Transocean Ltd (RIG) 2010 Q4 法說會逐字稿

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

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

Good morning and welcome to Transocean's fourth-quarter and full-year 2010 earnings conference call. A copy of the fourth-quarter press release covering our financial results, along with supporting statements and schedules, is posted on the Company's website at deepwater.com.

We have also posted a file containing 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, first, average contracted day rate by rig type, out-of-service rig months, operating and maintenance cost trends, and finally, 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 intangible revenues.

Join me on this morning's call are Steven Newman, our Chief Executive Officer; Ricardo Rosa, Senior Vice President and Chief Financial Officer; Ihab Toma, Executive Vice President of Global Business; 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 companies 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 letters 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 materials, including the most directly comparable GAAP measure, and an associated reconciliation on our website at deepwater.com under Investor Relations, Quarterly Toolkit, and non-GAAP Financial Measures and Reconciliations.

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

Thanks, Greg. Hello, everyone, and thank you for joining us today. Our reported fourth-quarter earnings were a net loss of $2.51 per diluted share. After adjusting for the items highlighted in our press release, diluted earnings per share would have been $0.68.

Before I turn the call over to Ricardo to provide some additional insight into the fourth-quarter numbers and our guidance for 2011, I want to make a couple of comments on 2010 and the Company and our business.

During 2010 our company faced unprecedented challenges and I want to thank our employees and our shareholders for their unwavering support, their commitment to our company, and their compassion for their colleagues. Our internal investigation into the events of the Macondo tragedy is nearing completion. However, in light of continuing delays in obtaining information on the third-party testing of the Horizon's BOP, we expect to release the findings of our investigation in the next month or two.

We continue to work closely with our customers to help insure the industry benefits from the lessons learned from this tragedy and then implements any necessary improvements to ensure this doesn't happen again. Improved safety is the best way we can honor the memories of those we lost last April. As we look forward, we also honor our commitment to never forget the events of the past.

As the industry moves forward following Macondo there is, understandably, increased scrutiny on all aspects of drilling operations, including the performance and reliability of well control equipment. While we believe that our subsea equipment on the Horizon functioned as designed, we have adopted an enhanced approach to maintaining and operating well control equipment, particularly subsea BOPs on our floating rigs. We have implemented more extensive between-wells maintenance and we are stress testing our subsea BOPs to new levels before they are deployed on each new location.

In the short term this is resulting in some incremental out-of-service time and also impacting our revenue efficiency. In the fourth quarter our revenue efficiency was 91%, excluding an adjustment for a customer dispute, compared with 92% in the third quarter and 92% for the full year.

In my view, our revenue efficiency has been disappointing. We are taking concrete steps to increase revenue efficiency by improving personnel competency through training, development, and assessment programs and equipment reliability through rigorous, standardized maintenance tasks, as well as adding more robust operating procedures to equip our crews with the knowledge, skills, and competency to carry out safe and efficient operations.

In our India and Middle East division, where we began implementing our enhanced approach in the second quarter of last year, we saw measurable results in the fourth quarter where this division delivered revenue efficiency of 97%. As we roll out this enhanced approach across the Company I expect our revenue efficiency in 2011 to return to normal historical levels.

At our recent Board meeting the Board of Directors recommended our shareholders vote to rescind the $1 billion 2010 distribution by way of a par value reduction. Contingent on the cancellation of the 2010 distribution, the Board has recommended a 2011 dividend of approximately $1 billion paid out of additional paid in capital in four quarterly installments of approximately $250 million. This approach recognizes the uncertainties and difficulties associated with the legal challenges we have encountered in registering the par value reduction.

The shareholders will vote on this proposal at our upcoming annual general meeting in May and, if approved, we expect to be able to make the first quarterly payment of approximately $250 million in June. As a reminder, there was a change in tax law at the beginning of 2011 which makes these dividends out of additional paid in capital free of Swiss withholding tax. Also, unlike a distribution via a reduction in par value, a dividend out of APIC does not require regulatory approval.

This recommendation reflects the Board's focus on returning value to shareholders and our disciplined approach to capital management.

As further evidence of our disciplined approach, we recently announced the construction of two new Super B Class high-specification jackups to be built at Keppel FELS Singapore yard backed by long-term contracts with Chevron in Thailand. Our ability to secure contract-supported, value-creating reinvestment opportunities stands us in clear contrast to our peers who have recently been reinvesting on spec.

I think speculative additions to industry capacity negatively affect market sentiment and long-term industry fundamentals. Our ability to secure firm contracts to support profitable reinvestment in our business speaks to the strength of our customer relationships and the disciplined approach we take to managing our capital.

We are also actively involved in efforts to dispose of some of our low-spec and non-strategic rigs. These efforts, coupled with our reinvestment deals, are a direct result of our strategy to reduce our exposure to low end commodity assets, both jackups and floaters, and reinvest in high-specification rigs. This strategy will enable us to continue to lead our industry going forward, just as we have for the last several years.

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. As Steven has already highlighted, we reported a net loss of $799 million, or $2.51 per diluted share, in the fourth quarter of 2010. This compares with net income of $368 million or $1.15 per diluted share earned last quarter.

Fourth-quarter results include three items highlighted in our press release, the most significant of which was an impairment charge that reduced the carrying value of our standard jackups by about $1 billion. Excluding these items, fourth-quarter net income was $218 million, equivalent to $0.68 per diluted share, compared to $411 million, or $1.28 per diluted share, earned in the third quarter.

At $0.68 per diluted share we missed the Street's fourth-quarter consensus of $0.92 per diluted share, primarily due to a $52 million provision related to a customer dispute in the US Gulf of Mexico.

As we indicated in our public filings, we regularly test for possible impairments of our long-lived assets. US GAAP requires us to conduct impairment tests of our long-lived assets by asset group if we identify indicators of impairment, such as unfavorable changes in our outlook for day rates and utilization. The test resulted in an impairment that affected only standard jackups acquired in the merger with GlobalSantaFe, which were revalued in 2007 under purchase accounting guidelines.

Adjusted fourth-quarter earnings were $193 million below the third quarter due to $149 million reduction in revenues combined with a $139 million increase in operating and maintenance expense. These adverse variances were partially offset by a reduction in income taxes which I will discuss momentarily.

The largest factor causing the $149 million decline in the fourth-quarter revenues was a $90 million decrease in rig utilization. Lower utilization occurred as six rigs were idled during the quarter due to a lack of customer drilling programs immediately following completed contracts and three additional rigs were called back. This was compounded by reduced revenue from shipyard out-of-service time, primarily from the Paul B. Loyd, the Deepwater Navigator, and the Jack Ryan, with a $41 million adverse revenue impact compared to the prior quarter.

Also impacting revenue in the quarter was a $52 million provision resulting from a customer dispute associated with standby activity in the Gulf of Mexico. This provision adversely impacted the overall revenue efficiency for the fourth quarter reducing it from 91% to 89%. These variances from contract drilling were partly offset by increased drilling management services revenue of $44 million.

The $139 million increase in operating and maintenance expense compared to the third quarter resulted from a $73 million increase in costs, mainly related to the Paul B. Loyd and the Deepwater Navigator shipyards. In addition, there was a $34 million increase in general non-shipyard maintenance costs across the fleet as various projects were completed before year-end. Lastly, there was a $35 million increase in expenses due to the improvements in drilling management services activity in the quarter.

Macondo well-related legal, insurance, and investigation expenses, net of insurance recoveries, were $28 million in the fourth quarter giving a total of $137 million for 2010. Macondo-related expenses came in $33 million lower than projected for the year, largely due to expected insurance recoveries and the timing of legal fees.

Operating and maintenance expenses in 2011 are expected to range between $5.4 billion and $5.7 billion and include $100 million in projected Macondo well-related costs. Total expenses are projected to increase as a result of newbuild ultra-deepwater rigs that commenced operations during 2010 or will commence operations in 2011. We expect these increases to be offset by cost savings from stacked rigs.

Shipyard expenses are projected to increase by $200 million to $260 million compared with 2010. These increases will significantly impact the first and second quarters of 2011 and relate primarily to the Sedco Energy, the Deepwater Navigator, the Deepwater Discovery, and the Falcon 100 shipyard projects as detailed in chart two on our website and in our fleet status report.

In addition, wage inflation driven in part by newbuilds entering the market has been factored into our cost projections. We also intend to increase investments in retention, recruitment and training. General inflationary pressures during 2011 are also expected to increase other operating and maintenance expenses.

Other revenues for 2011 are projected at $500 million. The costs associated with this low-margin other revenue category are estimated to be $450 million in 2011 and are included in the operating and maintenance expense range of $5.4 billion to $5.7 billion.

The low-end of the range assumes that inflationary pressures, especially wage inflation, will not exceed what we have included in our guidance and are offset by other savings. At the top end of the range we have assumed that all proposed incremental shipyards will take place, all identified reactivations will occur, and inflation will exceed budgeted projections.

General and administrative expenses for 2011 are projected to range between $245 million and $255 million, in line with 2010. Depreciation will range between $1.5 billion and $1.6 billion for 2011. Total depreciation is expected to be more or less flat for 2010 because $160 million decrease in depreciation as a consequence of the impairment for the carrying value of the standard jackups will be largely offset by increased depreciation related to newbuild rigs which entered service in 2010 or will enter service in 2011.

Capital expenditures in the fourth quarter were $428 million, up $124 million compared to the third quarter reflecting the investment in the newbuild Transocean [Honor]. Capital expenditures for 2011 are projected to be $1.1 billion with about $450 million relating to newbuild construction costs and associated capitalized interests, and the remaining $650 million for expenditures on the existing fleet.

Interest expense net of capitalized interest is expected to range from $570 billion to $590 million and will be higher than 2010 as a consequence of lower capitalized interest from rig construction activity and the full-year impact of the $2 billion in senior notes issued in September 2010.

The annual effective tax rate for the fourth quarter and total year 2010 benefited mainly from the relocation in the quarter of certain rigs. Rig relocation with similar tax impacts are not expected to re-occur in 2011. As a result, we estimate that the annual effective tax rate in 2011 will range from 17% to 19%.

Achieving the lower end of the range will be dependent on activity level and the mix of jurisdictions in which the activity occurred.

Net income attributable to non-controlling interests is projected to increase from $27 million in 2010 to about $90 million in 2011 as the three newbuild drillships owned by joint ventures will be active throughout the year. We expect to continue generating positive cash flow in 2011 as we monetize part of our firm free cash flow backlog and incur lower capital expenditures as the ultra-deepwater newbuild construction program is virtually complete with nine of the 10 units on contract.

We have repaid the Series A convertible senior notes in December 2010 and expect to utilize part of our 2011 cash flow to repay the outstanding Series B notes in December 2011. We have also developed a capital structure strategy with the primary objective over time of achieving and maintaining a high B investment grade rating while reinvesting in value-creating growth opportunities over the business cycle and returning cash to shareholders in a sustained and disciplined fashion.

In pursuit of this strategy we are targeting over time a range of gross debt between $7 billion and $9 billion. Our current priorities are to reinvest in the business, maintain between $2 billion and $3 billion in cash on hand, reduced gross debt, and return excess cash to shareholders in the form of a regular dividend and, when appropriate, repurchase shares.

With that I will now hand over to Terry to provide you some insight into the market.

Thanks, Ricardo, and good morning to everyone. Before I cover specific markets I would like to make a few general comments. Contracting in the ultra-deepwater market over the past quarter resulted in several short-term awards, while we await the outcome of some outstanding long-term tenders in Brazil, West Africa, and the Far East that we expect to be awarded by mid-2011.

Tendering pace remains active with some short-term projects expected to start up in the next six months. We expect this pace to continue with the commodity pricing approaching $100 a barrel. Contracting activity in the deepwater market has been light but we expect to see some opportunities develop over the next few months. Challenges still remain with the overhang of ultra-deepwater capacity in the near-term, especially for the more deepwater fleets.

The midwater market continues to experience active tendering in the UK, Asia, Australia, India, and West Africa with the few short-term contracts being awarded during the past quarter. The high-spec jackup market demand continues to improve since our last earnings call resulted in anticipated demand outpacing supply of high-spec units by mid to late 2011. The market should further improve as long-term demand coming from Saudi, Mexico, Southeast Asia, India, and the UK.

Finally, we are excited to report the execution of approximately $1.8 billion of contract revenue since our last earnings call. This improvement over the previous quarters represents a very positive trend that market activity is moving in the right direction.

I will now move to the various markets and we will begin with a discussion on the ultra-deepwater market. The ultra-deepwater market has further improved with multiple contract awards taking further supply out of the market. While these awards were mainly for short-term programs, day rates have firmed up with most fixtures in the mid to high $400,000 and some over $500,000.

As a result of this positive trend, we are in advanced discussions with several customers for our only ultra-deepwater unit available in 2011. Unfortunately, despite the official lifting of the moratorium in the US Gulf of Mexico, new drilling permits have not been granted by the regulators leaving some uncertainty when activity levels in the region will return to normal. This uncertainty has resulted in further relocation of ultra-deepwater units to other operating arenas.

In Brazil, Petrobras recently announced the award of seven newbuilds from an initial tender of up to 28 units. In order to bridge the gap to the first Brazilian newbuild delivery anticipated in 2015 we believe Petrobras will take multiple units under the long-term 1,500-meter tender, which is still outstanding. Additionally, the recently announced tender for 3,000-meter capability also supports our previous comments about much-needed ultra-deepwater capacity to fulfill the demand of the pre-salt in Brazil.

We regard these tenders as a prime opportunity to further increase our market share in this important ultra-deepwater market. Continued exploration successes in the frontier oil and gas basins of Tanzania and Mozambique in East Africa and Ghana, Liberia, Sierra Leone, and Ivory Coast in the Gulf of Guinea have already resulted in furthering incremental ultra-deepwater demand offshore sub-Saharan Africa.

The combination of the incremental capacity requirements of Petrobras offshore Brazil, the anticipated increase in activity in the emerging provinces, coupled with demand in the US Gulf of Mexico which continues to accumulate during current levels of inactivity supports our optimistic view that the current oversupply is of a short-term nature. The long-term fundamentals for the already solid ultra-deepwater market remain strong.

Turning now to the deepwater market where contracting activity has been very light over the past quarter, we succeeded in securing an 11-month extension for our Sedco 702 at $364,000 in Nigeria. We continue discussions with some of our customers and believe it's only a question of time before we secure some work for our marketed deepwater units. We believe that until ultra-deepwater oversupply has been absorbed by anticipated demand the deepwater fleet, especially moored units, will continue to be challenged in the near term by the supply overhang.

In a harsh environment market we have been extremely successful in contracting our units in the last couple of months resulting in the following fixtures. Transocean Arctic for six wells plus multiple options at an average rate of $403,000; Transocean Leader for three years firm at $390,000 plus one-year option; Paul B. Loyd Jr. for 12 months firm at $345,000 plus two by three month options; Transocean Searcher for 12 months at $380,000 plus 12- or 18-month options.

Given other recent fixtures in Norway there is little near-term capacity of available except on a farm-out basis. This, in combination with Statoil's newbuild tender for up to four units, bodes well for this harsh environment market and Transocean is ideally placed to benefit from these positive developments.

Moving on to the worldwide midwater floater market, contracting activity, albeit for short-term durations, has been high, especially in the North Sea, resulting in multiple fixtures for Transocean during the last quarter. Transocean Prospect for one well at $245,000 and a further one-well option plus options program at $245,000 ; Sedco 714 for six months at $250,000; Transocean John Shaw for 180 days at $245,000; Sedco 704 for five wells at $250,000; and the GSF Rig 135 for two wells at $264,000 in Nigeria.

We are also in advanced discussions for multiple midwater units for our customers in the UK, West Africa, Asia, and Australia, and expect to capitalize on these opportunities in the near term. The positive demand picture in the midwater market is rounded off by some anticipated long-term tenders coming to market in India, which we believe we are also well-placed to capture. Caution, however, is still needed regarding the competition from the deepwater fleet and supply of midwater units available in the market.

Moving to the jackup market we see improvement in high-spec demand in Southeast Asia, West Africa, Mexico, and the North Sea, and expect this to continue through 2011. The continued strength in the high-spec market and our operational excellence in Thailand resulted in a contract award for two newbuilds, KFELS Super B units. The term of this contract is five years with firm pricing of $135,000 for the first three years and a market adjustment provision in years four and five based on a day rate floor of $135,000 and a ceiling of $160,000.

Our newly executed contracts plus the acquisition of an already existing high-spec jackup, the Transocean [Honor], reflect Transocean's commitment to renewing our jackup fleet and the strong confidence in the future of this market. Further Transocean fixtures were extension of the GSF Galveston Key for eight months plus one-year option at $103,000 in Vietnam; reactivation of the GSF Monitor for 120 days plus 100-day option at $110,000 in Nigeria.

In our actively marketed jackup fleet we have multiple high-specification standard jackups coming off contract through 2011, but based on our current contracts with our customers and the continued tendering activity, we remain optimistic that we will secure programs for most of these active units. We acknowledge the fact that customers will continue to prefer newbuild high-spec units, even from programs that cannot be executed by standard jackups due to the increased efficiency and performance capabilities of new equipment.

We believe this bifurcation of the jackup market will continue for some time until the market utilization and the day rates for high-spec jackups rise to levels that operators will return to capable standard jackups as a cost-effective solution for their standard jackup programs. We will continue to look for opportunities to reactivate our standard jackup fleet and also high-grade our fleet with profitable, newbuild opportunities on a case by case basis.

In conclusion, while we still encounter some near-term challenges in the US Gulf of Mexico, near-term oversupply in the ultra-deepwater and deepwater categories, and continued bifurcation in the jackup market, the high level of commodity price has led to increased tendering and contracting activity across most markets. We remain very positive in our long-term outlook and believe that Transocean with its unique fleet portfolio is well-placed to benefit from this improving market environment.

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

With that we are happy to open up the lines for Q&A.

(Operator Instructions) Robin Shoemaker, Citi.

Thank you. Steven, I wanted to ask you, in the last building cycle you had several other companies besides yourself who were sort of disciplined in terms of seeking contract-supported rig construction and were successful at that for the most part, including yourselves. But this time it seems like you might be the only company with that strategy.

So I know you see the same trends we all see, but is that likely to be the case this time?

Well, I will tell you, Robin, it is the case that we are going to remain disciplined in our approach to how we think about our business and how we manage our capital. So to the extent that that draws a clear distinction between ourselves and our peers, then I think you can characterize that as sustainable.

I think there are two fundamental differences between this building cycle and the last, and that is who is doing the building and who is providing the capital. In the last newbuilding cycle the folks doing the building were outsiders to our business. They were looking at the business from the outside in. They viewed this as an attractive business and wanted to deploy capital in it, and so they wanted to enter our industry. And the capital was readily available.

This time around it's existing industry participants who are doing the building, and by and large because of the attractive commercial arrangements that the shipyards are providing, they are basically financing the construction. So it really is a different feel to this newbuild cycle than the last one.

Right, okay. So my follow-up, if I could ask Terry about the tender in Brazil, the 1,500-meter water depth tender. As you indicated, you thought they would take multiple rigs under that tender. Do you have kind of a better number in mind or is that the first of perhaps several tenders in that water depth range?

Robin, I have what I believe is going to be the number of units they are taking but I think it's no better than anyone else's guess. So there is a lot of folks that believe it could be up to four to eight, but I think it's just going to have to be a wait and see as Petrobras fulfills their needs.

And I do believe there will be more tenders. But, again, we are going to have to wait and see how Petrobras places. They are very clever about going about their strategy of contracting rigs and I don't think this will be any different.

Okay, thank you.

Angie Sedita, UBS.

Good morning. Terry, I will start with you. On the Gulf of Mexico are you hearing any change of tone regarding permitting, either positive or negative? Could you also -- 13 deepwater rigs in the Gulf of Mexico as of March I believe. How many are actually operating today versus on standby rates? And what would be your best case and base case for rigs actually operating late 2011?

Angie, that is -- hello, Angie, by the way. It's good to have you back on the call. I think as far as trying to project what is going to be operating at the end of 2011, I think that is something that is going to be difficult to predict.

Today I think we have four that are actually operating and I believe there is three more that are operating in the Gulf of Mexico. I think the sentiment by some of the customers have turned positive. I would say if you polled them I would say that there are those that have moved to the positive category, but there are some that feel like they still need to take their rigs back out of the Gulf of Mexico until they are feeling more positive.

And we may actually be moving one out here shortly. I would rather not say which one it is because it hasn't been firmed up, but we are in discussions about one particular unit.

Okay, that is helpful. Then, Steven, you mentioned that you may or you are looking to dispose some of your low-end jack ups. How many rigs could be up for consideration? And I would assume this would be a consideration for a sale.

Yes, it's difficult to be crisp because we look at them as asset by asset or in small packages. We have segmented our fleet between those rigs that we characterize as long-term core assets and those rigs that are not long-term core assets. But simply because a rig falls into that category of being not long-term or not core doesn't mean we are necessarily going to rush to the auction block to get rid of it.

So we look at our fleet like that. We have active discussions ongoing with potential buyers looking at them on individual asset basis or in some cases packages of assets where you could think about Transocean selling a going concern type business. Strong relationships with the customers in that particular area, a mix of operating rigs and stacked rigs so you get some immediate cash flow, and near-term upside through possibility of reactivation.

All right, okay. And then finally, as Robin indicated, you guys have been the standout here as to sticking to having contracts before building. Are you in any conversations today for building ultra-deepwater rigs for contracts?

Angie, we are always in conversations about possibilities and the best way for Transocean to meet the needs of our customers. So we don't necessarily take anything off the table as part of those expansive conversations that Terry and her folks have with our customers.

Greg just wants to make a couple of comments here about your previous question, Angie.

Hi, Angie. I just wanted to add a little bit to Terry's earlier comments. While it is true that we have maybe four rigs or so actually conducting operations in the Gulf of Mexico, most of the rigs in the Gulf of Mexico that are on standby rate are still generating rates that are pretty close to their contracted day rate. It's only a couple of rigs that have special standby rates that are significantly below the contracted day rate.

Right, fair. That is certainly well aware, just curious how many were actually working. Thanks, though.

I just wanted to make sure that was clear.

Great.

Collin Gerry, Raymond James.

Good morning. So I guess I want to follow-up on the newbuild conversation as well. Could you remind us what with the thresholds, whether it be from a rate of return or percentage of the newbuild costs, that you would get with the contract that you require when you are looking at either jackups or floaters? Is it a hard-and-fast rule or is it a little softer?

It's not hard and fast. We have a definite starting point and when we talk about an ultra-deepwater floater, Collin, we set an initial expectation of 80% simple payback in the first five-year firm term contract.

So we will negotiate off that. We have accepted as low as 60% in three years in the past, but our starting point is 80% over five years. That is on an ultra-deepwater floater but it's indicative when we think about jackups -- though in the case of the jackup we would look at the full life of asset internal rate of return.

So these are 35-year economic models. And if -- like the case of the Chevron Thailand rigs where we got a five-year firm contract, we are modeling out 30 years to identify the full life of asset internal rate of return to make sure that that exceeds our cost of capital.

Perfect, that is very helpful. And you spent some time on the revenue efficiency, seems to be a pretty big push internally within Transocean. I wonder if maybe you could outline -- is there a certain class of asset or maybe a geography that stands out within that context?

Also, I am afraid I know the answer to this question already, but any chance you could quantify maybe what that means in terms of dollars and revenues if you do get back up to the levels you are hoping?

Let me take the first part of your question first. You know, I talked during my prepared comments about the initial efforts we made in our India and Middle East operation and that was as a result of some particularly acute issues, both in terms of our performance and in terms of the relationship with our customers there.

So we tended to focus initially on the India and Middle East. But it did provide an excellent proving ground for the strategy we are adopting, the actual tasks we are implementing and I think it highlighted what is possible when we get focused on it.

So I am encouraged by the fact that our worldwide management team is now focused on this and I am optimistic that we are going to see some measurable results in 2011. Now I am going to shy away from giving you specific, quantifiable outcomes, other than to reiterate what I said in my opening comments which is over the course of 2011 we expect to return our revenue efficiencies to historical levels. And I think we do a good job of disclosing over time what our performance has been and so you can look at what our historical performance has been and figure out what it will look like when we get back to that level.

All right, thanks. Appreciate it. That is it for me.

Mike Urban, Deutsche Bank.

Thanks, good morning. Wanted to keep going on the popular theme today of contracts, or lack thereof, on newbuilds.

So certainly commend you guys for staying disciplined. It's pretty clear that on the deepwater side, at least at this point, you wouldn't be building a rig unless it's against contract. Then, of course, you have done a good job on the jackup side with the Chevron rigs.

Would you rule out building any rig on spec including in the jackup market, or is that a little bit different animal just because of the nature of that market?

I think it would fundamentally go against our historical discipline. We have, for a long time, prided ourselves on the disciplined approach we take to managing our capital and thinking about our business. As you and Robin and Angie have pointed out, it does stand us in stark contrast to our peers but we think that is the right way to manage our business.

This is, at the end of the day, Mike, this is a supply and demand business, and we just don't think it is good industry behavior to add to capacity on a speculative basis.

I would tend to agree. Now does that then necessarily -- I know you don't necessarily have a target, per se, in terms of your mix of assets, but would that, just given the age of the jackup relative to the floater fleet, given that it's probably less likely to get a contract on a jackup newbuild versus a floater newbuild, would that tend to push you more in favor of the -- from a mix perspective to the floater side as we go forward here?

I think for the last several years folks have said it would be impossible to build a jackup to a contract, and yet our marketing people have proven that it is possible. I think it's something we will continue to focus on and continue to strive for opportunities to do that.

I don't think that the challenge of securing an opportunity to build a jackup to a firm contract necessarily sways us in the direction of focusing only on reinvestment opportunities in our floater business. We are going to remain focused on being a high-spec driller, both jackups and floaters.

Okay. That is all for me, thank you.

Scott Gruber, Bernstein.

Good morning. The vast majority of floaters that have been ordered recently have been drillships. I think there has only been one semi that has been ordered recently. What does this suggest about the demand for the semis?

There has been this expectation that rates for the moored semis bifurcate from the DP units, but could we also see a bit of a spread between the deepwater DP semi rigs and the drillship rates as the demand seems to be concentrated on the drillship side?

I think the recent decisions on the part of the industry participants to invest in drillships is more, I think, focused on ensuring that to the extent that it's a speculative asset that there is as much flexibility from an operational perspective as possible. So drillships just offer a little bit more flexibility in terms of the ability to move from one location to the next, the ability to operate in remote environments because of the significant deck load capacity. It's just a more versatile animal than a semi-submersible.

I don't think that necessarily means that the demand is going to be focused, biased towards drillships. I just think that is the way, that is the vehicle that the contractors are choosing to invest in for flexibility reasons.

Okay, that makes sense. Beyond selling some of the jackups do some of your midwater floaters also fit into the non-core category at this point and potentially be up for sale as well?

Yes, we have even got deepwater assets that today we would characterize as non-strategic or non-core, and if we found the right value proposition we would consider selling those as well. So that characterization of non-core, non-strategic assets really spans the asset classes with the exception of ultra-deepwater.

Okay, great. I will turn it back. Thanks.

Joe Hill, Tudor Pickerington Holt.

Good morning. Steve, just following up on the last question, what characteristics in the deepwater space would you characterize as defining non-core?

Age, capability, technical outfitting, survey class, status. If a rig is coming up against a significant shipyard to enable it to work the next five years, we might consider that investment, the size of that investment to be uneconomic to us, not attractive to us. And that would shift an asset into the non-core category.

Okay. Under the technical capability side what specifically are you thinking of?

It's generally going to be things around pit capacity, combinations of quarters capacity, variable deck load, hook load, things like that.

Okay, great. Terry talked a bit about day rates in the ultra-deep space being in the mid to high $400,000, maybe some over $500,000. Feels like that market is starting to firm up a little bit. Saw last night Noble's Jim Day got a pretty nice rate at $45,000 before bonus.

Curious as to why you think we are seeing things firm up a bit given the magnitude of uncontracted newbuild capacity coming to market?

Joe, I think if you look at what is available in the market today and that the availability is shrinking very quickly. Then also you have the outstanding tenders and the ability for Petrobras to take a significant portion of 2011 availability. And I think that the pendulum has swung because the customers are now saying, well, you know what, we need to push some of this demand out there and let's move to contracting. And I think that that is what we are seeing.

I think that the urgency has now started moving in the right direction. So there is more conversation, there seems to be a bit more demand, now not long-term at the moment. But with the expectation that Petrobras will take off some of this supply I think there has been an improvement in urgency with our other customers.

Okay. So this is more perceptual than anything else at this point?

I would say it could be really real here in the next couple of months.

Okay. Last, just to quickly follow-up here, have shipyards slot prices begun moving up yet?

We haven't really asked a shipyard for a price in the recent past so it's difficult for me to give you a definitive answer on that. My sense is that with the pace of newbuilding announcements that have materialized in the last three or four months it wouldn't surprise me if shipyard pricing starts to move.

Okay. That does it for me. Thanks, guys.

Geoff Kieburtz, Weeden & Co.

Thanks very much. Just a follow-up Joe's question there. I think we have got shipyard pricing. We also, as you mentioned, have shipyard financing. If we were going to see the shipyard start to tighten up, would you expect that it would be outright cost that moves first or would you start to first see changes in their willingness to finance these projects?

Jeff, I haven't spent a lot of time looking at the shipyard balance sheet, so I am not sure just exactly what kind of capacity they have in terms of capital and financing. My sense is that they can move pricing pretty easily and the commercial arrangement is almost entirely up to them. It's a shipyard market right now, so trying to handicap which one of those they would move first I am just not sure.

Okay. And a second question, clarification on the revenue efficiency comment you made. Wasn't quite clear whether -- take the Middle East India segment as an example perhaps, but how much of this initiative you are undertaking is a response to Macondo versus addressing issues that were existing independent of Macondo?

There is obviously a Macondo component to it. As I alluded to in my comments, there is increased scrutiny on well operations in general but probably more particularly on well control equipment. So some of what we are doing around -- between standardized between-wells maintenance and rigorous pre-deployment testing and stress testing and pre-deployment checks, part of that is clearly in response to Macondo.

But our deteriorating revenue efficiency trend predates Macondo. So some of this has been in process since before April 20 of last year.

And the key drivers of that, let's say, pre-existing trend in your mind is it predominately training and personnel related or is it predominately equipment, or can you really say?

I don't think the split between those two is meaningful in one direction or the other. We are trying to address personnel competency so going through a comprehensive program of training and development and formalized competency assessment, and greater emphasis and greater focus on equipment reliability. Our approach is really two-pronged in that respect.

Okay, thank you.

Kurt Hallead, RBC Capital Markets.

Good morning or good afternoon, I guess where you are. Just wanted to follow-up first on the -- when you look at those jackup contracts I am think, as you guys are pretty well aware, the investor base thought that they offered very low returns. And I heard your comment earlier about projecting it out over 30 years and give you better than cost of capital type return.

In that context, with a hurdle rate of better than 11% do those jackups and your calculations give you kind of a mid-teens kind of return or more like a low teens kind of return?

The way we evaluate our cost of capital we think we are in the range of 10%. When we model the 35-year economic life of the jackups that we have just invested in, the returns over that 35-year period are in excess of that cost of capital. And so what we are looking at when we build a model like that is what is our base case expectation.

When you model that out 30 years there is significant upside depending on the direction about your day rates. And we think that over time the reliance on new equipment is going to increase. Our customers are showing a clear preference for the capability, the efficiency, and the performance of that kind of equipment.

And so while the five-year firm term of the contract gives you that portion of the return, we think the out 30 years provide significant upside.

Okay. And then as a follow-up, Terry, your comment I thought there in terms of the sense of urgency was actually very bullish in the context of it potentially coming here in the next couple of months. In your prepared remarks you had referenced day rates in the mid to high $400,000s and even some exceeding $500,000 a day.

Do you think that $500,000 a day is going to become more the norm? Do you think that is possible that we are going to cross over to that point here in 2011 or do you think that is more likely a 2012 type event?

Well, we have already seen some short-term fixtures over $500,000. Now they were in harsh environment areas so I think it's going to be difficult to predict just when this occurs and when it becomes the norm, other than to say it again it's a supply/demand picture. And if it plays out again that Petrobras takes more off the market, then I think you will see it.

And I think also we are in discussions about demand that hasn't been put on the table so we have a little bit closer view to the customer than I think is known in the market today. So that is why the comment may sound a little bit bullish. But I do believe that the fundamentals have improved and that again we are going to wait and see what Petrobras has to say, and I think this is going to happen quickly.

I think they are going to have this tender done in March and that they will be able to contract these rigs fairly quickly. So that is why I say that it could be the next couple of months that we will see a change.

Okay. And then, Steven, just your comment about this planned use of capital. So despite your competitors' lack of discipline on use of capital, you are still very optimistic about the supply/demand balance for deepwater rigs going forward. Is that a fair assessment?

Yes, I mean you can always take things to illogical extremes, Kurt. If the pace continues at what it has been over the last four months, as I said in my comments, that tends to change market sentiment and it will have an impact on long-term industry fundamentals.

Now we believe today in the long-term industry fundamentals, but we recognize we are in a supply and demand business and we are hopeful that the industry can be collectively disciplined about managing supply.

Great. Thank you.

Jud Bailey, Jefferies & Co.

Thanks. Good afternoon to you. A follow-up on some of the comments regarding just the deepwater market and the midwater market. It sounds like those two segments are making slow improvement.

Terry, do you think that we could see some of the rigs that are currently idle, could those potentially be reactivated maybe in 2011 or would we push that off into 2012?

Jud, I think that again it's going to depend on how quickly the ultra-deepwater capacity is taken off the market because we are having some push down. As you know, we are also having some push down from the deepwater market into the midwater market.

I think things are going you have to tighten up a bit before we see some reactivation of cold-stacked rigs. But again I am hopeful that with this increase in demand that we will be able to put some of the idle capacity back to work.

Okay. Then my follow-up is we have seen from various companies rigs have gone cold stacked, not because -- after they roll off a contract. It was more because they required significant capital expenditures to remain active and marketable, and so they have elected to stack those rigs.

Coming up this year or next are there any rigs in your fleet that many we don't know about that we need to be aware of that may require some substantial survey work or something of that nature where there is more a risk of it being idle than what we would believe right now?

Jud, there may be one or two but I am not sure that it's material and I am not sure I want to tip our hand quite yet.

Understood. Okay, thanks, guys.

Ian Macpherson, Simmons & Co.

Hi, thank you. Good morning. I wanted to circle back to earlier in the call about the cost guidance and frame it against expectations for activity levels. I know that the top end of the cost guidance assumes the maximum number of identified reactivations.

Would you be able to give us a flavor of how many reactivations are embedded within the low end of cost guidance, if any?

Ian, good morning. It's Ricardo here. Yes, we have embedded some reactivations at the low end. Can't give you the exact details, but effectively we are looking at perhaps four or five units built in to the $5.4 billion.

Okay. Then quickly, Ricardo, a follow-up for you. You said you wanted to keep $2 billion to $3 billion of cash on hand and looking back 2007, 2008, 2009 you only kept about $1 billion to $1.1 billion. Is this increase a function of the higher risk profile of the business today versus then, or why do you need $2 billion to $3 billion of cash on the balance sheet?

That is a good question, Ian. I think it's not our intent to horde cash unnecessarily, but there are additional uncertainties in the environment post Macondo and we believe it remains prudent for us to retain the flexibility to respond to new circumstances. We can look at it both in the positive as well as a negative sense and consider opportunities for growth and acquisitions. And we don't -- but we want to maintain this level to be able to face the opportunities and uncertainties out there without putting any strain on our balance sheet.

Got it. Okay, thank you.

That concludes our question-and-answer session for today.

Thank you. We will talk to you all again next quarter.

Thanks, everybody.

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