Transocean Ltd (RIG) 2010 Q2 法說會逐字稿

Good day, everyone, and welcome to this Transocean Limited second-quarter 2010 earnings results conference call. Today's conference is being recorded.

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

Thank you, Jake. Good morning, everyone. Welcome to Transocean's second-quarter 2010 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'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 dayrate 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 covering revenue efficiency, other revenue details, daily operating and maintenance costs by rig type and contract intangibles.

Joining me on this morning's call are Steven Newman, our Chief Executive Officer; Ricardo Rosa, Senior Vice President and Chief Financial Officer; Ihab Toma, Senior Vice President, Marketing & 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 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 are or may be considered non-GAAP financial measures under Reg G. As I indicated earlier, you will find the required supplemental financial disclosures for these measures, including the most recently comparable GAAP measure and an associated reconciliation, on our website at www.deepwater.com under Investor Relations Quarterly Toolkit, 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 and that concludes the preliminary details. Now I will turn the call over to Steven.

Thanks, Greg. Good morning, everyone, and thank you for joining us this morning. Our second-quarter earnings came in at $2.22 per diluted share. After adjusting for the items highlighted in our press release, diluted earnings per share would have been $1.67, so our results were slightly below Street estimates, driven by a drop in revenue efficiency and increased costs as a result of the Macondo well incident. Ricardo will walk you through the second-quarter results and our outlook for the remainder of 2010, including our updated estimates of the impact of the Macondo well incident, in a few minutes.

As I said on our first-quarter call, the Company remains focused on three key priorities related to the Macondo well tragedy. Working with all of the Transocean personnel who have been affected by this tragedy, especially the families who lost loved ones and the men and women who worked on the Deepwater Horizon. Supporting BP and the unified area command in the efforts to permanently plug the Macondo well. And I want to say how proud I am of the crews of the Transocean rigs which have been involved in these efforts. And third, finding out what caused this terrible tragedy.

Through this entire ordeal, our organization has remained strong, steadfast and focused, and we appreciate the support we have received from our customers and our colleagues in the drilling industry. During the second quarter, our management and operations teams around the world remained focused on their business, in spite of the potential distraction of the Macondo well events in the Gulf of Mexico.

As I mentioned, though, our revenue efficiency did slip a bit in the second quarter, driven by startup issues with a few of the newbuilds and unplanned downtime on some of the Deepwater and Ultra-Deepwater fleet. Some of this unplanned downtime related to BOP equipment and control systems, resulting from the rigorous testing and maintenance we always perform as part of our standard operating procedures.

Our investigation of the Macondo well events is progressing, and we continue to respond to requests for information from Congress and the Administration and others, including BP. We have an active dialogue with the US Department of Justice aimed at demonstrating to them the ability of our US subsidiaries to meet any Macondo well related obligations. As part of those discussions, we have agreed to temporarily suspend activities under our shareholder-approved stock repurchase program, pending further discussions with the DOJ.

As we have regularly stated since the event, we have a broad indemnity in our drilling contract from BP with respect to, among other matters, claims related to the cleanup of pollution from the well or claims resulting from such pollution. In order that our investors understand our contract and these indemnity obligations, we have filed the drilling contract in connection with our 10-Q Filing.

While BP has to date reserved its rights with respect to our indemnification demands, in light of the facts, the law and the long history of contract sanctity in our industry, we remain confident that BP will ultimately honor its indemnity obligations.

Let me now make a few comments about the market before turning the call over to Ricardo. The Jackup market has remained relatively stable over the last quarter, with the total number of idle Transocean Jackups at 27. While we are close to agreeing deals to reactivate a couple of those rigs, we also have a couple of rigs in other parts of the world nearing the end of their existing contracts. So the overall level of utilization in the worldwide fleet and in our own fleet is likely to remain relatively steady for the next several months.

Turning to the Midwater, the number of stacked Transocean rigs increased to six with the completion of the Sedco 701's contract in Angola. The Arctic III has completed her reactivation and is now working for ExxonMobil in the North Sea.

With the uncertainty in the Gulf of Mexico, the worldwide Deepwater and Ultra-Deepwater markets could see some near-term softening. The two deepwater rigs we are currently marketing with 2010 availability are the MG Hulme, where we negotiated a settlement to the disputed Gazprom contract in Libya, and the Discoverer 534, which is finishing her contract with Reliance in India. The only other active deepwater rig we had available in 2010, the Richardson, has been extended with Chevron into early 2011.

In the Gulf of Mexico, we continue to work closely with our customers through this period of uncertainty. Our recent fleet status report listed the force majeure declarations we have received from our customers and the agreements we have reached in some cases in response to those declarations.

In general, our approach with these customers recognizes the unique circumstances of each situation and strives to preserve the overall contract backlog. These discussions are productive, and generally reflect the strength of our relationships and the customer community's long-term commitment to activity and investment in the Gulf of Mexico.

The best example of this is Chevron's decision to extend the Deep Seas for two years through mid-2013. With the Deep Seas deal done, the next available Ultra-Deepwater rig in the Transocean fleet is the Sedco Energy, which is available in May 2011, following the completion of her Chevron contract and a 10-year special periodic survey.

Elsewhere in the world, we declined to bid on the Petrobras newbuild program, but we are optimistic that we will continue to build on our strong business relationship with Petrobras.

In closing, let me make a few comments on the shareholder distribution. We have submitted our application for the first quarterly installment to the commercial registrar in the Canton of Zug. They have indicated to us that the review process may take longer than normal, which is why we haven't yet set the record and [next] dates. As stated in our press release, while we strongly believe that the par value reduction should be register, the registry has indicated that it needs time to consider the matter in light of US lawsuits which were served on the company in Switzerland. As soon as we receive a response to our application from the commercial register, we will communicate that to you.

I think we should now turn to the numbers and let Ricardo take you through some of the details. After that, Terry will talk a bit more about what is going on in the market. Ricardo?

Thank you, Steven, and good morning, everyone. In the second quarter of 2010, we generated net income of $715 million, or $2.22 per diluted share. This compared to net income of $677 million, or $2.09 per diluted share, in the first quarter of 2010.

Second-quarter net income was favorably impacted by certain items highlighted in our press release totaling, on a net basis, $180 million, or $0.56 per diluted share, including a $267 million accounting gain from the loss of the Deepwater Horizon, offset by $69 million of increased insurance and legal expenses associated with the Macondo well incident and $18 million of expenses resulting from litigation matters that did not relate to the Macondo well incident. After adjusting for these items, second-quarter net income was $535 million, or $1.67 per diluted share.

Second-quarter contract drilling revenues were down $151 million compared to the first quarter this year. Contract drilling revenues were down quarter-to-quarter primarily because we stacked four additional rigs and because of the impact of an average dayrate decline across our fleet of about $15,000, the increases in shipyard and mobilization time, the impact of increased unplanned downtime, and about $37 million in lost revenue from the loss of the Deepwater Horizon.

Total revenue was about $60 million below Street estimates for the second quarter. We believe the shortfall was primarily due to lower revenue efficiency and utilization in the Ultra-Deepwater fleet. Four of our newbuilds had startup-related unplanned downtime, and some of our Ultra-Deepwater Floaters experienced extended periods in shipyard and mobilization.

Contract drilling revenues for the remainder of 2010 are projected to benefit from the start of higher dayrate contracts for certain High-Specification Floaters, and the continued growth in revenue from newbuild Ultra-Deepwater units, with two more expected to be commissioned in the second half of this year.

Revenues will also benefit from the continued activity of two newbuilds, the Discoverer Inspiration and the Dhirubhai Deepwater KG2, that commenced operations during the second quarter.

However, these projected increases in contract drilling revenue for the remainder of 2010 are expected to be more than offset by the adverse impact on revenue of five significant items during the second half of this year. First, the impact of the drilling moratorium in the US Gulf of Mexico, which we currently estimate to be approximately $165 million. Second, the effect of the loss of the Deepwater Horizon of approximately $130 million. Third, the impact of additional rigs back during the year. Fourth, higher planned out-of-service and mobilization time for High-Specification Floaters. And fifth, declining rates on some Jackups and Midwater Floaters as they commence new contracts at lower dayrates.

We expect our other revenues for 2010 to be approximately $550 million. This is down from prior guidance, mainly because of the impact of the US Gulf of Mexico drilling moratorium on our Other Operations segment.

Operating and maintenance expenses in the second quarter were $1,358,000,000 versus $1,196,000,000 in the first quarter. The quarter-to-quarter increase in operating and maintenance costs of $162 million was primarily attributable to a $65 million activity-driven increase in costs in our Other Operations segment, in addition to $109 million relating to the Macondo well incident and unrelated litigation matters that we discussed previously.

Our full-year 2010 operating and maintenance expense guidance is consistent with our prior guidance, ranging between $5.2 billion and $5.4 billion. This range includes about $530 million of expected costs related to our low-margin Other revenue items, and an estimate of $180 million for incremental expenses, net of expected insurance recoveries, associated with the Macondo well incident, down slightly from previous guidance.

The largest item included in the $180 million of incremental expense is $70 million of insurance deductibles, most of which were recorded in the second quarter. Other incremental expense items primarily include legal fees and expenses, internal investigation costs, increased insurance premiums and sundry other potential costs.

We must emphasize that this estimate is subject to the results of ongoing investigations, changes in regulations, operating requirements and additional information that may become available.

General and administrative expenses were $58 million in the second quarter compared to $63 million in the prior quarter. The reduction was primarily due to higher share-based compensation costs in the first quarter that were nonrecurring. We expect general and administrative expenses for 2010 to be between $235 million and $245 million.

Capital expenditures in the second quarter of 2010 were $300 million versus $379 million in the first quarter, with the decrease largely due to reduced payments related to our newbuild program, which is nearing completion. We expect capital expenditures for the full year 2010 to be about $1.4 billion, including capitalized interest, with $900 million for newbuilds and $500 million primarily related to upgrades and sustaining capital expenditures, including an expected $25 million in additional equipment upgrades to comply with new regulations in the US Gulf of Mexico.

Interest expense, net of amounts capitalized in interest income, was $136 million in the second quarter. We continue to expect our full-year 2010 interest expense, net of amounts capitalized in interest income, to be about $540 million. This is net of an estimated $85 million in expected capitalized interest, and assumes repayment of debt and maturity, no additional newbuild commitments, no new debt issuance and short-term interest rates remaining at current levels.

For the first six months of 2010, our annual effective tax rate was 15.5%. We expect our annual effective tax rate for the full year to be between 15% and 17%, after taking into account the estimated $180 million cost increase projected for the Macondo well incident.

To get as complete a financial picture as possible regarding the Macondo well incident, please refer to our Form 10-Q for June 2010 that outlines our insurance coverages for hull and machinery and excess liability, both of which have been renewed through May 2011 on generally the same terms and conditions.

The Form 10-Q also includes disclosures on pending litigation, contractual indemnities and ongoing investigations. In addition, as Steven mentioned earlier, we have filed as an exhibit to the 10-Q our drilling contract for the Deepwater Horizon with BP America, together with all its exhibits, annexes and amendments.

Lastly, our cash balances have increased (technical difficulty) during the second quarter to reach $2.9 billion as of June 30. These cash balances provide Transocean with significant liquidity that, combined with the free cash flow we expect to generate from our contracted backlog, will position us well to meet our debt obligations as they mature.

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

Thanks, Ricardo, and good morning to everyone. I will move straight to the various markets, and we will begin with a discussion on the Ultra-Deepwater market. While we currently have no availability in 2010 and little remaining availability in 2011, the Ultra-Deepwater market remains oversupplied in the near-term, compounded by the uncertainties of the US Gulf of Mexico moratorium.

Despite this challenging environment, we remain confident that we will be able to extend our only remaining unit available in 2011. As Steven indicated in his opening comments, we extended the Discoverer Deep Seas for two years at 450K per day, and this solid fixture represents the long-term commitment of our customer base and the confidence our customers continue to have in our people and equipment.

Moving to Brazil, Petrobras is still evaluating the recent 28 newbuild tender, and we believe that some incremental demand will be required to bridge the gap to the deliveries of the Brazilian newbuilds. Additionally, Petrobras has recently issued a deepwater tender for one incremental unit. We remain committed to growing our market share and improving our position with Petrobras in Brazil and will continue to look for opportunities to do so.

Other areas of opportunity coming to market exist in East Africa, Gabon, Ghana and the Black Sea. Future Ultra-Deepwater demand will continue to grow based on the recent drilling successes in the US Gulf of Mexico, Brazil, Angola and Mozambique. With a solid worldwide resource base, we remain optimistic about the healthy future of the Ultra-Deepwater market.

Turning to the Deepwater market, we extended the Richardson to March of 2011 in Angola at 340K per day. The two remaining marketed Deepwater units available in 2010, Discoverer 534 and MG Hulme, are under consideration by our customers, and we are expect to capitalize on these opportunities shortly, despite the challenging near-term softness of the Deepwater market and the uncertainty of the situation in the Gulf.

Turning to the Harsh Environment, Norway continues to present opportunities for our existing fleet, with open tendering from various operators. An additional requirement in offshore Eastern Canada will soon be tendered and will be incremental to the existing fleet offshore Newfoundland. Our presence and performance in Canada puts us in a great position to further expand our business there.

Moving on o the worldwide Midwater Floater Fleet, the tendering remained active and the contracting pace remained steady compared to the previous quarter. Opportunities, generally short-term in duration, continue to materialize in the UK, India, Asia and Australia. Transocean's contracting activity for the quarter resulted in the following fixtures. Actinia for one well at 190K in Vietnam; extension of the GSF Rig 135 for two months at 249K in the Congo; an extension of the Sedco 714 for six months at 250K in the UK. Our 2010 availability consists of four active rigs, with six additional rigs cold-stacked.

We remain optimistic that oil price stability will continue to fuel more projects. However, we are concerned with the oversupply of Deepwater units that could compete in the Midwater market space.

Moving to the Jackup market, much like the Midwater market, tendering activity has remained steady over the previous quarter and resulted in a number of fixtures worldwide, largely due to the stability in the commodity price.

The resulting fixtures are as follows. Extension of the GSF Baltic at 100,000K for two years in Nigeria. Extension of the GSF High Island VII at 87.5K for three months in Nigeria. Extension of the Trident VIII at 85K for six wells in Gabon. And the extension of the D.R. Stewart for three months.

We also secured a contract to reactivate the Key Gibraltar for three years in Thailand at 105K for the first six months. Thereafter, the rate is adjusted quarterly, based on market dayrates of similar class of rigs. Startup of the unit is estimated to be Q1 2011.

Of our marketed fleet, we had three High-Specification and seven standard Jackups available in 2010, and expect more fixtures are on the way. We are optimistic about continuing tendering activity and expect to reactivate a few of our units between now and the first quarter of 2011. However, we remain cautious about the supply overhang from the newbuild entries and expect that some more stacking of rigs may occur in the near term.

Marketed utilization for premium Jackups greater than 300 feet is 90%, while standard Jackup utilization is around 70% for the total international Jackup fleet. We are seeing some downward pricing pressure on the standard Jackups, but the premium Jackup rates are improving, and we expect to see it continue through 2010.

That concludes my discussion on the market, so I'll turn it back to you, Steven.

Thank you. With that, we are ready to open up the line for Q&A.

(Operator Instructions) Jeff Tillery, Tudor, Pickering, Holt.

For the rigs you have in the Gulf of Mexico contracted right now in the Deepwater side, could you give us an update on just how many -- without naming rigs -- that you see could be moving internationally, as well as an update on how you are treating the rigs that have had force majeure declarations? Are you recognizing that revenue going forward?

I'll let Terry give you some insight, because she is probably most closely involved with some of those conversations.

Other than what has been reported, we are in active discussions with several of our customers on trying to look for opportunities or farmout opportunities or other contracts that they can mobilize the rig to international locations.

As of today, we are really only speaking with one of our customers that is interested in moving -- I'm sorry --there's two customers that is interested in moving to an international location.

With respect to your question on revenue recognition, Jeff, I don't think there is really an issue. The conversations we have had with the customers who have declared force majeure have been productive and there is no real contentious dispute. So we continue to invoice them and recognize that revenue and they are paying.

Great. My second question, on the disclosure around OPA in the 10-Q, recognizing that Transocean has been established as a responsible party, is it your understanding that is just with regards to the pollution around the Horizon sinking, or has the government sought to lump you in with the operator?

We have acknowledged OPA-related liability for fluids that emanated from the drilling rig on or above the surface of the water.

Okay. Thank you very much.

Arun Jayaram, Credit Suisse.

I wanted to narrow in -- in the Q, you talked about $2.1 billion of backlog that could potentially be lost in the Gulf of Mexico associated with the moratorium. I just wanted to see if you could comment. Is that what customers intend to do, or is that just if all the customers intended to terminate the contracts, this would be the impact to your backlog?

That's purely an effort on our part to be as transparent as possible. If the customers were able to successfully defend a force majeure declaration and subsequently terminated the contracts, that represents the contract value that is at risk, because there is no early termination fee associated with those particular contracts. There is a number of assumptions embedded in there, but that is the -- if you applied all of those assumptions, Arun, that is the outcome.

Okay. Thanks for that. Second question is regarding -- kind of a follow-up to Jeff's question. I know in the previous Q, the Coast Guard had identified Transocean as a responsible party to potential spill from the Deepwater Horizon rig, the diesel fuel, as well as at the subsea from the well. Can you comment on what would be the steps for them to narrow that distinction, and when and if that could occur?

The statute is pretty clear on that. We have applied our understanding of the statute, and we're going to continue to stand behind that understanding, which is that we are a responsible party for fluids emanating from the drilling rig on or above the surface of the water.

Okay. And last one would be, in your 10-Q filed yesterday, the language signals, I guess, that BP may attempt to challenge the indemnity clause with the contract. Could you comment on how they could do that or what means? I guess gross negligence, [breach of] contract would be, but what means do you get the sense that they may try to challenge that indemnity?

I really don't think it is appropriate for us to speculate on BP's intentions or motives.

Okay, fair enough. Thanks, Steven.

Ian MacPherson, Simmons & Company.

Steven or Terry, I didn't discern anything from your Deepwater commentary that would support the conclusion that the low-end Deepwater market is going to crater near-term. As you look out a couple years in your assessment of the market fundamentals, do you think that the low-end Deepwater market is going to bleed lower, utilization-wise, and we will see more stacked rigs? Or what does your market insight suggest at this point?

I'm going to let Terry share all of the weight and benefit of her market insight for you.

Ian, I think it is -- certainly with the suspension -- I guess that's what we are calling it these days -- the suspension in the Gulf of Mexico, I think it is a little difficult to certainly be crisp on answering that question.

I think that we do have softness in the near term, and I do think you're going to see some pricing pressure. But I think when this market settles out, I think the customers with the favorable commodity picture that they are going to be seeing, I think they are getting excited about the budgeting process.

And we're having a lot of discussions, and look what we've done with -- during this difficult period. We have contracted an Ultra-Deepwater unit two more years. So I think there is a lot of confidence in the market. The numbers -- I realize the numbers showing the availability are pretty big. But I think we are going to have to have a wait-and-see and believe that it is going to -- we are going to make it through this and it's going to come back.

Okay. A follow-up question for Ricardo. I think you said, if I got this correctly, that your second-half revenue impact for Macondo, outside of the Horizon revenue erosion, was up $165 million. Is that correct?

And from that number, would that be what we might infer from your maximum backlog revenue generation, less whatever you are getting on your various standby rates and suspended rates, etc.? Is that what that number means?

Ian, you are quoting the right figure. I did say $165 million, and your interpretation is correct.

Great. Okay, I'll pass it over. Thank you.

Angie Sedita, UBS.

Steven, can you give us a time line as far as the Coast Guard patrolling up the BOP and investigating what took place and when you would expect to have some kind of conclusion on the BOP?

In reviewing the forward planning with our operating people, I suspect we will have access to the BOP on the seabed either later this month or early in September. We have proposed to the Unified Command that we perform some function testing on the BOP while it remains on the seabed, so we can get a better idea of the condition of the BOP as it is sitting there right now.

And then recovery of the BOP will take a week or 10 days beyond that. So in terms of the forensics really commencing in earnest, we're probably looking at late September or early October.

And it is just a question of beyond that, how long those forensics take and how quickly we can get to any sort of definitive answer on what actually happened with the BOP. And that's a little bit more difficult for me to give you any real clarity or crispness around, Angie.

Okay. That's very, very helpful. And then going along with that, any time line, any guidance from the Swiss authorities on timeline on the review process for the dividend? And in your mind, is there any risk that the dividend may not be able to be paid?

In terms of the timeline of the review, it's difficult. I think the Swiss authorities are dealing with a situation they have never really dealt with before. So they are being very prudent and cautious and deliberative in how they evaluate it. It is difficult for me to handicap the risks. As we've said in our press release and our Q, we believe that all the requirements for registering the reduction in par value have been met.

Okay, that's fair enough. And then, Terry, as a follow-up to your comments on Petrobras, beyond the one tender out there, any sense of the incremental demand that Petrobras may have for deepwater rigs, given the dislocation in the market? And any thoughts on if you believe all 28 of the rigs, the tendered rigs will be built.

Okay. I do believe that to be able to continue their programs, and certainly with the continued success that they are having, they are going to have to come to the market for some incremental gap fillers. And how many rigs that they will need, Angie, I would just be guessing at this particular moment.

Also, I would be guessing at how many rigs they are going to contract in this shipyard tender. There are a lot of rumors going around inside of Brazil, saying it might be half, it might be 75%. But I think we are going to have to wait and see.

But also coupled with this near-term softness, it may end up being that some of the available units are much cheaper than what they see from the shipyards or the contract drillers. So I think we are just going to have to wait and see, and as Petrobras always comes through with a very good strategy, I don't see them doing anything differently. So I think that they are going to have some good choices in going forward.

Thanks, Terry. Thanks, guys.

Scott Gruber, Bernstein.

Terry, you mentioned the potential to reactivate additional Jackups by early 2011, even in light of some near-term softness at the moment. How many do you think could go back to work based upon your conversations with customers?

You know, there are quite a few opportunities that are about to come to market that I don't think that the general market is aware of. And they seem to be long-term. I think we are going to see some interesting opportunities appear in Thailand and Angola. Again, as the customers look forward to the pricing stability and they are confident, and I think the 2011 budgets are going to reflect that. So I think it is a very optimistic picture.

And also, if you look at the rumors around Pemex, they are saying that they perhaps will come out with 21 rigs tender. So I think that the market is shaping up, and I think we can look for some opportunities to certainly reactivate some of these standard Jackups that are sitting on the beach.

Okay. And does that reflect at all any incremental shift of dollars out of the deepwater into the shallow water, or does it simply reflect a healthy commodity price at this point?

From my perspective, I think it reflects a healthy commodity price. And I think that there was a lot of pent-up demand that just needs to be rolled out into the market.

Okay. And given your cash building on the balance sheet and your deepwater investment program winding down, does this change your outlook toward investing and upgrading some of your older rigs, particularly within the Jackup market, as there has been a clear preference through the downturn for higher spec equipment?

I don't think it has really changed our perspective on that, Scott. We have regularly looked for and taken advantage of opportunities to continually upgrade our fleet. And we are going to continue to look for those opportunities. We are going to be disciplined about it, as we have historically been. But we will continue to look for opportunities to do that going forward.

Okay, great. I will turn it back.

Andrea Sharkey, Gabelli & Company.

I had a question on the blowout preventer. There has been a lot of talk about modifications, adding second-tier rams and things like that. And some have said that one of the issues will be whether the rigs can actually carry the extra weight of these upgrades to the blowout preventer. So I was curious if you could talk about how many of your rigs would need to have that sort of upgrade done, and then would those rigs be able to, say, carry that extra weight -- what your thoughts are on that.

It is an interesting question, Andrea, and it is one we've spent a lot of time on. Our initial focus has been on ensuring that we have the resources and the plans in place to get all of the rigs compliant with the initial Notice to Lessees Number 5, which does address BOP certification, configuration, testing and maintenance.

Beyond that, we have sort of taken a preliminary look at some of the legislation that has been proposed in Congress and the impact that legislation might have. I think the Company is in a good position because of the high-specification equipment we operate in the Gulf of Mexico. Most of our rigs in the Gulf of Mexico are big rigs. So if it is a question of weight consideration, the bigger rigs that Transocean operates in the Gulf of Mexico will certainly be at an advantage.

Great. That's helpful. And maybe just to follow up on that same issue, with the NTL 5 getting the blowout preventers recertified, have you been able to do that yet on all of your rigs in the Gulf of Mexico, and I guess where does that stand?

We haven't been able to do it on all of the rigs. We have certainly started. Some of the rigs are extremely far along in that prospect. Certainly the newbuilds that have just come out are extremely well-positioned. The equipment that has been out five or 10 years is part way through that process. So for each rig, we have a good understanding of the requirements to get to full certification and a good plan for getting there.

Okay. Great. Thanks. I will turn it back over.

Robin Shoemaker, Citi.

I wanted to ask you, we've seen about $5 billion worth of M&A deals in offshore drilling in the last couple of months. You obviously saw all of those deals. I wonder if you passed on them out of lack of interest, is it because of the circumstances you are in and the agreement with the DOJ, or how do you feel about Transocean as a prospective acquirer of rigs that are being offered for sale currently?

We continue to be on the lookout for opportunities to grow the Company, particularly in the strategic segments. We did look at the deals that were done. They were done at prices that didn't meet our criteria for attractiveness. We continue to hope for opportunities that materialize that do meet those criteria, and I think we will be in a good position to strongly consider them and hopefully act on them.

Okay. So this DOJ agreement you have doesn't in any way influence that.

The agreement we've reached with the DOJ is that we will maintain an active dialogue with them, and it principally relates to the condition of the US subsidiary. So we have talked with the DOJ about regular financial reporting for the US subsidiaries. We've talked about maintaining cash balances and not executing any significant cash transactions outside the ordinary course of business with the US subsidiaries. But also the discussion with the DOJ is related to the ability of the US subsidiaries to meet any expected Macondo well-related obligations.

Okay. Let me just ask one other question then. Ricardo mentioned, I believe, some costs or downtime related to startup of newbuild rigs. You've had such a prompt and on-time delivery of those rigs from shipyards in the ten-rig program that you started quite some years ago. Can you characterize these Deepwater rig newbuild startup issues?

Yes, on the Clear Leader class that were built in Daewoo's yard in Korea, there was a problem we discovered with the riser tensioner foundations. We discovered the problem as we were testing one of the rigs as part of the commissioning process in the shipyard in Korea. And as a result of that event, we reinspected all the other rigs, and discovered similar problems. So we had to take those rigs out of service to correct that problem.

The other newbuild startup-related issue we had was on the DD3, which was built in Keppel FELS in Singapore. That problem related to the high-pressure mud piping. So we had to do some significant rework of the high-pressure mud system.

Okay. Great. I appreciate that. I'll turn it back. Thank you.

Scott Burk, Oppenheimer.

With the Swiss authorities slowing down the approval of the dividend payout, just wondered what -- if they have any additional oversight over capital expenditures or other capital outflows or acquisitions.

No.

Okay, so --.

This is purely related to the reduction in par value.

Okay. But they also have some oversight over share repurchases as well, correct?

The oversight of the share repurchases is largely one of ensuring that the market is provided with adequate information. And as a result --.

It's a question of transparency and reporting.

That's right, and we have met that through posting every five days an update on our repurchases on our website.

Okay, thanks for that clarification. And can you talk about the permitting process for any rigs -- for rigs operating in the Gulf of Mexico? I'm thinking mostly the shallow water rigs. There has been a big slowdown in permitting. Are the operators you are working with starting to see permits becoming available so that activity can ramp up, specifically in the shallow water?

In the shallow water business, our exposure in the Gulf of Mexico is really through ADTI. And I guess the anecdotal information we get from ADTI, from ADTI's customers, is that maybe there is a little bit of a loosening of that process. Maybe the permits are starting to be issued now.

All right, thanks.

Matt Conlan, Wells Fargo Securities.

Earlier in the week, Bromwich said that the moratorium could end early if that is what the facts support. I would like your opinion on what facts do you think could convince the Administration to end it earlier? And if it were ended earlier, how quickly, what kind of leadtime until the operators could get back to work?

That would really test my powers of speculation, Matt. I'm not sure what kind of facts Mr. Bromwich is going to be looking to. I think compliance with NTL-05 is going to be a key fact, I think. More clarity and understanding about what happened on Macondo is going to be a key fact. Beyond that, I am not really sure what else Mr. Bromwich might have had in contemplation of an early termination to the suspension.

And to the second part of the question, assuming that permits are going to be issued in a timely manner, how long do you think it would take your customers to be able to get back to work?

Most of the discussions we've had about the readiness to resume work during this period of suspension has been around, from our perspective certainly, it has been around maintaining crews and the capability of the equipment to go back to work as quickly as possible.

So setting aside the process we are going through to comply with NTL-05, the rigs are ready to go back to work and the customers are similarly in a position where they have kept all of their capability intact as well. So I would think it would be a relatively timely resumption of activity.

So it would predominately be dependent upon their ability to get the permits?

Yes.

Okay, terrific. Thank you very much.

Kurt Hallead, RBC Capital Markets.

Good morning or good afternoon, wherever you may be. A couple follow-ups. First, Ricardo, I think you reference a dollar amount you expect to spend to meet the new requirements as to the NTL. Is that all inclusive, or do you expect that number to increase?

Based on our assessment of the requirements as they are spelled out in NTL-05, Kurt, that $25 million is related to the capital we will have to add. There is clearly some -- there will be some costs, some operating costs in terms of getting the inspectors out there, and maintenance; the internal spend we will incur in terms of tearing the equipment down so that the inspectors can conduct their full inspection. The $25 million is just the capital associated with the new requirements.

Okay, and then a follow-up. With respect to the Swiss authorities, did they give you any specifics as to why they are going through this type of review process? I know you said it is a unique situation for the Swiss government, but at the same time, you have all these rules and laws over there that require you to get shareholder approval. What is it that the Swiss government said explicitly to you as to why they are holding off on letting you pay the dividend?

They haven't been explicit or specific in their comments to us, but we understand generally it relates to the fact that some of the claims that have been lodged in the US, some of the litigation in the US, does name the parent company as a defendant, and those claims have been served on the parent company in Switzerland.

Okay.

Just to add on that point, bear in mind too that this process is linked to the fact that we have requested a reduction in the par value of the share. Dividends potentially in the future paid out of [APIC] or the equivalent [APIC] would not be subject to such a rigorous process.

Okay, and your perspective -- from a corporate perspective, even with what is going on in the Gulf of Mexico, your view is the dividend that you had put forth for approval is something that can be sustained beyond a 12-month period.

The dividend that has been approved by the shareholders is $1 billion paid out over the next year. That is a commitment the Corporation now has as a result of that shareholder approval.

Beyond that, we are -- you can imagine we are currently engaged in a thorough review of the full financial situation of the Company, including our outlook for the business, our estimate of capital expenditures required, our estimate of operating cash flows generated, the debt profile of the Company. There is a significant number of factors that are going into that, and we will continue to evaluate that as more information emerges.

Okay, great. And then just for Terry, a follow-up on the market dynamics. If you -- you gave, I think, an underlying tone of overall optimism, with some near-term caution. So when you look at the pricing dynamics of the different stratification on Deepwater and Jackups, would you characterize each of the strata now as a point of pricing stabilization or can you delineate for us where you see explicit downside pricing risk?

Kurt, I think -- that's a good question, by the way -- I think we are going to see pricing pressure on the moored units, the Ultra-Deepwater and the Deepwater moored units. And I'm afraid that it could potentially trickle down into putting -- as we stated in the comments -- putting pressure on the Midwater Floaters. Because we have a few Midwater Floaters coming available here shortly. I think we have about 17 coming off -- rolling off of contract through the end of 2010.

So I think there may be some pressure going down. Also, in the Jackup space, we are seeing some pressure on the standard Jackups. So those prices, while they are not dipping significantly, there is a bit of pressure on those, too.

And then, Terry, I don't want to take up too much time here, but generally speaking, when you talk about the pressure, like for example on the standard Jackups, is that even from the current leading edge or are you talking off of the Transocean kind of prior contract?

I am speaking in reference to the Transocean prior contracts.

Okay, great. Thanks.

Brian Uhlmer, Pritchard Capital.

I was trying to clarify -- you had a little discussion on insurance or you talked about your insurance, and I was trying to understand that you renewed all your insurance through 2011, and it didn't seem like it was incrementally that much higher. And what you see as insurance maybe beyond that or just clarify that a little bit for me, if you could.

Ricardo can give you some insight on that.

Brian, as we've indicated in the Q, and I think you're probably quoting from that, we were successful in renewing our insurance cover for both hull and machinery and excess liability, which are our two main insurance policies, through May/June 2011 on substantially the same terms and conditions. And there is no indication at all that the insurance market would in future years not give us access to those covers in the future.

Okay. Outstanding. That's really all I had. All my other ones were answered. Thank you.

Lukas Daul, SEB Investments.

I was wondering in your discussion with the operators on the available units, do you get a sense that the oil companies are more selective in terms of who they want to work with, referring to track record, operational team, etc.? And does it maybe make you less concerned with the speculative newbuilds potentially coming to the market than you were six, nine months ago?

Terry will give you some insight into our discussions with operators, because she is intimately involved with those.

Good morning, Lucas. I would say that, by and large, and certainly after the Horizon event, our customers are saying that it is important for them to have operational teams that they can count on, that can deliver operational excellence, and that they are concerned about being able to contract units that they don't know who the crews would be, they don't know any sort of -- or have any track record to depend on. So we are seeing a preference by the operators in looking at those companies and building better relationships with those companies that they can count on.

Okay. And then on the Midwater units that you have currently stacked, if you were to bring them back to work, could you give us a range of what kind of activation costs you would be looking at?

Generally, the reactivation costs on the Midwater rigs are somewhere between $20 million or $30 million at the low end and $50 million or $60 million at the high end, for those that we would choose to reactivate. There are maybe one or two in that list that have reactivation costs significantly higher than that, and so you would need a really unique set of circumstances to be able to undertake that kind of significant expenditure.

All right. Thank you.

Rob Mackenzie, FBR Capital Markets.

I guess my first question for you is regarding the shareholder approval for the "dividend." Does that approval applied just for the par value reduction, or would that also approval for a dividend payout of APIC, if you wanted to do it that way in the future?

We would require shareholder approval for all distributions, Rob.

So for an additional -- a change in the distribution format, you would require a new approval?

Yes, if going forward -- once we fulfill the current obligation, the par value reduction distribution, if we chose in 2011 and going forward to convert to a dividend that would be in the form of a payout of additional paid in capital, that distribution would still require shareholder approval. And once shareholders had approved it, it then becomes an obligation of the Corporation.

Okay. My question was -- and you've answered it indirectly -- was whether this approval would let you choose the method. But obviously not.

On the oil spill response organization that Chevron and others are spearheading, has RIG been asked to or considered contributing assets or funds to that?

We've not been asked.

Okay. On BOPs, can you give us a feel for who the companies are that are certifying those, and what some of the challenges are in getting these certified in a timely manner? Is there a meaningful backlog that you guys have to fight through?

There is a backlog, and the limiting factor is just resources. So if you think about some of the third-party experts that are capable of doing this, and the NTL gives you some direction in terms of what qualifies as a third-party expert, it's just a question of are there enough third-party expert resources out there to work through all of the 30 or 31 deepwater rigs remaining in the Gulf of Mexico.

Okay. Thanks.

Rob, excuse me. This is Greg Panagos. I just want to make sure that we are clear on the shareholder distributions. When the shareholders approve the distribution out of a particular equity account, that approval is not open-ended or perpetual. It is for a particular amount over a particular time period.

So whenever any distribution is approved and then paid out, you have to get shareholder approval for a new distribution, even if it is out of the same equity account.

Fair enough. Thank you. And then a final question, since the Macondo incident and your subsequent release here of a startlingly strong indemnity clause in your 10-Q, have you seen operators try and change the level of indemnity specifically, even including gross negligence, from recent contract negotiations, or are you still able to get the same kind of contract terms?

I would say in terms of that sort of an indemnity provision, we are still largely successful in obtaining the same provisions.

Great. Thank you. That's all I had.

Waqar Syed, Macquarie Capital.

Terry, regarding the Deep Seas, you got what I would consider pretty decent dayrate. Was the dayrate negotiated post the Macondo incident, or was this negotiation for dayrate going on before that and it just got announced now?

Actually, we negotiated this contract yesterday. So we've been in discussions for a while, but this has been continuing on. And as we all know, our customers have opportunities to delay, or if the circumstances provide themselves that they find themselves that they are having second thoughts about contracted rigs. But clearly in this case, this is something that is pointing very positively with the long-term fundamentals of this market. We are delighted, and thank you for the compliment of the rate.

But when you said that you expect weakness -- when you say that, I just want to understand what the reference point is for you. Are you saying from like historical levels of 500, 600 for this class of rigs, or are you talking about this recent contract level of 450?

I think that this -- I guess maybe you need to rephrase the question, because I'm not really clear of what you are asking. But I think this is a strong fixture, and I think that the Ultra-Deepwater market is going to be strong through this softness in the market.

So I don't see a lot of deviation from this rate as we move forward. There may be some downward pressure because we are going to have availability. But like I said, I'm optimistic. So is there another way you would like to rephrase your question?

No, I understand. You had mentioned that you still expected some weakness in the Ultra-Deepwater market in the near term. And I just wanted to understand from -- what was the reference level, because I think there are a lot of people, investors out there who, believe that maybe the rates for enterprise class rigs or even (inaudible) rigs could fall into the $300,000, the low $300,000 level. And I just wanted to understand what your take was on that. And when you said weakness, 450 may be weaker from 600 level that we had seen before, but certainly is a pretty decent rate versus where the expectations in the investor community is.

Okay, I think 450 is a strong fixture. I think we are going to see pressure, and I think the differentiation, for me at least, is the moored -- the Deepwater, as I just previously said -- the Deepwater and the Ultra-Deepwater moored units, there is quite a few of those, and they are going to be competing certainly down into the Midwater levels, because the demand scenario right now is not robust in the near term. So that is why I say we are going to see a little bit of pricing pressure here in the near term.

So I would say they we are going to go below 300, and I think that the recent fixtures that we've seen in the market in its rigs that have just -- one rig that has just moved to Egypt, and I believe that we saw another fixture out there that was certainly an indication of these moored units finding work and competing for work.

Right. So it is quite clear that what you are saying is that the weakness is for rigs that call themselves Ultra-Deepwater, but do not have the capabilities that your enterprise class rigs or some of the newer (inaudible) rigs have in terms of DP or size or number of cranes and all these other factors that go into drilling?

Yes.

Steven, I have a question, kind of more macro. Have you implemented any major changes in your standard operating procedures on the rigs following a review of the incident on Deepwater Horizon?

I wouldn't characterize them as major changes. Initially following the event, there was a notice issued in the Gulf of Mexico by the US Coast Guard that had to do with emergency response capabilities. So we've taken that, and we've pushed that globally across the Transocean fleet. Beyond that, pending a full understanding of what actually happened on Macondo, it is difficult for us to decipher whether any changes are required at all in our operating systems.

Okay. Thank you very much.

Jud Bailey, Jefferies & Company.

A couple of questions. Terry, you talked about Brazil and your thought that there will be some incremental -- or I guess they will probably come to the market to fill some gaps when some of the Brazilian newbuilds are late. How do we think about a time frame? Do you think that would probably be out in 2013 or '14, when they realize they are going to be late? Or how do you think about timing for them maybe coming back into the market?

I think that it is going to be sooner than that. I think they are going to quickly be able to quantify the number of units that they need. And again, they also -- another thing is that Petrobras does have some international Ultra-Deepwater units that they may actually bring back to Brazil also to fulfill some of the demand.

So they've got some units, and certainly there are some sublet units out there. So that could also fulfill their needs. But I'd still believe that there are some opportunities for the existing fleet.

Okay. And just a quick follow-on there. If they were to bring rigs from Petrobras international into Brazil, do you have any sense that they would then seek to replace the rigs in the market that they left, like West Africa or the Gulf?

I think it is too early to say there. I think they are still drilling their programs and trying to evaluate where they are in those programs, so that they can ascertain what their needs are going to be in the future.

Okay. And then another question, a little bit bigger picture on the Midwater market. If you go back and look at -- back in 2002 and 2003, we saw a lot of Midwater rigs go idle at the expense of Deepwater rigs. You've commented on your expectation of some softness in the Midwater market.

Do you think that we could see something similar, where utilization just gradually bled down over a couple of years and got probably below 70%? Do you think it could get that bad, or do you think it is going to wind up being better than that with this oil price?

Jud, I think the demand is going to improve with this positive outlook of oil. I think that is one thing that is for sure. I think we are going to have to wait and see how we play out with the Gulf of Mexico.

And I do think we are going to see some bleed-down because of the current availability in the near-term. Will it get as bad as you are describing? I think that we need a couple more quarters of -- maybe not a couple, but we need certainly some more quarters to see the confidence build and let's see what the 2011 budgets say.

Okay. I appreciate the perspective. And if I could just slip in one more, on the Hulme and the 534, given the comments around the 300 level, should we be thinking about something below 300 for both of those rigs for the next contract?

I think that we are -- that was a difficult one to answer because we are in a current tendering scenario, where both of those rigs are placed into the tender.

I'm not sure we want to tip our hand on what we bid.

Understood. I appreciate it. Thank you.

[Dan Duma, G.T. Trading]

My question has been answered. Thank you.

(Operator Instructions) It looks like we have time for one final question today, and that will come from Geoff Kieburtz with Weeden & Company.

Sorry to disappoint. You have answered my questions. Thank you.

Very well. With that, I will go ahead and turn the call back over to your speakers for any additional or closing remarks.

All I would say is thank you for your continued interest in the Company and your support of us during the events we've been through, and we will talk to you next quarter.

And with that, that will conclude your conference for today. Thank you for your participation. Everyone have a wonderful day.