Transocean Ltd (RIG) 2010 Q3 法說會逐字稿

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

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

Thank you, Camille. Hello, everyone, and welcome to Transocean's third-quarter 2010 earnings conference call. A copy of the third-quarter press release covering our financial results along with supporting statements and schedules is posted on the Com0pany's website at deepwater.com.

We have 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 Tool Kit, 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 tool kit 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 and intangible revenues.

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 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 cyclical industries 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 Regulation G. As I indicated earlier, you will find the required supplemental financial disclosure for these measures, including the most currently comparable GAAP measure and an associated reconciliation, on our website at deepwater.com under Investor Relations, Quarterly Tool Kit, 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 and now I will turn the call over to Steven.

Thanks, Greg. Hello, everyone, and thank you for joining us today. Our reported third-quarter earnings were $1.15 per diluted share. After adjusting for the items highlighted in our press release diluted earnings per share would have been $1.36.

Before I turn the call over to Ricardo to provide some additional insight into the numbers I want to make a couple of comments about the Company and our business. Our investigation into the events of the Macondo tragedy continues. Next week we will review some of our preliminary findings with the Presidential Spill Commission. I expect our final report will be available late this year or early in 2011.

We are currently finalizing our own conclusions and awaiting the results of inspection work on the Deepwater Horizon's blowout preventer. While the general public's interest in the tragedy has subsided and the media have turned their attention elsewhere, I want to assure you that our focus is squarely on the execution of safe and efficient operations around the world and the resolution of Macondo-related litigation and public policy issues.

During the third quarter there were a few developments with respect to our shareholder-approved distribution. As you know, the commercial register in Zug rejected our request to register the first installment of the par value reduction. We appealed this decision in the Zug administrative court and we are currently awaiting the court's decision on our appeal. We expect to hear from the Zug administrative court sometime in the next couple of months.

If we are unsuccessful at this level, we will evaluate our options including a further appeal at the federal level. We maintain the position that we have met all of the legal requirements to register the par value reduction and make the distribution.

Let me now making a few comments about the market. We continue to view the worldwide jackup market as stable, though there are some clear trends developing. I think it's pretty clear that a bifurcation in the jackup market is taking place.

Utilization for the worldwide fleet is hovering in the low 70%s and day rates are in the $50,000 to $75,000 per day range for the lower spec jackups while the standard jackups are earning $80,000 to $100,000 per day. However, utilization for high-spec premium jackups is in excess of 90% and day rates appear to be edging up slightly, above the $125,000 to a $150,000 we have seen recently.

The midwater market is also stable with day rates ranging from $200,000 to $250,000 per day, though there does seem to be some increased interest as our customers approach year-end and finalize their 2011 investment plans. Terry will talk specifically about the deepwater and ultra-deepwater markets in a moment.

I want to make a few comments about the Gulf of Mexico. Despite the continuing uncertainty in the Gulf of Mexico coming most recently from the court's decision to overturn NTL-05, we continue to see evidence of our customers' long-term commitment to the region. Late last month Chevron announced the approval of a $7.5 billion project to develop the Jack and St. Malo deepwater fields. Our Gulf of Mexico revenue in the third quarter reflected this uncertainty.

The only rigs which collected operating rate were those supporting BP in Macondo response operations. Other than rigs in the shipyard, the other rigs were on standby or special standby as a result of the government-imposed moratorium. Currently, none of our Gulf of Mexico rigs is in a force majeure situation. With the moratorium now officially lifted we should see a gradual return to normal levels of activity in the Gulf.

The historical performance of our equipment and our people has built strong relationships across our entire customer community. These strong relationships have served us well through the last six months as none of our Gulf of Mexico contracts have been terminated, we have preserved our entire Gulf of Mexico backlog, and we haven't suffered deterioration in terms of our Gulf of Mexico contracts.

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.

Thank you, Steven, and hello, everyone. In the third quarter of 2010 we generated net income of $368 million or $1.15 per diluted share. This compares to net income of $715 million or $2.22 per diluted share in the second quarter of this year.

Third-quarter net income was unfavorably impacted by certain items highlighted in our press release totaling $65 million or $0.21 per diluted share. The two most significant items on an after-tax basis were, first, a $22 million loss associated with the early retirement of approximately $703 million of our Series B and Series C convertible senior notes and, second, additional expenses totaling $22 million incurred as a result of the Macondo well incident and comprised mainly of legal expenses, professional fees, and increased insurance premiums.

After adjusting for these items, third-quarter net income was $433 million or $1.36 per diluted share compared on an equivalent basis with $535 million or $1.67 per diluted share for the second quarter.

Compared to the second quarter, third quarter's contract drilling revenues were down $92 million. The quarter-on-quarter reduction reflected the application of special standby rates negotiated with customers for four of our rigs in response to the drilling moratorium in the Gulf of Mexico with an aggregate impact of about $118 million. We also experienced the full-quarter effect totaling $34 million of certain midwater floaters and jackups which were called back during the previous quarter.

Days out of service due to shipyards was significantly lower than the previous quarter resulting in an $85 million increase in revenues, but this was partly offset by a total of $25 million in other activities and day rate related variances, the most significant being the idling of being the M.G. Hulme. Other revenues were $104 million lower, primarily due to depressed activity levels experienced by our drilling management services as a consequence of the slow issuance of shallow water drilling permits in the Gulf of Mexico.

Total revenue was below Street expectations for the third quarter. We believe part of the shortfall was due to the lack of drilling management service activity which I have just mentioned. On the contract drilling side the shortfall was due to the application of the special standby rates on certain rigs in the Gulf of Mexico, as well as reduced revenue efficiency in utilization rates affecting the ultra-deepwater and deepwater fleets outside the US.

In contrast to the second quarter, we achieved a significant and encouraging reduction in the unplanned downtime of our newbuild fleet. Though this improvement was offset by unplanned downtime or additional time in shipyards incurred by other units as certain customers extended certain aspects of the NTL-05 requirements to rigs operating in non-US territorial waters.

Contract drilling revenues for the fourth quarter of 2010 will be adversely impacted by an estimated $200 million due to the carryover effect of the drilling moratorium, resulting primarily from the continuation of special standby rates, shipyard extensions to comply with NTL-05, and shipyards brought forward from 2011 to mitigate the impact of the moratorium on our customers. Fourth-quarter revenues will also be negatively impacted by increased out-of-service times to be incurred by the ultra-deepwater fleet, primarily due to shipyards postponed from the third quarter because of operational factors.

We expect our other revenues for 2010 to be approximately $530 million. This is $20 million lower than prior guidance but we are expecting increased drilling management service activity in the Gulf of Mexico in the fourth quarter.

Operating and maintenance expenses in the third quarter were $1.213 billion versus $1.358 billion in the second quarter. The quarter-to-quarter decrease of $145 million was primarily attributable to a $96 million decrease in costs due to the previously discussed decline in activity of our drilling management services in the Gulf of Mexico, in addition to a $65 million reduction in expenses related to the Macondo well incident.

There is no further charges incurred for insurance deductibles. These were partly offset by smaller cost variances detailed in our press release.

We expect our full-year 2010 operating and maintenance expenses to be at the low end of our prior guidance of between $5.2 billion and $5.4 billion. This range includes about $510 million of expected costs related to our low margin other revenue items and an estimate of $170 million for incremental expenses net of expected insurance recoveries associated with the Macondo well incident, a reduction of $10 million from the detailed guidance provided in the second quarter due mainly to lower projected legal and professional fees.

Capital expenditures in the third quarter of 2010 were $304 million, in line with the previous quarter. At this point, our capital expenditure guidance remains unchanged from the second quarter at $1.4 billion including capitalized interest for the full year.

Interest expense, net of amounts capitalized in interest income, was $142 million in the third quarter, in line with the second quarter. For the full year we are projecting interest expense as just defined to be closer to $550 million than the previously indicated $540 million as a consequence of the recent debt offering. This estimate assumes stable interest rates and that in the fourth quarter we will continue our debt repayment plans, which I will discuss shortly, and that we will not execute any asset acquisitions, disposals, or debt offerings.

Our annual effective tax rate, which excludes discrete tax items, rose from 16.3% in the second quarter to 20.9% in the third quarter. The increase is attributable to a change in the mixture of our operating income resulting from the redeployment of units to higher tax jurisdictions, increased costs incurred in certain [deemed] profit jurisdictions, and reductions in overall profitability in part due to the drilling moratorium. We expect our full-year 2010 annual effective tax rate to be between 16% and 18% depending primarily on the timing of shipyard activity and newbuild startups in the fourth quarter.

On September 16 we successfully executed a debt offering that resulted in the issuance of $2 billion in senior notes with five- and 10-year maturities. We intend to use the proceeds to fund the repurchase of the Series A convertible senior notes in December and accelerate the repayment of a portion of the Series B and Series C convertible senior notes.

Since our last earnings call we have retired approximately $1 billion of the Series B and Series C convertible senior notes at an effective average yield of about 4%. We believe that this debt offering, which took advantage of a favorable capital market environment with low underlying interest rates, provided us with an excellent opportunity to improve the Company's debt maturity profile and reinforced the Company's liquidity in a cost-effective manner.

As a result of the offering and our cash generating operations, our cash balances have increased $1.7 billion during the third quarter to reach $4.6 billion at September 30. We expect these cash balances to diminish in the next six months as we execute our convertible senior note repurchase program and as we meet our cash distribution commitment assuming a favorable ruling by the Swiss courts.

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

Thanks, Ricardo, and hello to everyone. Before I move to the specific markets let me make a few general comments.

The ultra-deepwater market remains active with a few new tenders coming to market and the contracting of several speculative newbuilds taking some of the available supply off the market. Deepwater opportunities are becoming more visible than in previous quarters. The midwater market has been active yet actual contracting has been light; however, we do expect some contract closures to occur within the next few months. And jackup tendering has increased for availability in early 2011 while actual contracting remained steady over the previous quarter.

High-spec jackup requirements are increasing along with utilization and day rates. Additionally, several long-term high-spec tenders are outstanding and should result in awards in 2010 and early 2011. I will now move to the various markets and will begin with a discussion on the ultra-deepwater market.

Activity in the ultra-deepwater market has been brisk with several contracts, albeit a few of short-term duration, being executed by the speculative newbuilds in various markets. Even with the temporary near-term softness in the ultra-deepwater market, this last quarter alone resulted in several new contracts all at market day rates well above $400,000.

If we combine this positive news with the official lifting of the moratorium, the continuing success in Brazil and West Africa, and the potential for incremental demand in the US Gulf of Mexico, we see improving customer sentiment and increasing demand moving the market in the right direction. As a result of this positive trend, we are in advanced discussions on multiple fronts with our customers for our only available ultra-deepwater unit in 2011.

Moving to Brazil, further delay is expected in awarding the Petrobras newbuild tender for up to 28 units, supporting our belief that additional incremental demand will be needed to bridge the gap to the deliveries of the Brazilian newbuilds. While we cannot be certain of the actual numbers of new units that will be needed to support the future drilling of Petrobras, A&P, and the IOC, we remain committed to growing our market share and improving our position in Brazil and will continue to look for opportunities to do so.

We are closely monitoring the upcoming drilling programs in the emerging markets of East Africa, Ghana, Liberia, Sierra Leone, Ivory Coast, and the Black Sea with the expectation that future ultra-deepwater demand will continue to grow and add to the already solid worldwide resource base that supports our optimistic view about the healthy future of the ultra-deepwater market.

Turning to the deepwater market, very few fixtures have been completed in the last quarter. Even with a lack of near-term demand, the two remaining marketed deepwater units available in 2010, the Discoverer 534 and M.G. Hulme, are under consideration by our customers and we expect to capitalize on these opportunities shortly. We believe the deepwater fleet could be challenged by the near-term availability of higher-spec ultra-deepwater units continuing down.

Now turning to the harsh environment, Norway continues to present opportunities for our existing fleet with open tendering from various operators. An additional requirement to offshore eastern Canada is expected and will be incremental to the existing fleet offshore Newfoundland. Our presence and performance in both Norway and Canada places us in a great position to further expand our business in both markets.

Moving on to the worldwide midwater floater market, the tendering remains active but the contracting pace slowed a bit in the third quarter. Opportunities, generally short-term in duration, continue to materialize in the UK, Asia, and Australia. We also expect to participate in some long-term tenders in India in the next few months.

Transocean's contracting activity for the quarter resulted in the following fixtures -- Sedco 704 for five wells at $250,000 in the UK, extension of the Transocean Legend for six months at $315,000 in (inaudible). Our 2010 availability consists of four active units rolling off contract in the next few months with six additional units cold stacked. We are in discussions with several customers to recontract the four actively marketed rigs.

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 also compete in the midwater market space.

Moving to the jackup market, tendering activity increased while resulting fixtures remained steady over the previous quarter with high-spec jackups attracting long-term contracts while the standard jackup market remained relatively short in duration. The Transocean fixtures during the quarter are as follows -- extension of the GSF 141 at $55,000 for six months in [EG,] extension of the GSF Galaxy II at $150,000 for two wells in UK, and a new contract for the GSF Galaxy II at $150,000 for two wells in the UK.

Of our marketed fleet, we have 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 uncontracted newbuild entries and expect that some more stacking of standard rigs may occur in the near term.

As Steven mentioned in his opening comments, we have seen a bifurcation of the jackup market whereby the market utilization for high-spec jackups is over 90% while standard jackup utilization is around 75% for the total international jackup fleet. While we are seeing some downward pricing pressure on the standard jackups, the high-specification jackup rates are improving along with increasing worldwide demand and we expect this to continue through 2010 and 2011.

This divergence of utilization can be attributed to efficiency and operational capabilities of the high-spec units as compared to the standard jackup fleet. In addition, we see a preference to utilize newer equipment that provides more flexibility for the customer. However, some high-spec units are being used on conventional wells that are perfectly suitable for the standard jackup fleet.

As the commodity pricing continues to improve, we anticipate increasing demand and higher utilization for the worldwide standard jackup fleet as customers will again contract these rigs for their conventional programs.

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

Thank you and with that we are happy to open up the queue for your questions.

(Operator Instructions) Jim Crandell, Barclays Capital.

Good morning. Steve, what is your interest in newbuilds today, both on the floater side and the jackup side?

Well, Jim, we are always interested in growing our business and so our marketing teams around the world continue to scour for opportunities that would justify us committing significant capital and growing the business, taking advantage of those kind of opportunities. So we are always interested. I wouldn't say my interest has changed from any time in the past to now. We continue to look for those kind of opportunities.

Are you surprised over the surge in jackup orders recently and seemingly the growing activity around the yards for floaters?

Well, we have been talking about this emerging bifurcation in the jackup market for the last quarter or two. And so I think other companies in the space see the same thing and are trying to potentially get ahead of that by committing to build on spec. That is not something we have done historically in the past and I would be real reluctant to change that aspect of our approach to the business.

And so I think we will continue to look for opportunities that justify us committing to new construction.

Okay. Do you think that the opportunities to sign up a rig with a three- or four-year contract could be well out into the future?

Certainly in the jackup space, Jim, we are seeing tenders today that are requiring high-spec equipment and offering long-term contract opportunities. And so we have tasked our marketing folks with fully exploring those opportunities to see if we can't land one or two or more of them and embark on a construction program that would be supported by contracts.

Okay. Thank you, Steve.

Jeff Tillery, Tudor Pickering Holt.

Good morning. Terry, could you talk on the ultra-deepwater side just -- so you mentioned the Sedco Energy under discussions with but could you just talk about kind of the range of terms available? The recent fixtures have been biased nine months to two years; are you seeing opportunities for three- and four-year contracts emerge?

Hi, Jeff. We are currently, as I have mentioned in the notes, we are currently in discussions with several customers about opportunities for this particular rig. Those are a little bit longer term so it's not the short-term nature for that specific program.

But if we look a bit further afield, we still have the Petrobras tender that is open that hasn't been closed yet, and that is certainly three years. Then you have some tendering, open tendering in Angola and you also have certainly a lot of open ultra-deepwater tendering in Nigeria. So those fixtures are a bit longer term.

So what we are doing is we are trying to understand how this market is going to unfold here in the near term. We are having a lot of positive conversations and our customers are indicating that there may be some more incremental demand on the horizon.

Great. Just one question on the deepwater fleet; with half a dozen or so either idle or rolling out contract over the next four or five months, what does the rate environment look like for those rigs? As well as, if you were in our shoes, do we assume two-thirds of those keep working, one-third, half? Just trying to look for some guidance on utilization for those rigs.

Well, right now what we see is we see that about 17 of the -- if you look at the total fleet. So we think 17 of the 57 are rolling over in 2011 and we do have some idle rigs right now. What we see is we are starting to see some more activity, we are starting to see some interest, and then we are having some conversations with the customers.

So I don't know that I can give you a number that is really indicative of what you can take to the bank. But, again, I am encouraged by a bit more of the conversations that is going on and I think we are just going to have to wait and see.

Okay, thank you very much.

Robin Shoemaker, Citi.

Steven, was wondering, with respect to your standby agreements in the Gulf of Mexico, I think some of those were negotiated with a November 30 target date in mind. Is it your view that the force majeure claims are kind of behind us or could they potentially reappear after November 30?

I will tell you, Robin, Terry has spent the most time intimately involved with those contracts so I am going to let her give you some insight into what we think might happen.

Okay.

Hi, Robin. When we set down and spend a lot of time with our customers to come up with a solution of how we all work together through this event, we made some initial agreements whereby the customers -- we would be on a special standby rate up until a particular date.

Of the ones that we discussed there is four of them, as I recall, and so we have a set standby where it goes to a particular date. Then if the moratorium is lifted, then we go back to work. Well, as we know, the recertification of the BOP has taken some time but in discussing with the customers on these four rigs we are getting positive indications that they feel like they are going to be able to get their permitting as soon as we get our BOP's recertified.

So we think it's positive conversations. We do believe the force majeure claims aren't going to come back to the forefront and that it's going to take some time to get back to work, as we all know as the permitting plays out. But we are positive of being able to work some things out here.

Okay. Steven, if I may ask you, there was talk earlier this year about an Arctic class drill ship which you might be able to build with a very long-term contract. But you haven't announced that and I wonder if that has been put on hold or if that idea has been scrapped at this point?

I would say the appropriate characterization, Robin, is that it has been put on hold. The Macondo tragedy certainly caused the Canadian regulators to rethink their approach and some of their regulations and so they have gone into a reevaluation mode.

These leases are still up there. The customers still have the work commitments to carry out and the additional terms on those leases are continuing to take away, even though the regulator up there appears to be in a bit of a holding pattern. So we have the design and we are prepared to embark on building that design if and when we get a contract that will justify building it.

Okay. So it's more the Canadian government indecision as opposed to a backing away from the customer I guess is the way you would describe it?

I think that is the right way to think about it. We are ready, the customers have the leases, and they have got the work commitments so the work is up there. It's just a question of when we get to a point that everybody feels comfortable going forward.

Okay, thank you.

Scott Burke, Oppenheimer.

Good morning. I had a couple of questions to follow up on kind of the Macondo spill. First of all, the costs associated with that have gone down the last two quarters. You did give some guidance on what you expect for next quarter; I didn't quite catch that number. And then I just wondered if -- what is going to be the run rate going forward that is going to be in operating expenses for Macondo litigation?

Scott, this is Ricardo. I think the figure I quoted for the 2010 outlook was $170 million. We don't give guidance by quarter in this respect. The guidance of $170 million is down $10 million from the $180 million that we provided you last quarter.

And as regards 2011, I will be in a better position to communicate some guidance in that respect once we have -- when we have our next earnings call early in the next year.

Okay. And I guess what I kind of wanted to get at is there some kind of a structural change to your cost basis that is going to stay there from the Macondo litigation or is that going to gradually get back down to zero over the next year or two? What are your thoughts on that?

The clear change that we have seen as a result of the Macondo well is in respect of the cost of our insurance cover. We have been able successfully to renew our insurance cover on the same terms and conditions as prevailed prior to the Macondo incident, but the cost is significantly higher. This being said, when you look at the operating costs on a daily basis and on a rig basis, it's not going to result in a very significant output.

Okay, understood. But that insurance premium is not included in the $27 million for this quarter, correct?

It is, yes.

Oh, it is? Okay. Then I also wanted to ask about if you -- in terms of the court holding up the payouts for the dividends, is that the main holdup to paying out the dividends? Or you also mentioned last quarter in agreement with the Department of Justice to get approval 30 days before you made any kind of payments to shareholders.

Anything else -- which of those two is kind of the bigger holdup in terms of actually paying out dividends or doing share buybacks?

The only impediment to fulfilling the shareholder approved distribution, Scott, is the rejection by the Commercial Register and the Canton of Zug to register the first installment of the par value reduction. We have appealed that decision to the administrative courts here in Switzerland, and so that is the situation we are in right now.

The discussions we have been having with the Department of Justice relate only to be shareholder approved stock repurchase program.

Okay, very good. Thanks for the clarification.

Doug Becker, Merrill Lynch.

Thanks. Steven, you mentioned Transocean's investigation of the Macondo tragedy would be completed by early 2011. Do you have a sense for the timing of some of these other investigations? We have the BOP, the National Commission and then the Department of Justice. Any sense on the timing of those investigations?

Doug, I have sort of directional sense on the presidential spill commission and the joint MMS or BOE/Coast Guard, the marine investigation board. I understand that the presidential spill commission is targeting the release of their report in January. I understand that the marine investigation board has just delayed the release of their report and I think they are intending to release in March of next year. I am not sure what schedule the Department of Justice is on.

Fair enough. And then I guess circling back to the potential of a par value reduction and some form of distribution. If the appeals are not successful, are there other avenues to go down or is that just kind of -- does that just get removed as an option?

Fortunately, Doug, at the beginning of 2011 there is a change in the Swiss tax laws that will allow us to distribute cash out of legal reserve, what the Swiss call legal reserve, or additional paid in capital. We will be able to distribute that without any Swiss withholding tax. And so as we get into 2011 that would open up that alternative as a possibility for us to follow through on our commitments to return cash to our shareholders.

And I assume that would be an avenue you would pursue?

Well, as we get closer to 2011 we will continue to discuss with our Board the outlook for our business, the prospects for cash generation and cash needs, and we will evaluate disposition of cash. Certainly returning cash to our shareholders is always a component of those conversations.

Fair enough. Thank you.

Roger Read, Natixis Bleichroeder.

Good morning or afternoon as the case may be.

Well, it is afternoon where we are.

If I could, since a lot of that stuff has been hit, what is your sort of strategy, thought process, view of your jackup fleet? In an industry that are obviously -- we are always moving towards higher spec, certainly we are seeing that steady march on the jackup front. You have got a fleet with both, but I think it's fair to say it's a little more weighted towards the standard side. Where do you want to take that over the next couple of years?

We have -- every time I get asked that question, Roger, I take advantage of the opportunity to talk about our commitment to the jackup business. There is a lot of advantages that the Company enjoys because of our participation in that part of our business, including the size of the Company, the geographic distribution of the Company, the leadership position we enjoy in a lot of the markets we participate in, the key customer relationships we have that we would have if we weren't operating jackups, and the opportunity to participate in those markets as those markets transition from shallow water activity to deepwater activity. And so we remain committed to the jackup business.

Now the real question I think you are asking about is how do we maintain a competitive position in that jackup market. We will do the same thing in the jackup business that we have done in the floater business. We will continually look for opportunities to high-grade our fleet.

We have done that in the past where we have taken advantage of contracts that justify significant expenditures to upgrade and modify and improve the capabilities of the existing rigs. And if we are fortunate enough in some of these tender exercises that are going on right now to land some of these high-spec, long-term contracts that will justify us taking advantage of the opportunity to possibly build some new rigs.

Okay. And have you -- and I don't think it's out there but have you taken the advantage during this downtime to do any significant upgrades on any of the jackups?

Not that I would characterize as significant. We are always looking for opportunities here and there to make modifications. I guess I would say that over the last year or 18 months most of those modifications have been minor in nature.

Okay, thank you.

Ian McPherson, Simmons.

My impression on your commentary for ultra-deepwater is that the market is -- pricing is probably flattish for now for the foreseeable future. And if that is, call it, a day rate range of $400,000 to $450,000, do you agree with that and do you think that is probably projectable for a few quarters?

I wanted also to see if you have any color commentary on subletting dynamics currently and as you see them unfolding first half of next year.

Ian, yes, I would agree that the ultra-deepwater pricing right now probably is flat but it has been disciplined. It has been holding above $400,000. But I would also say that it will be impacted or there could be some positive news if we see Petrobras come out for some multiple opportunities in Brazil.

So I think that there is a dynamic that could change very quickly with that type of positive news. But all that being said, I think, yes, we are going to see that in the next couple of quarters. Steady as we go.

Okay. Subletting?

Subletting, we have seen a couple of sublet rigs in the market that have been absorbed. We have been in discussions ourselves with some of our fleet with customers who would like to assign a couple of months here and there, and then we hear of other sublets that have been successfully taken on the market.

So as of today we really haven't seen our customers being able to -- they have been able to go ahead and forward contracts the free time that they have available. So it seems to be percolating along. I don't think there is a lot of it out there but we are seeing one-offs here and there.

Okay, thanks. Steven, are you engaged with the newbuild inquiries from Statoil for the new Norway work horse newbuilds?

We have a long relationship and history in Norway and so as Statoil started talking about renewing their fleet in Norway we were right there with them exploring opportunities for us to participate in that. Absolutely.

Do you think that that is something that is actually going to move forward or is it kind of a slow burn development?

I would characterize it as slow burn, but Statoil seems pretty committed to following through on what they have been talking about.

Okay, thanks. Can I sneak in one more? Ricardo, will you help us with depreciation for Q4?

There is no change in the guidance that I had provided in the last quarter, Ian.

Okay, thank you.

Matt Conlan, Wells Fargo Securities.

First, Terry, I just wanted to make sure that I heard you correctly. Did you say that your customers are suggesting that as soon as you get your rigs certified they can move forward with permitting? Is it really the rig certification that is the key component to getting permits issued?

It's the BOP certification so what the -- it's not the MMS anymore. The BOEM is saying that bring the rigs, the BOP certification with the application to repermit. So that is how we understand the process is now and that is what our customers are saying, but they feel like they will be able to move forward at that time.

Do they think that they can handle the requirements, the additional requirements that are being put on them, particularly the environmental requirements?

My experience, Matt, in talking with the customers is as soon NTL-06 came out they started working on developing all of the analytical support and the environmental justification and analyses that would allow them to comply with NTL-06. So it's sort of a dual path for the contractors to comply with NTL-05 and the operators to comply with NTL-06.

And as Terry said, the BOE have set clear expectations that you can't even apply for your permit until you have both certification of the BOP under NTL-05 and all of the analytical and support documentation required to satisfy the requirements of NTL-06.

All right, I will move on. In your slideshow you show that the shipyard time, out-of-service time for the first half of 2011 is going to be decreasing significantly, particularly for the ultra-deepwater units. Is that an estimate that we should feel good about or is that something that is likely to trend upwards when 2011 budgeting is completed?

I think it's something that has a tendency to trend upward, Matt, as shipyards which are potential but not -- but are still subject to a certain amount of uncertainty crystallize. This being said, 2010 has been characterized by a lot of work on the 10-year special periodic survey and we are not expecting that sort of activity in 2011.

We are also working very hard at present to, as I indicated in my comments, to recertify rigs and make them compliant with certain aspects of NTL-05, even those that are operating outside the US. And I would see that peaking in the next six months.

Okay, terrific. That is very helpful. I thank you very much.

(Operator Instructions) Kurt Hallead, RBC Capital Markets.

Hello. I don't want to get into too much of the semantics here so my question is really based on curiosity. When you look at some of the contract and what you have in the fleet status with respect to these deepwater Gulf of Mexico rigs that are on standby rate and some of the terminology that suggests that if these companies cannot or are prevented from operating after November 30 they could potentially terminate the contract.

To me it's pretty crystal clear that the lifting, the official lifting in the Gulf of Mexico moratorium does not prevent them from operating in the Gulf of Mexico. And the fact that if they file their permits they could operate. But once again, I can -- I have been in this business a while and you never know how the operators are going to act to try to get their costs down.

So how do you guys think about that situation and how do you view it? And what kind of risk is there that come November 30 these operators opt not to get permits filed and use that as an excuse to try to get out of a contract?

Well, let me give an initial comment and then I will ask Terry to give you some more detail. But in my opening comments, Kurt, I talked about the strength of our relationships. And I think that has served us extremely well in the last few months as we have had situations where the customers could have pressed a force majeure claim and hauled us into court and litigated the issue and really forced us to try and come to some extremely uncomfortable resolution.

But you haven't seen us do that and I think that is reflective of the strong operating history we have with those customers, with the great performance our people have delivered to those customers, and the fact that they really need the activity and the access to the equipment going forward.

I think Steven summed it up. I think that is what I would also have said it's the strength of the performance of the folks out there working with our customers. They don't want to lose the crews and they don't want to lose those rigs. So I think that it speaks for itself.

As we all know, it has been very difficult for everyone that is involved and certainly the industry. For our customers to stand by and say, hey, we are in this with you, let's try to get these rigs back to work, I think it speaks volumes.

Okay. And then I have been hearing recently that the outlook for the ultra-deepwater market is definitely improving and that there is a possibility, very strong possibility that we could see a $500,000 a day contract sometime by the end of 2011. I know you guys are generally optimistic on the direction of the ultra-deepwater market. Would you generally agree with that price point and/or the timing?

Well, I would just make the -- I think it's much of what I have answered earlier regarding Petrobras. I think Petrobras is the swing and I believe again that they are going to have a lot more incremental demand. The conversations that we are having have been very positive, so I think that we are going to be surprised by 2011 and I think it's going to be a pleasant surprise.

And then typically that drags everything else up along with it? Is that typically correct or do think there is a structural problem with the deepwater market that would prevent that asset class from participating?

I think that when we are talking about the ultra-deepwater market I think that that certainly is -- it could easily happen. I think that there is pent-up demand out there that has been held back because of the short term and also the crisis of what we have been facing and the newbuilds coming online. But I do see a positive trend and, again, confidence from the customers and positive conversations.

I am sorry; my question was on the structural issue with the deepwater market. Would there be anything structural that would prevent the deepwater market from participating as well?

No, Kurt, I think the market dynamics that would allow for a $500,000 or an increasing day rate environment in the ultra-deepwater market will certainly have a similar effect on the deepwater market as well.

Okay, great. Thanks.

Jud Bailey, Jefferies & Co.

Thanks, good morning or good afternoon to you guys. I wanted to circle back on some of the commentary on the midwater and the deepwater market.

Terry, if I understood you correctly, it sounds like you think you have -- you are going to keep your four midwater rigs that are rolling here, in 2011 you are probably going to keep those working. Your prospects for the ones that are cold stacked, do you anticipate a scenario where any of those could be reactivated or do think it's more realistic those probably stay idle next year?

Well, Jud, we are -- with the number of opportunities and discussions that we are starting to see -- now it's not long-term, these are more of a well-to-well type discussions with our customers -- we could see that we could reactivate one of the units. We will just have to see how this plays out.

But I think there is going to be some new demand that comes on to the market in India that is going to be a little bit of a long-term nature and I think we may have an opportunity there. But the four rigs I think it's going to be well-to-well and we will keep punching out there to keep these rigs contracted.

Okay. So to summarize, it sounds like there is some short-term opportunities and you could reactivate a cold stacked one if you could land one of these longer-term contract opportunities. Is that fair?

That is exactly right.

Okay. And on the deepwater side you mentioned the 534 and the Hulme. Could you give a little more color about the opportunities there, just in terms of maybe geography and contract term that you are evaluating?

I would hate to give up -- there are still some secrets in the industry, not very many, but I would hate to give that up. I would love to tell you but I just can't.

At this point I can't, but we are a little bit optimistic here in that one of these is certainly a tendering opportunity in Australia and the other is perhaps a direct negotiation so that is why I really can't say.

All right. Well, I don't want to get you into trouble on the call so I will move on to the next question.

On the cost of reactivation on some of the cold stacked units that you have could you remind us, and I am sure the number may have gone up some, for your jackup fleet, the rigs that are cold stacked can you maybe update us on the range of cost of reactivating some of your cold stacked jackups? And while you are at it, maybe the cold stacked midwater rigs as well?

If you look at the jackup fleet, Jud, there is about a third of those rigs that you could reactivate for $10 million or less. There is another third of the fleet that is probably at the other end of the spectrum, probably $60 million or $70 million or $80 million to reactivate. And then there is a third that is somewhere in the middle of that, $10 million or $20 million or $30 million reactivation.

Okay.

Same is probably true of the midwater floater fleet. There are a couple that you could reactivate for relatively inexpensive and there are a couple that are going to require significant expenditure to come back down.

Okay, that is great. And if I could slip in one more. Steven, on the newbuild jackup side I just want to make sure, if you were to pursue a newbuild opportunity is your criteria for a jackup the same as it is for ultra-deepwater, roughly a five-year payback? Or would you accept a shorter term to maybe try to renew some of your jackup fleet?

Well, we have accepted shorter term on some of the floater newbuilds we have done in the past, too. So our starting point is, out of a position of preference, we would like a five-year firm contract but we will negotiate off of that down to a four- or a three-year firm contract. We have done that on the floater side. We would be willing to do the same thing on the jackup side.

Okay, great. That is all I have got. Thank you.

Lukas Daul, SEB.

In ultra-deepwater fixtures that we have seen recently are you surprised by, one, the day rate level and, second, that these operators are able to secure a contract because they certainly have a limited track record on the deepwater side?

Lukas, I would like to think that there is -- has been some good discipline amongst the contract drillers in securing their ultra-deepwater fleet. They have economic returns that they have to meet also so the speculators have got to remain disciplined and focused in getting their fleets put together and contracted.

As far as their ability to perform, I think that is what you are asking, and the operators to have confidence, I think there is -- we have quite a few of our former folks that are out there with some of the speculators. So those are some good folks and they are able to put together some teams, evidently, that the operators are having some confidence in.

So I am not terribly surprised but I am glad of the discipline.

Okay. And when you sort of look at Brazil and you talk about the needs that Petrobras has, how many rigs do you think they should take to sort of turn the momentum in between the operators and the contractors so that operators maybe start thinking, well, it's getting serious again and maybe we should start contracting rigs? Are we talking about three, five, or eight rigs?

Lukas, I wish I had that magic, that crystal ball to be able to determine what that turning point is. But I think if you look at the developments that they have to do and the contracted fleet that Petrobras has, if you can do the math you can see that they are short some rigs. So I don't have a number for you but I think that we have taken a few more rigs off the market in the ultra-deepwater space is going to be a positive move.

Okay, thanks.

Operator, we would like to just keep the call open for one more question and then we will have to end the call.

Waqar Syed, Macquarie Capital.

Thank you for taking my call. Could you provide us with some guidance on interest expenses for next year?

Waqar, we don't normally provide guidance for 2011 until the first earnings call of next year. That is in part because we are still in the budget process and our budget has not yet been approved.

Okay. Secondly, on Pacific Drilling, they have an option that they can sell their interest in a couple of rigs to you guys. Do you know what they are going to do with that and whether they would want cash or shares?

We have absolutely no indication at present, Waqar, what their intentions are.

Okay. But that option is now exercisable, is that correct?

That is correct and it's articulated in the Q.

Yes, thank you very much.

All right, everybody. Thank you for your time and if you have any questions feel free to call Amy Roddy or me.

That does conclude our call. We appreciate your participation.