $40 million.

Okay. Are they smoothly distributed between the high-end and low-end?

Yes, that spans the spectrum.

Okay. Do you think during the previous cycle was your rate of investment in the jackup fleet less than peers? Or does the idling of the equipment now simply reflect a different strategy of investing in the fleet?

Our rate of investment I would say, relative to our peer group, is probably comparable. We focus a lot on operating standards and maintenance standards designed to keep the fleet competitive with respect to the worldwide fleet and the opportunities available in the marketplace.

The stacking of our jackups is a result primarily of where the jackups were. We were the largest operator in West Africa, and the political uncertainty in Nigeria and the OPEC quota restrictions in Angola forced our customers there to reduce their activity levels.

So they quit working and they laid down Transocean jackups when we came to the end of those contracts. It wasn't a specific strategy designed to take capacity off the market. It was a result of decisions being made by our customers.

Okay. That's all I have. Thanks.

Scott Burk, Oppenheimer.

Good morning, guys. I know the Discover Enterprise is drilling a relief well for BP. I just wondered; is the other rig also a transition rig? And are they earning normal day rates while they are doing that activity?

Actually the Development Driller III is the rig that has spudded the relief well, and it is operating under its normal contract with BP.

The Discoverer Enterprise is preparing to mobilize to the location and may or may not undertake operations with respect to relief well or crude oil recovery, effluent recovery. And it too will be operating under its existing contract with BP.

Okay, so in terms of recovery, that means the rigs might actually be involved in putting this dome over the leak somehow?

That is one of the alternative operations being contemplated for the Discoverer Enterprise. The Discoverer Enterprise, as you probably know, has crude oil storage capacity on the vessel. It is fitted out with third-party completion and separation equipment to be able to handle those well fluids. So it's ideally suited to being able to undertake these kinds of operations.

Okay. Can you give us pessimistic and optimistic case for the amount of time required to finish the relief well that Development Driller has already spudded?

Yes, to answer a question like that, Scott, I would just point you to the comments and official perspective that is coming out of the Unified Area Command there in Louisiana. I believe the latest estimates are up to 90 days.

Okay, all right. Thank you.

Mike Urban, Deutsche Bank.

Thanks, good morning. It may be too early to understand the market impact, but since the Horizon incident have you noticed any slowdown or delays in conversations with customers about picking up new deepwater equipment?

You know, I will tell you that the outpouring of, first, sympathy and, secondly, support from our customers has been overwhelming and extremely appreciated. They are anxious to -- like us, they are anxious to understand what happened, so that whatever changes need to be made can be efficiently and swiftly implemented. But with respect to specific conversations about actual deepwater activity, I would say that there hasn't been very much of a change at all. The customers continue to be interested in executing their plans.

Then I guess same kind of question on newbuild discussions. I guess you have been talking about a few things, in particular in one Arctic class rig. Anything to report on that front?

I will let Terry update you on where we are with those specific conversations.

Yes, Mike. The conversations continue. On the Arctic we are still in conversations with our customer. I wouldn't say that there is really anything to update at this point.

On the Voyager, we are seeing some interest in the smaller ship design; and we have continued that discussion with several other customers. So we continue the discussions and we believe that at some point we will have something meaningful to report.

Thank you. That's all for me.

Rob MacKenzie, FBR Capital Markets.

Good morning or good afternoon, all. I wanted to delve more deeply actually back into the jackup market, which you guys illustrated some increased confidence in here. If you could tell me where you see the potential for incremental growth in tenders over and above what we are already seeing.

So where is the next new source of demand likely to come from, based on your conversations with your customers?

Terry will give you an answer to that one.

Rob, right now the interest from our perspective certainly continues in the Southeast Asia. We are also seeing a little bit of pickup in activity in West Africa. So those two areas we believe are going to continue to improve.

There certainly is a lot of pent-up demand in Nigeria. So I think that those could certainly be optimistic areas that we could put some more units back to work and/or extend our current fleet there.

Then again, waiting on PEMEX and their tenders that they currently have out. And we do believe that there will be more tenders in Mexico.

Also, Middle East we understand there may be a few more requirements from Saudi Aramco. So I think that with this continued price stability we are going to see these markets pick up.

Okay, thank you. My follow-up question is, I wonder if you can comment or share with us some of the precautions you might be taking on your other deepwater rigs. Not knowing exactly what happened with the Horizon, what precautions are you taking elsewhere to ensure you don't have a similar event?

I will tell you, Rob, we haven't really provided any specific guidance to the worldwide fleet until we know exactly what happened. But we have simply reminded our people that our comprehensive systems, our policies and procedures, our traditional approach to our business we think addresses the specific aspects of well control and operational efficiency and safety.

So we have just had continuing conversations and dialogue with our people around the world about those aspects of our business.

Okay, thank you.

Lee Cooperman, Omega Advisors.

Thank you very much. Just a question really on the repurchase program. Have we suspended the program or do we intend to continue to pursue it?

Good morning, Lee. Repurchases under our program are a function of our outlook for the business, our estimates of future cash flow, the Company's ongoing capital requirements, a lot of factors like that, the relationship between debt and backlog, general market conditions, and other things.

So as we continue to evaluate the potential impact of the Deepwater Horizon incident and how that might affect one or more of those factors, that may determine what we ultimately decide to do with respect to the stock repurchase program. But as it stands right now we have not been any changes to that program.

Well, the pace has certainly slowed down. If I am tracking it right, we seem to be buying back -- I am not saying you should or you shouldn't by the way. I just wondered, as a measure of your confidence in the outlook and what is going on, I wouldn't be surprised if you suspended it.

That was the question I was really asking. Do you think you will step to the sidelines to see things settle out?

You know, Lee, what we will do is watch how the situation with the Deepwater Horizon incident evolves. If it significantly influences any one of those factors, particularly our estimates of cash flow or our outlook for our business, that would obviously have a significant impact on our thinking about the stock repurchase program.

Thank you.

Roger Read, Natixis Bleichroeder.

Good morning. I guess I would like to maybe delve in a little bit on the op costs just to make sure I've got all the moving parts here. On the last call, $5 billion to $5.5 billion for the year; now $5.2 billion to 5.5 billion.

So really all we have added in is the estimated $200 million of costs associated with the Deepwater Horizon event, right?

Ricardo is going to give you an answer to that one, Roger.

All right, thank you.

Good morning, Roger. In fact, just a small correction. I think the last guidance that we gave in February was between $5 billion and $5.4 billion, excluding of course any reference to Deepwater Horizon costs.

If you take the range that -- we effectively tightened our guidance today, excluding the Deepwater Horizon costs of $200 million, and placed it between $5 billion and $5.3 billion. I highlighted in my comments the factors that would cause us to come in at the high end of the range or at the low end of the range.

Right. No, I got the factors, I was trying to make sure what the baseline was to start from there. Okay.

Then maybe just a little bit on acquisitions, disposition side. You've got some jackups that may cost a substantial amount to reactivate, I would imagine those rigs could be in the disposition category.

Then maybe if you could just comment -- I know it is probably not foremost on your mind. But you are always looking for rig acquisitions on the higher end of the jackup scale or potentially deepwater. Just what you are seeing there on the bid prices, the ask prices on those units.

The cost to reactivate an asset, Roger, is one factor we take into consideration. Another factor would be the basic strategic quality of the asset itself.

So if it's a high-end jackup, a High-Specification Jackup, even if it might cost a significant amount of money to reactivate it, we may not be necessarily inclined to sell that kind of an asset. So in terms of looking at the strategic quality of the fleet, we will continue to do what we have done over the last several years, which is look for opportunities to dispose of non-core, nonstrategic assets and, similarly, continue to look for opportunities to acquire strategic assets.

There are conversations going on, on both sides of that spectrum, all the time. We get approached regularly about opportunities to dispose of assets; and we are looking for opportunities to acquire assets.

Any comments? Have prices changed at all one direction or the other over the -- let's say year-to-date?

I wouldn't say that there has been a meaningful change in price expectations at all. Either our price expectations for selling assets or the seller's expectations for assets we might be looking to acquire.

Okay. Thank you.

Ian MacPherson, Simmons.

Good afternoon. Thanks for taking my call, my question. I guess with regard to the Horizon-related costs of $200 million, could you repeat what that entails and how it might break down into the respective elements? And also provide any indication as to how it might impact the year timing-wise.

Ricardo, do you want to answer that?

Good morning, Ian. I hesitate to give you a detailed breakdown. I have given an indication of the cost that comprise the $200 million. I mentioned the insurance deductibles, the possibility of increased insurance premiums, and additional legal fees as the main components.

It is difficult to tell at this stage at which point these costs will be incurred during the year.

Fair enough.

Ian, we well start incurring those costs in the second quarter.

Okay. Switching to a question on the markets, part of your opening comments talked about Petrobras's expected need to backfill their newbuild program with other rig requirements.

I think that seems to me to be one of the biggest X factors for deepwater demand over the next couple years. I wonder if you might throw some numbers out there to frame what you think that demand opportunity could be, given maybe a high and low case.

Good morning, Ian. It would really be speculation for us to throw a number out there. But we do believe that they do need incremental units and believe that their strategy has been to have open tendering inquiries, and then they select only a few rigs from that tender.

Then they wait. As the last example, they waited a couple of months; and then they presented a new tender inquiry. And it resulted in lower pricing.

So we believe that they will follow the same strategy and another tender inquiry may be forthcoming. But we would be speculating on the number of units.

Okay, thanks. If I may just squeeze in one more quick one. The $80 million in cost variability for this year that relates to the potential for reactivations above what has already been disclosed, just to confirm. That is all jackup related? And would it be fair to assume that might correspond with say four to five jackups?

I wouldn't make either one of those assumptions, Ian. It might be -- it might relate to reactivation of Midwater Floater assets as well. What we're trying to do in terms of guiding the Street or giving the Street some additional information with respect to what we think drives the range, we have targeted $80 million or identified $80 million in potential reactivation costs that could drive us towards that upper end of that range.

But that would likely be a combination of jackup assets and midwater assets. Difficult to be too precise about the numbers. But directionally that is what we would expect would drive us towards the upper end of that range.

I see. Okay. Thank you very much.

Geoff Kieburtz, Weeden & Co.

Thanks very much. Steve, I don't normally make a comment on these calls, but I just want to express my appreciation for your decision to field questions on the Deepwater Horizon under the circumstances.

But with that, my questions are, one, are you aware of there ever being a blowout with a subsea BOP?

I am aware of well control incidents on floating drilling rigs. I can't give you crisp numbers but there are a couple of them that stand out in my mind on Transocean rigs over the history of the offshore drilling industry. And I am sure if we did a thorough deep-dive into the record books, I am sure we would identify well control events where hydrocarbons were allowed to get to the surface.

Okay.

None obviously of this magnitude, but there have been well control events in the past on floating drilling rigs.

But we would have to say that -- pretty exceptional circumstances?

I would say it is a rare event, yes.

I had been told down at OTC that BP had sent out a letter asking drilling contractors to verify the condition of their BOPs. I don't know what the specifics were.

It seemed to be something to do with original manufacturer specifications. Are you aware of such a letter?

Geoff, I can confirm that we have received a letter from BP, and we are currently going through the exercise of responding to the questions that are addressed in that letter.

Okay. Thank you very much.

Pierre Connor, Capital One Southcoast.

Hello, Steve. I am sure Greg has passed on. Just want you to know that many of us are thinking of you and all your employees at this time.

Thank you. I appreciate that.

Yes. Steve, I wanted to ask you about revenue efficiency, and the trends we are seeing, more so the deepwater fleet. If I am looking at the numbers correctly for the first quarter, we're about 90%.

What is that target? It seems like the last couple of quarters have been fairly flat. Do you see some trends there? Do you have some projects underway to improve it?

We do have projects underway to improve it. We have put in place a team specifically looking at the performance of the deepwater fleet in general and significant efforts underway to address where we think the equipment reliability issues are.

The conventional deepwater fleet in the first quarter of 2010 was affected by primarily two rigs operating in India, the 534 and the Seven Seas. The 534 was a dynamic positioning issue and the Seven Seas was a BOP issue.

Okay. As a follow-up, just to ensure. As a result of the incident MMS is doing a number of rig inspections in the Gulf. And my assumption is that additional testing that they might require, that that would be at full day rate costs and not a part of any downtime cost.

As long as the testing is successful.

Right.

Which we expect. As long as the testing is successful then the cost of meeting regulatory requirements and satisfying regulatory oversight is a normal part of the operation.

Okay. My follow-up is for actually Ricardo. Maybe I missed it. Any guidance on other revenues? In particular, integrated services revenues, any update from prior guidance that you had given in last quarter?

Pierre, no, there is no additional guidance with regard to the last quarter.

Okay. We will stick with that. Thank you, gentlemen.

Jason Mandel, Chapdelaine.

Yes, hi. Thanks for taking the question. I just wanted to get a little bit of more clarity if possible regarding the progress in rolling over renewing the insurance policies that were set to expire on May 1, that was extended for a month given the current situation.

Given that you have a $200 million estimate which includes expectations for higher premiums, does that to mean that you have made progress in those, in negotiating the rolling of the contracts, of the insurance contracts?

Yes, good morning, Jason. What I can tell you with regard to our insurance coverage is that we renew it every year. It is within this time frame, this month in fact. We are in the process of negotiating with our underwriters the renewal for May 2010 through 2011.

Clearly the Deepwater Horizon incident will have an impact on the level of premiums that we can expect. However, at this stage the discussions are reasonably fluid.

Although we expect prices to harden, we also have to take into account the opportunities to increase the level of risk that we retain in-house. It is difficult; we have made our initial estimates, but it is difficult to determine at this stage where we are going to pan out.

So as part of the discussions and as part of your own decisions, there are -- there is a consideration of possibly ending up with in one way, shape, or form, reduced coverage for certain types of events or cats, things of that nature?

That is a possibility that I wouldn't rule out, yes.

Okay, very good. Thank you for your help.

Walther Lovato, Passport Capital.

I'm sorry; my questions have been answered. Thank you.

Waqar Syed, Macquarie Capital.

My question relates to the taxes. In your 10-Q you mentioned there are some additional investigations that have recently been started in Norway and in the US. Could you kindly provide us with some more color on those investigations?

I think they are well defined and articulated in the 10-Q. So there is not a lot more that I can comment in addition to what is already in there, in either case.

Okay.

In the case of Norway, as we indicated, we have received notification of some criminal charges. But however, this notification doesn't constitute in itself an indictment under Norwegian law. And we are continuing to discuss issues with the authorities there.

In the US, we have yet to receive any formal notification of the assessments. Once we have received them, we will defend our position vigorously. We believe that our position is clear and very defendable.

Okay. Then actually just one general question. In various places in the disclosures you say that some event could have a material impact on the financials.

What is your definition of material? What is the cutoff where you -- revenue impact cut off where you say okay, now it is in the material range?

I think that is a question that is very difficult to answer. I think it depends on the circumstances and clearly the amounts involved and the financial situation of the Company at the time that we have to make that decision.

Okay. Is it on a percentage of earnings basis? If it has a certain percentage impact that you start to call it material?

I really don't think I can comment further in any informative way on that.

My perspective on that is there's always two issues of materiality. One is a quantitative measure; and that is one the accountants spend a lot of time trying to articulate and nail down. The other one is a qualitative measure of materiality; and that is, how might the information impact a prudent investor in the Company.

So it is difficult to be too very crisp about that qualitative aspect of materiality, but that factors heavily into the conversations. That is why it is a bit difficult to give you a meaningful answer to the question.

Okay. Thank you very much.

Arun Jayaram, Credit Suisse.

Yes, good morning. As you know, standard IADC contracts in the Gulf of Mexico indemnify drilling contractors such as yourself from the release of hydrocarbons and cleanup costs. My question is if the indemnity clause would limit your potential exposure to lawsuits brought off by fishermen, the tourism industry, etc. So lawsuits resulting from the impact of the spill.

Well, the way the contract language typically reads, we are indemnified from any expense or claim related to pollution from the wellbore. We believe in this particular instance the contract is pretty clear about that.

As I said at the outset, our industry has a long history of contract sanctity; and we expect BP to honor that.

Okay, so I just wanted to be clear about that. The indemnity would, you think, limit your exposure to those types of lawsuits should they be brought?

We think so, yes.

Okay. My follow-up question is, your policies or your indemnity clause is subject to there not being any form of negligence or gross negligence, I believe. I was just wondering, Steven, if you could just comment on the documentation you have on the historical maintenance of the rig and how this was maintained, including the BOP.

Do you believe that the rig was appropriately maintained where there would not be some form of negligence here?

You know, I can appreciate, Arun, that everybody wants to know the answers to those questions -- and nobody more than us. Those are details that are being evaluated and assessed as part of the investigation. So I am just not prepared to comment on that aspect of it right now.

Okay. Fair enough. Thanks a lot.

Arun, this is Greg, just to further comment on your question about the indemnity. The indemnification in the contract is very broad.

Okay, thanks, Greg.

Jim Crandell, Barclays Capital.

Good morning. Steve, I think you in response to a question talked about the impact of the accident on your Company's business. But could you speculate on what you think the impact of this on Gulf of Mexico drilling will be in general going forward here?

And then really international deepwater as perhaps firms or countries contemplate further regulations.

The operative word there, Jim, being speculate. So this is my opinion and it is speculation.

I think it is difficult to overemphasize the importance of the energy industry to the US economy. The Minerals Management Service is the second-largest source of federal revenues after the IRS. Then when you consider all of the revenues that are collected by the local and state governments, the industry contributes a tremendous amount to the federal and state budgets.

Then when you consider the contributions to the IRS by energy companies and by individuals employed in the energy sector, the amount of contribution to federal and state budgets is significant. The energy industry is a source of revenues, it is a source of jobs, and it's a source of economic growth.

I don't think that the Administration are going to act rashly about this. I think they're going to be as thorough as the industry is in understanding what happened, what the root causes are that caused this cased and cemented well to catastrophically fail. And the industry and the Administration will implement whatever regulatory requirements are justified in response to that root cause. And the industry will continue.

Okay. My follow-up question, Steve, relates to another question about Brazil. You have I assume by this point submitted bids, or you will be submitting bids to build rigs in Brazil, which have not really built or don't have the capacity anyway to build many rigs, and where the costs are extremely uncertain.

So it would seem that you would have to have a lot more clarity in order to want to submit bids that would give you a good chance of winning. With that as a backdrop, how do you think this whole thing in Brazil will play out with the 28 rigs that are due, and I think 19 of them I guess scheduled to be bid on by contract drillers?

This is a very fluid situation, Jim. The bid submission date has recently been extended to early June. So we are continuing to work through the process of assessing all of the aspects of contemplating building a rig in Brazil, where there is no existing rig building capacity to speak of. Assessing all of the risks in terms of delivery risk, cost risk, the performance of the subcontractors and equipment manufacturers and vendors. And trying to quantify all of those risks and properly allocate them in a commercial relationship with an appropriate shipyard partner.

And then present those in the form of a responsive tender to Petrobras -- I think it is going to be an interesting challenge, but the Company is taking a thorough look at it.

Do you think this is something that because of the -- because of its nature that it is unlikely that we would see any contracts awarded to a contract drilling company this year?

I'm not sure I would necessarily categorically rule it out. But I know the exercise we are going through and the complexity of the challenge. To the extent that an international drilling contractor can get comfortable with all of those challenges and present a responsive submission to Petrobras, I suspect it is going to take a fair amount of time for Petrobras to go through their evaluation exercise, and then conduct all of the intricacies of the negotiation exercise before they ever get to contract signatures.

So if your question is really about the time frame of it, my guess is it's going to be a challenge to get all the way through that process to contract signature in 2010. But I do believe that the international community of drilling contractors is paying close attention to it.

The opportunity to grow in Brazil is an attractive opportunity. And Petrobras are obviously driven by their desires to develop their resource. So both sides I think are going to be interested in participating and making it happen, but it is a complex and time-consuming effort.

Okay. Good answer, Steve. Thank you.

Operator, this next question will have to be our last.

Jeff Tillery, Tudor Pickering Holt.

Hi, just one quick question. Most of mine have been answered. As you went through the new fixtures in ultra-deepwater, you talked about the Enterprise, 18 months at $435,000 and Frontier at $475,000. Have I got those right, I guess is my question?

And then can you amplify on who the customer is for each of those?

Good morning, Jim. Yes, you got the math right there. We extended the Deepwater Frontier for two years in Australia and that will be with Exxon Mobil. And then the Enterprise has been extended by BP for 18 months at the $435,000 in the Gulf of Mexico.

Okay, great. Thank you very much.

Okay. Thank you all for listening and, Amy, Roddy, and I will be available to answer your questions all day today.

That concludes today's conference. Thank you for your participation.