Transocean Ltd (RIG) 2011 Q1 法說會逐字稿

Good day everyone. Welcome to the first-quarter 2011 results conference call for Transocean Ltd. Today's conference is being recorded. At this time for opening remarks and introductions I will turn the conference over to Mr. Gregory Panagos, Vice President of Investor Relations and Communications. Please go ahead, sir.

Thank you, Anna. Good morning and welcome to Transocean's first-quarter 2011 earnings conference call. A copy of the first-quarter press release covering our financial results, along with supporting statements and schedules, is posted on the Company's website at deepwater.com.

We 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 dayrate by rig type, out-of-service rig months, operating and maintenance cost trends, free cash flow backlog and debt maturities.

The quarterly toolkit also has four additional financial tables for your convenience covering, first, revenue efficiency, then other revenue details, daily operating and maintenance costs by rig type and contract intangible revenues.

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

Before I turn the call over to Steven, I would like to point out that during the course of this conference call participants may make certain forward-looking statements regarding various matters related to our business and Company that are not historical facts, including future financial performance, operating results and the prospects for the contract drilling business.

As you know, it is inherently difficult to make projections or other forward-looking statements in a cyclical industry since the risks, assumptions and uncertainties involved in these forward-looking statements include the level of crude oil and natural gas prices, rig demand and operational and other risks, which are described in the Company's most recent Form 10-K and other filings with the US Securities and Exchange Commission.

Should one or more of these risks and uncertainties materialize, or underlying assumptions prove incorrect, actual results may vary materially from those indicated.

Also note that we may use various numerical measures on the call today that are or may be considered non-GAAP financial measures under Regulation G. As I indicated earlier, you'll find the required supplemental financial disclosure for these measures, 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. I will now turn the call over to Stephen.

Thanks, Greg. Hello, everyone, and thank you for joining us today. Our reported first-quarter earnings were $0.96 per diluted share. After adjusting for discontinued operations and the other items noted in our press release, diluted earnings per share would have been $0.53. This compared to $0.67 for the fourth quarter of 2010.

Adjusted earnings per share were down $0.14 sequentially, primarily driven by an increase in our effective tax rate, partially offset by lower depreciation and increased interest income.

Revenues and costs, with the exception of depreciation, were essentially flat quarter to quarter.

Ricardo will walk you through the change in our effective tax rate and the details of our financial results shortly, followed by Terry who will provide some color on the market. First, though, I want to make a few comments.

Looking at the market globally sustained high crude oil prices are contributing to increased interest across all rig categories. During the first quarter we were pleased to see this increased interest manifest itself in our ability to sign $2.5 billion worth of contracts, which Terry will talk more about shortly.

Driven primarily by Petrobras' urgency to fulfill their immediate needs, along with increased tendering activity globally, we are beginning to see the near-term availability of ultra-deepwater rigs diminish. It is also very encouraging to see that we are already discussing contracts that would commence in 2012 and beyond.

The deepwater and midwater markets, which have been soft until recently, are beginning to show signs of a pickup in the second half of this year. While the deepwater market may be in the earlier stages of its ramp up, midwater tendering pace is noticeably accelerating.

As the supply tightens in both the ultra-deepwater and midwater markets, we expect to see the deepwater market follow suit and tighten as well. This dynamic should lead to increasing day rates as we move into 2012.

On the jackup side, strong demand for high-spec units continues. At the same time, the limited supply of such rigs relative to increasing visible demand indicates that standard jackups should begin to see more opportunities as well.

During our last quarter call I talked about our disappointing revenue efficiency. Our reported revenue efficiency in the first quarter was 90%, slightly higher than the 88.7% we reported in the fourth quarter of 2010. However, fourth-quarter efficiency was understated by 2.3% because of a customer dispute.

During the first quarter all rig categories performed at or above our expectations and historic levels in terms of revenue efficiency, with the exception of our ultra-deepwater and deepwater rigs.

While more work needs to be done, and it will take time to get where we need to be, I believe we have turned the corner and are beginning to see some improvement in this important area. If we continue making progress I think we will be back to normal levels by the end of this year.

To do this we are focused on a comprehensive program of equipment reliability which involves thorough inspections by Transocean and third-party experts to understand the baseline condition of the equipment, standardized maintenance plans to ensure the equipment meets Transocean's high standards, and regular testing to make certain the equipment performs as required.

Our India and Middle East division, where this program began in mid-2010 continues to report excellent results, proving that our program can deliver sustainable results globally.

Recognizing the critical role our subsea equipment vendors play in providing us with quality equipment in a timely manner, we have also taken a significant step in placing Transocean personnel in over 45 vendor facilities around the world, assisting our vendors with demand planning and quality control in order to help them cope with an unprecedented surge in activity.

I continue to believe that our internal focus on equipment reliability, along with the enhanced external support we are providing to our vendors, will deliver improved revenue efficiency results during 2011 and beyond.

I also want to talk about our continued efforts to optimize the competitive makeup of our fleet by disposing of non-core rigs and adding new, high-spec floaters and jackups. We have just completed our 10-rig ultra-deepwater newbuild program, and I am pleased with our continued leadership position in that market.

We currently have three high-spec jackups under construction, demonstrating our commitment to invest in a disciplined manner in that component of our fleet as well. Our world-class fleet, combined with the operating strength and expertise of our people, puts us in a competitive position that is second to none.

Disposing of non-core assets could take the form of one-off asset sales, as you have seen us do with the Tident 20 and the Mercury, or transactions involving packages of assets. While I cannot commit to a timeframe for any possible actions, we will continue to explore all possibilities.

We recently filed a supplement to our proxy, updating you on some potential political and legal challenges to the Swiss tax laws governing dividends out of APIC. As we indicate in the supplemental information, while we believe that the possibility of these challenges could affect the tax withholding status of our planned 2011 dividend is remote, we want to be sure our shareholders are aware of any potential challenges to the dividend no matter how remote the possibilities may be.

What, if any, impact these potential challenges may have on our future cash distribution in 2012 and beyond is too difficult to speculate on right now. We will continue to monitor the situation and work to preserve our ability to return cash to our shareholders in as flexible and tax efficient manner as possible.

Regarding Macondo, we recently honored the lost men and their families at a memorial service held on the first anniversary of the accident. We continue to make progress on our internal investigation, though we are currently awaiting the results of further testing of the Deepwater Horizon's BOP to incorporate into our findings.

Delays in these results will affect the timing of our report, which we now expect to release in June, assuming that the additional BOP testing data is made available soon.

The Coast Guard recently released their internal report, which was critical of all parties involved with the Macondo well. Specifically it was critical of Transocean in three respects -- the material condition of the Deepwater Horizon and emergency preparedness, the vessel's dual command organization, and our safety management systems.

It is important to note that the Coast Guard had inspected the Deepwater Horizon only seven months before the accident, and at the time of the accident the rig was in compliance with all applicable Coast Guard regulations. I think it is also significant that none of the criticisms in the Coast Guard report are related to the cause of the explosion, nor do they point to negligence or gross negligence.

In addition, directly contradicting speculation regarding our internal emergency response and safety management systems, is the fact that 115 out of 126 crew members survived the accident.

In keeping with the court's deadline for filing claims related to the Macondo incident, on April 20 affiliates of the BP and others filed claims against the Company for costs associated with the Macondo oil spill. And we also file claims against BP and other parties to enforce our indemnification rights.

These filings were in response to the court's deadline that all claims must be submitted by April 20 or claimants lose their right to sue. Although we are disappointed at the prospect of legal action with an important customer like BP, the claims by BP and others were expected. I want to assure you that we remain confident in our belief that the costs associated with the Macondo well incident are the responsibility of BP, and nothing in recent investigations has changed that belief. We fully expect BP to honor its agreement and meet its contractual indemnification obligations as spelled out in the BP Deepwater Horizon contract.

Lastly, I would like to thank the 18,000 plus Transocean employees for their dedication and hard work, maintaining our focus on constantly improving our performance. With this great team, as well as a world-class fleet, Transocean remains uniquely positioned to continue to lead the offshore drilling industry.

With that, I will turn the call over to Ricardo to take you through the numbers.

Thank you, Steven, and hello everyone. As Steven has mentioned, we reported net income of $310 million or $0.96 per diluted share for the first quarter of 2011. Excluding the four items highlighted in our press release, which I will discuss in more detail, first-quarter net income was $0.53 per diluted share compared to $0.67 per diluted share for the fourth quarter of 2010.

Compared to the prior quarter, adjusted first-quarter 2011 results were generally flat with a few exceptions. Our annual effective tax rate of 19.3% mainly reflects the change in the mix of operating locations. In addition, we recognized a tax benefit in the fourth quarter of 2010, which was the result of the redeployment of certain rigs.

The change in the annual effective tax rate alone, which totaled $88 million, accounted for a $0.28 drop in adjusted earnings per share in the first quarter.

Partially offsetting the higher annual effective tax rate was a $27 million decrease in depreciation due to the impact of the prior-quarter impairment charge against the carrying value of the standard jackup fleet.

As highlighted in our press release, and in line with our continuing efforts to dispose of nonstrategic assets, we have classified as discontinued operations the oil and gas properties of Challenger Minerals, our exploration and production business, as well as our Caspian Sea contract drilling operations.

The $176 million of income generated by these operations in the quarter was due almost entirely to the gain on sale of the subsidiary owning the Trident 20, our sole rig operating in the Caspian Sea.

We expect to close on the sale of the Challenger Minerals properties in the second half of this year. We do not expect recurring net income in future quarters to be significantly impacted by the disposal of these operations.

Contract drilling revenues decreased $59 million from the prior quarter due to lower utilization levels, mainly impacting deepwater and midwater floaters. Lower utilization was due to higher shipyard time, in particular for the Prospect and Falcon 100, the stacking of the Sovereign Explorer in Richardson, and some unplanned downtime impacting the Sedco 702 and 706.

Rig time in shipyard increased by 10 months compared to the previous quarter. The increase was almost entirely due to reactivation work on jackups, approximately six months, and about four months of new contract prep work on floaters.

A $75 million improvement in revenues from drilling management services more than offset the decline in contract drilling. The increased costs in this low-margin business offset declining costs in contract drilling and resulted in higher operating and maintenance expenses in the quarter.

Our guidance for 2011 operating and maintenance expenses remains unchanged at between $5.4 billion and $5.7 billion. However, we currently expect these costs for the full year to fall at the higher end of the range, mainly as a result of increased drilling management services activity, where we expect costs to increase from $450 million to $580 million. Other revenues are expected to increase by a similar amount. Wage pressures in high-growth countries such as Brazil, and globally for certain specialized positions offshore. Adverse foreign exchange movements due to continued weakening of the US dollar. And most significantly, increases in estimated time and expenditures and shipyards mainly in the second quarter, as reflected in the updated chart 2 of our website toolkit.

The 14 rig month increase in out-of-service time during the second quarter compared to our previous second-quarter estimate is partly driven by the reactivation and contract preparation activities that I highlighted earlier. It is also partly impacted by delays encountered in obtaining NTL-05 or similar precertifications of subsea control systems from capacity constrained vendors, and stringent industry expectations with respect to equipment conditions.

In short, while we expect to move toward the upper end of our operating cost guidance range, much of the increase is positive longer-term, because it reflects increased drilling activity and reactivations.

Macondo well-related expenses at $23 million, net of insurance recoveries, incurred during the first quarter were slightly below the prior quarter. And our guidance for these expenses remains unchanged at $100 million for the year.

Our 2011 guidance for capital expenditures remains unchanged at $1.1 billion. Net interest expense is expected to remain unchanged at $570 million to $590 million, but we have revised our forecast annual effective tax rate upward from the 17% to 19% range, to the 19% to 21% range. This adjustment to our annual effective tax rate reflects a forecast change in the geographic mix of our income in 2011 and changes in timing of shipyards.

Operating cash flows generated in the first quarter at $390 million were $406 million lower than the previous quarter, mainly reflecting an increase in working capital with collections from customers returning to normal levels.

Our cash balance of $3.8 billion at the quarter end, combined with our projections of continued positive operating cash flows and lower capital commitments, position us well to continue executing on our capital structure strategy and reinvesting in our business.

Assuming the applicable resolutions are approved by shareholders at the annual general meeting in May, we expect to distribute in four installments $1 billion as a dividend from APIC, additional paid in capital.

We also expect to reduce our gross debt balance by approximately $1.7 billion through the repayment of the remaining Series B convertible notes, assuming there they are put to us at the end of the year.

At this point I will hand over to Terry to provide you some commentary on the state of the market.

Thanks, Ricardo, and hello to everyone. Before I cover specific markets, I would like to make a few general comments. As we stated in our previous conference call, we believe that 2011 is going to be an exciting year. It has certainly been successful thus far for Transocean from a contracting perspective, as we have executed contracts worth over $2.5 billion since the beginning of the year. And we expect more positive news to follow as we move to the next quarter.

With the additional backlog, we have reversed the downward trend that we have experienced since the fourth quarter of 2008. The tendering pace in the worldwide ultra-deepwater market over the past quarter has been brisk. Previously available ultra-deepwater units have been snatched up by customers who are anxious to secure capacity for their upcoming programs.

The rush to contact the available fleet has been nurtured by the stable and now rising commodity price, coupled with Petrobras' urgency to fulfill their immediate needs. We expect more awards to be announced shortly as the 2011 supply of ultra-deepwater units get fully committed, even in a timeframe of near-term uncertainty in the US Gulf of Mexico.

Contracting activity in the deepwater market has been light, but we expect to see more opportunities in the second half of 2011. While we are seeing some idle capacity in the near term, especially for the moored fleet, the lack of available ultra-deepwater units should improve the deepwater market going forward.

The midwater market outlook for the second half of 2011 is also positive, as tendering activity has been very high up in the UK, Asia, India and West Africa, with our available in midwater fleet being bid on multiple tenders. Demand in the high-spec jackup market continues to improve resulting in anticipated demand outpacing supply for high-spec units in the second half of 2011.

The significant demand increases recently announced in the Middle East, in addition to active tendering in Mexico, Southeast Asia and the UK, will create more opportunities for the standard jackup fleet.

I will now move to the various markets, and we will begin with a discussion on the ultra-deepwater market. The sentiment in the worldwide ultra-deepwater market has further improved, with the expectation that Petrobras is close to finalizing commitments on three ultra-deepwater units. With the other recent contracting activity in this market there is very little availability remaining for 2011, and we are barely into May.

Reflecting this positive trend, we are very close to finalizing an agreement on the Sedco Energy, our only available ultra-deepwater unit in 2011. Additionally, we executed the following fixtures since our last earnings call.

Discoverer India, five-year extension at 508,000 a day in India. Sedco Express, one well at 490,000 a day, plus another contract for 90 days at 470,000 a day in Israel. The [GSF Arctic IV], 90 days extension at [510,000] in Indonesia.

US Gulf of Mexico permitting is showing signs of improvement with the 11 permits awarded thus far and 36 permits ready to be approved. In Brazil we expect Petrobras to reach under the 1,500 meters opportunity and contract least two units. And then as the year goes on we believe that more opportunities will be pursued with their pre-salt plans.

We regard these as prime opportunities to further increase our marketshare in this important market. Our outlook is optimistic for the ultra-deepwater market, and we are now in discussions for opportunity beyond 2011, further supporting our belief in the long-term ultra-deepwater market.

Turning to the deepwater market, where contracting activity has been a bit light over the past quarter, we were able to secure a 210-day extension on the Jack Bates at 380,000 in Australia, bringing the total award for 2011 to four for the global fleet since the start of the year, and we contacted two of those fixtures.

We continue to look for opportunities to return our deepwater units to the market, and believe that the demand picture will improve for the second half of 2011.

Moving on to the worldwide midwater floater market, the tendering and contracting activity continues to be very active, resulting in two of our idle units returning to work, the Sedco 701 for one well at 210,000 in Gabon, and the Sedco 135 for five months at 264,000 in Nigeria during the last quarter. Additionally, price options have been exercised on the Transocean Prospect and the Sedco 701 in the UK.

We are also in advanced discussions on multiple midwater units with our customers in the UK, West Africa, Asia and Australia, and expect to capitalize on these opportunities shortly. We expect the positive demand picture in the midwater market to continue to provide opportunities for our midwater fleet. Available deepwater units will continue to compete in the midwater market until we see a bit more deepwater demand in the second half of 2011.

Moving to the jackup market, demand continues to build for high-spec jackups, and we expect that the contracting pace will pick up shortly with a number of active tenders being evaluated. Our discussions regarding opportunities for the Transocean Honor are encouraging, and we expect to have some positive news regarding placement of this high-spec newbuild.

We had a very active contracting period for our high-spec and standard jackups, resulting in the execution of the six contracts with rates ranging from the high 80s to the high 140s in the last quarter.

With the anticipated tightening of the high-spec fleet driven by increasing demand over the next few quarters, we expect more contracting opportunities for our standard jackups. And based on our current engagement with our customers, we remain positive about the opportunity to secure programs for our active units and to put a few of our stacked units back to work.

In conclusion, 2011 is living up to our high expectations with a robust level of commodity pricing and the increasing 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.

With that, I will turn it back to you, Steven.

Thank you. Anna, we are ready to open up the Q&A and take some questions.

The question and answer session will be conducted electronically. (Operator Instructions). Roger Read, Morgan Keegan.

As you look at this -- number one, thanks for the in-depth review of the market conditions here. I was trying to reconcile one thing. One of the other calls earlier in this earnings season there was talk of a contract tender in Brazil that they ended up pulling. The high-spec equipment bid on it, yet it was -- they were happy with a standard type deepwater rig, let's say, as opposed to ultra-deepwater.

And there were a lot of rigs that bid on that contract. I am just trying to reconcile that with what appears to be a much more tighter market as you all are looking at. Maybe it was a timing issue of when that contract began, but I am trying to put the two pieces together there.

This is Terry. The 1,500 meter tender was canceled. There were several reasons for that, but I think basically Petrobras wanted to test the market and wanted to see where the market rights were going to be offered. I believe that they thought that at this time the rates that were offered were higher than their expectation. Then there were some procedural issues also.

But just to say that they will be back in the market and we will see how they put the new tender forward. It could be a reduction in their rate. I mean -- I'm sorry, a reduction in the water depth, and maybe a reduction in capability. But we are hearing both things. We are hearing it could be a higher spec; it could be a lower spec. But again, the important thing to remember is they're going to come back out for a tender, and they're going to take two more rigs off the market.

Okay, thanks. Then the other question I had was on the operating cost side, the last conference call the range was given and it said higher end of the range, assuming you bring rigs back into the market. Obviously, that looks to be the indication here.

Is that the only thing driving -- that, and the drilling management costs, the only thing driving you to the higher range or is there anything else, other than the items you have mentioned, Brazil and so forth, that is pushing on the higher cost side?

No, Roger, I think I gave a pretty comprehensive list of the items that will impact our operating expenses. As I said earlier, it is largely as a result of the additional shipyard time and some wage pressures. We will see potentially, depending on where the rigs are deployed geographically, some cost upside, or rather cost increases, as a result of the location where they're likely to operate. But the main drivers are the ones that I mentioned in my prepared notes.

Okay, thank you.

Mike Urban, Deutsche Bank.

I wanted to dig into your comments about some of, I guess, for now divergent trends in the floater market. It makes a lot of sense that you're seeing that tightness in the ultra-deepwater market. It was a bit surprised to hear that the midwater market, at least from a tendering standpoint, kind of tightening so rapidly without really a commensurate improvement in deepwater. I would normally think of it as a progression downward from a spec's standpoint. What is driving that dynamic there?

As we look at what is happening in the market, a lot of the midwater opportunities, the demand has been there, but now with the high price the demand is really coming out very strong. And I understand what you're saying, you are saying that the deepwater competes down into the midwater, and until that market tightens we are still going to see capacity in the midwater arena.

But we can see with the buildup that we will -- in mid-2011 that we believe we're going to see a lot more opportunities. Now does that mean that the market tightens completely? No, I think we've got a lot of capacity before we get to that stage. But each asset class has to move up to where it is fit for purpose. So the midwater -- the deepwater has to move back to working in the deepwater. And then the ultra-deepwaters has to tighten a bit more so that each asset class is working in the segment that they were built for.

So that is what we see. The increase in demand is pretty prolific and we expect, again, to see a positive picture by mid-2011.

So more just a function of where the projects are located from a capability and water depth standpoint, that is kind of the driver?

Yes.

Then as you do see the market tighten up how would you view unstacking some of the capacity that you have stacked right now and the timing of that? Do you still need to build up a significant amount of backlog on the existing rigs? Do you need to see pricing go up? How are you thinking about stacking that idle capacity right now?

In both Ricardo's comments and Terry's comments we indicated that we were in the process today of shipyards related to reactivation. So as an incremental project comes in, we look at the opportunity in terms of the economics that might justify reactivating additional capacity. So we will continue to do that.

We thank demand is going to tighten. We think that the outlook is good, and we think that should present opportunities to us to think about further reactivation.

Okay, great. Thank you.

Scott Burk, Canaccord.

I wanted to also ask about the midwater rig that you're bringing out -- or bringing -- taking out of stacking. You previously have given some ranges about how much it would cost for a certain percentage of your fleet, although I think those are more focused on your jackup fleet. Can you talk about how much it would cost to bring out the remaining, let's see, five or six rigs that are currently stacked in the midwater fleet?

Okay, Scott, the way I described it for the jackups is probably analogous to the way I would describe it for the floaters. There is probably one-third of those rigs -- one or two of those rigs -- that could come back relatively easily, probably $30 million or so in terms of reactivation expenses. There is probably another one or two that would cost in excess of $60 million or $70 million. There's a couple that we are not contemplating reactivating because the costs are simply prohibitive.

When you look at the rates that they are receiving, it is $210,000 and $260,000 a day on these two reactivated rigs, are those the kind of rates that you anticipate towards the second half as this demand continues or do you see upside to those rate levels?

This is Terry. What we are seeing now -- it has been stable for quite some time. We are seeing a little bit of movement in the UK market, but you would expect that, because it is extremely tight. So I think I would say stable to improving. We've still got some capacity out there, and that is how I would view it.

Then on those two rigs that just came out of stacking, the contracts looked relatively short, if I'm looking at the right ones. I assume that you anticipate some additional work after those contracts are up or you wouldn't have brought them out-of-service. What do you anticipate after the current contracts?

Well, there are numerous opportunities out there that -- we are currently tendering them. If you look at India alone you've got 12 rig years. Those are four separate opportunities. And I like our chances, and there are quite a few more opportunities out there. So I think that with the -- again, the active tendering pace, we like what we see.

Yes, that sounds terrific. That was very good color. Then one other question about revenue efficiency. If you look back at 2008 revenue efficiency was almost 95%. With the various levers that you guys are doing, the increasing inspections and whatnot, can you get back to those levels of revenue efficiency, or should we anticipate that first-quarter levels are going to be where we stay?

I will be pretty frank with you, I am not happy with the first-quarter revenue efficiency, particularly in deepwater and ultra-deepwater. I have said that I think we can get back to historic levels. We are already there with the other asset classes, with the exception of deepwater and ultra-deepwater. I think the programs that we have in place, the efforts that our people are going to, I think are going to help us return to that historic level of revenue efficiency.

All right, thanks.

Ole Slorer, Morgan Stanley.

So a little bit more on the structure of the Company. We are starting to see quite a few -- I wouldn't say startups, but pure play deepwater companies. How you see your Company competing and positioning itself over the medium term, given your array of assets from kind of the low end to the very, very high end? Do you see any benefit in potentially doing what you did with [(inaudible) a few years ago, and spinning out some of the older assets and maybe leaving them as an asset play on the really strong market, while focusing the core Company on the more narrow asset base and more modern asset base?

That is an excellent question. It speaks to the strategy we've been talking publicly about for quite a while now. We are focused on increasing our exposure to high-spec assets, both high-spec floaters and high-spec jackups, and decreasing our exposure to low-spec or commodity class assets.

So we have just come out of our 10 rig ultra-deepwater newbuild program. I really like our position in the ultra-deepwater and the high-spec floater fleet. We are in the process today of building three high-spec jackups, so we are finding opportunities. Our marketing people are doing an excellent job in finding opportunities for us to reinvest in high-spec jackups in a disciplined manner. We're going to continue to look for those kinds of opportunities. So I think the Company has done an excellent job in pursuing that increased exposure to high-spec assets, both jackups and floaters.

We have seen a couple of asset sales in this first quarter that have continued to execute on our stated strategy of decreasing our exposure to the commodity class assets. We are going to continue to do that. We will look at one-by-one asset transactions and we will look at packages of assets if we can put a deal like that together.

If we are successful, and I think we will be, if we are successful in executing on this strategy I like where we will -- I really like where we will you be.

Absolutely, you have a very strong core -- a modern core. My question was more if you look at the average fleet, clearly you will have an age profile -- an average age profile which will be very different to, say, some of the more recent entrants into the market. Do you see any benefit in maybe doing what you did with Todco and separating Transocean into two units?

Well, you have to bear in mind that the Todco transaction was a geographic transaction. What that did is it got us out of the shallow water Gulf of Mexico market. And we are not in that market today. So we might consider disposing of a package of low-spec assets similar to the deal we did with Todco. But the end result of that deal would not be to get us out of the jackup market. I intend to stay in the jackup market and remain competitive. That is why we've got the three newbuild construction projects going on today.

I think that makes a lot of sense. But my question was more whether you would see a -- it is an area where you would spin older assets to shareholders, and give them maybe an opportunity to participate in the tail end of the bat.

It is one of the alternatives we are considering.

Okay, well, thank you very much.

Scott Gruber, Bernstein.

Steve, the internal equipment review and upgrade program appears to certainly be key to improving the revenue efficiency number. I assume this program that you are executing today, which was started at the midpoint of last year, was an enhancement of your legacy review process.

But I am curious as to the timing of the step up. Is this just in reaction to the drop in revenue efficiency, or has there also been a marked increase in the equipment performance standards of clients? And if so, does this, in your mind, reflect the new rigs that have come into the market over the past few years?

I don't think it is necessarily a reflection of the new rigs. I think that is an interesting question. We started down the path in challenging ourselves on our revenue efficiency a year, year and a half ago. And in response to some trends we saw, as we started to deliver our ultra-deepwater newbuilds, we recognized that the conventional component of our deepwater fleet, the performance there started to deteriorate. So we stepped up our game initially in response to that.

I think the more stringent industry expectations are more a reflection of the post Macondo world we all operate in, rather than necessarily a result of the new equipment that has come into the marketplace.

Okay, that makes sense. Then during this enhanced review process, do you expect your maintenance CapEx figure to rise materially? I think it is estimated around $650 million today.

Not materially, no. We suffered a little bit in 2010 in our Gulf of Mexico fleet in terms of an increase in capital spending. But that is because we had to bring a significant number of rigs to a new standard almost immediately. So on the Gulf of Mexico fleet in 2010, I think we spent an incremental $25 million over what we had anticipated.

I don't see it having that kind of an impact over the global fleet, because we will be able to do it more on our own timeframe rather than the acute timeframe constraints we were under in the Gulf of Mexico in response to increased regulatory requirements.

Is the incremental Gulf spend virtually over at this point? And is that $650 million figure fair for this year in terms of maintenance?

Scott, this is Ricardo. We have kept our capital expenditure guidance unchanged for this year. And it takes into account any incremental expenditure associated with the upgrades that Stephen was discussing.

Okay, excellent. Thank you.

Robin Shoemaker, Citi.

I just want to go over the projection for the out-of-service rig time in the second half of the year number, which is quite low. And, of course, the first and second quarter got revised upward very substantially from what you estimated at the beginning of the year, for good reasons. It sounds like for good reasons and bad reasons. Reactivation of rigs, of course, being the good reason. But what is the possibility that your current estimates for the third and fourth quarter meaningfully increase either for good or bad reasons?

Hello, this is Ricardo. I will attempt to answer your question there. I think it is a very good one. The best way of explaining it is to give you an insight into the methodology that we apply in determining whether or not to include a shipyard in our out-of-service time -- a project in our out-of-service time data that we reflect in our fleet status report.

Essentially, we have to have a very high degree of confidence that that shipyard is going to be executed upon. And often that is driven by the renewal or the confirmation of a contract. In exceptional cases we make a commitment to take a rig into shipyard even without the necessary contract coverage. And you can detect those items by reviewing the fleet status report. But, in general, we don't reflect shipyards that we are still considering whether or not to execute upon.

As a result of this approach, there is a tendency over time for shipyard out-of-service periods to increase in the outer quarters that we display on our website toolkit.

Right. Again, I guess especially at a time when you are reactivating idle rigs.

That is correct. Clearly reactivation will be driven by contracting opportunities, and we have to have a heightened degree of confidence that those opportunities will crystallize before we commit to the shipyard, if one is required.

Okay. Then my other question was on Brazil, which -- could you update us on the status, Terry, of the 3,000 meter? I understand that was not a tender but a market inquiry. And you had previously offered the Sedco Energy and Express under the 1,500 meter tender, but what is your expectation on the timing of the 3,000 meter?

Well, here it could be today or it could be next week. They have an annual -- I mean, a weekly Board meeting to approve these types of things. The 3,000 meter was a direct negotiation type tendering process to where it is not their formal protocol. The 1,500 meter was the formal protocol.

So it is an opportunity and an expression of interest to be able to be a bit more flexible. In protocol -- 1,500 meter protocol requires that you comply 100%. And with our two rigs we knew that we were not going to be compliant, because of being able to get some long lead lovely items. We couldn't deliver the rig in the timeframe, but we wanted to participate anyway and show our interest to Petrobras. We expect to be able to participate in the next tender that comes out.

Okay. Your rough estimate of the number of rigs they could hire imminently under this 3,000 meter inquiry?

Well, I said in my notes the market is heavy on the rumor site saying it is three. So we will see if that is true. As far as putting a number out there of what we believe that they could contract for this year, in the last earnings call I said 4 to 8. So I hope it is more, but we will see.

Okay, thank you.

Collin Gerry, Raymond James.

I just had a follow-up question on the -- kind of a more strategy question. Steve, it seems that it has obviously been an interesting last few years, and the Company is at a point now from a balance sheet perspective certainly more dry powder, a more bullish outlook on the market, and still a very disciplined approach, I would say, to newbuilds.

So, I guess, if we think about all that put together, if you were to monetize some assets what do you do with the cash? If we are not going to be building new assets should we think about more dividends or is it acquisitions? I mean, just more strategic how do we high grade the fleet further as it relates to your cash situation?

So there is kind of two questions embedded in there. One of them is how do we think about cash. And whether the cash comes from asset sales or from operating cash, we think about it as cash. And we take a disciplined approach to how we make use of that cash.

Our first preference is to reinvest in our business. So we will continue to challenge our marketing people to help us find opportunities that make sense. I think so far they have done an excellent job this year in identifying strategic opportunities for us to redeploy capital in our business.

We are going to remain disciplined about that. We won't build on spec. We will look for opportunities to add to our high-spec position in floaters and jackups. And I think we will be successful in doing that.

Second priority, when we think about our cash is the quality of our balance sheet. We want to remain an investment grade quality balance sheet. We have done a good job at that, and we are comfortable in our position, particularly as it relates to how the rating agencies think about it.

The third alternative that is to give it back to the shareholders. I think we have demonstrated a historical track record of discipline in doing that. And, so, that is the way we think about it going forward. We want to reinvest in our business. We want to maintain an investment grade quality balance sheet. And we want to be shareholder friendly in how we think about our cash.

Okay, and maybe just drilling down a little bit more. It seems to me your disciplined approach and not building on specs, you have been very adamant about that. The market as it stands today, based on what we see, seems to be that building a rig is done on spec. The market is not really offering a lot of contract-backed newbuilds.

Do you anticipate that changing over the next year? And if not, does that put you in a position where you're more on the -- focused on the M&A market from a new rig point of view?

Well, I think, if you and I had this conversation six months ago, you probably would have told me that it would be impossible to get a contract that would support building a jackup. There is just too many jackups available, too many jackups being built on spec. And, yet, our marketing team was successful in landing opportunities for us to do that. So I don't ever want to rule out the possibility that our talented marketing team will find more opportunities for us to do that.

Okay, that is very helpful. Then the last one for me. It seems we got OTC going on, and I think some of the scuttlebutt coming out of it is renewed vigor on that BOP restrictions and possibly that making its way across the globe. You have 7 rams on the deepwater stack.

I guess my question is, how many meaningful is that to the industry? If we think about the industry, there are a lot of old assets out there that may or may not be able to handle that capability of a BOP. And if you see a lot of this these customers just standardize on that type of BOP, is there a tightening mechanism there? Is there an obsolescence factor in some of the industry's older rigs that can't handle the new BOP standards?

I hear a lot of discussion about that. I'm always a little perplexed, because of the historical creativity of this industry. If you came out next week and said for any rig to operate on a well it has got to have X number of rams seated on the wellhead. The industry -- believe me, the industry would figure out a way to get that done, with a minimal amount of incremental capital, without obsoleting a $200 million hull. So I think the industry will apply the creativity we have always applied in figuring out how to accomplish the increased expectations.

That is excellent color. Thank you on both questions. Thanks.

Kurt Hallead, RBC.

So (technical difficulty). So on the Gulf of Mexico, the question is how many ultra-deepwater rigs do you have currently running? And of the rigs that you do have running, how many are at or near the contractual dayrate?

As I scramble for the slide, I may have to do this from memory, but I think -- well, they are all on a rate, and most of them are on operating rate standby -- and a standby rate, which is very close to the operating rate. I think that, too, on -- no, I think that's it. Yes, that's it.

(multiple speakers) what is it, how many? So is it 10 or 13? How many rigs do you have ultra-deepwater now actually [drilling] in the Gulf of Mexico, actually operating?

Today there are 12 Transocean rigs in the Gulf of Mexico. Only one of those is a midwater rig. The Amirante is the only midwater rig left in the Gulf of Mexico -- Transocean.

Right, and of the ultra-deepwater rigs that you do have, I guess, what I'm trying to get at -- how many are actually drilling right now? How many are actually working as we speak?

One of us is going to have to get back to you with the answer to that question.

I appreciate -- okay, thanks. I appreciate that. Now you did mention, Terry, earlier that there were (inaudible) -- I couldn't pick it up exactly. How many permits did you say were awaiting approval right now in the Gulf of Mexico?

36.

36 were awaiting approval. Interesting. Now we have heard some scuttlebutt about there being a potential risk of environmental lawsuits to hold up the permits that have actually been approved to date, and hold up any additional permits that had been -- that may be coming down the pike.

How do you guys assess that risk? Do you think it is a real risk? Do you think it is one that is low probability? Can you give us and some color around what your thoughts are?

I can only give you anecdotal color on that, because we are not directly involved in the permitting process. We support our customers in their attempts to secure permits. All I can tell you, and maybe Terry can add to my comments, all I can tell you is what the customers tell me, which is they anticipate that there will be some environmental challenges to the permitting process going forward. But they don't consider it to be detrimental to their long-term business model in the Gulf of Mexico.

They think it might introduce some incremental administrative burden and some incremental frustration, but not a significant -- not a significant challenge to their long-term business. Terry?

I agree with that, Steven. If we look at the 2011 and the customer base and the programs that they have queued up, they are still comfortable that they're going to be able to build continuous work to get through 2011. And that may be the new normal, at least this is what we hear from the customers, will have a new normal by the end of the year. So that there is a normal cycle that they're going through.

But right now they seem optimistic. And we even received a permit for our older midwater fleet -- I mean, our older midwater floater, the Amirante. So we're heading back to work with that one, which we are really encouraged about that, so I think it is improving.

I appreciate that color. Now you had mentioned earlier too that on the revenue efficiency front there are some bottlenecks, or at least I inferred from your commentary there are some bottlenecks at the vendor level as you're working through your certification processes. What do you see from a timing standpoint, how long will it take to work through these bottlenecks? When do you think you'll have all these certifications done and these rigs ready to get back to work?

I tell you, it has been interesting. One of our subsea equipment vendors told us that in the last nine months they had been presented with more work than they had conducted in the previous five years. So these guys are completely overwhelmed with the surge in activity.

We have taken the step of putting some Transocean personnel in their shops to help them do simple tasks like demand planning and quality control on our equipment before it leaves their shop. We feel a lot better about their ability to support us, given the assistance we are providing.

Hopefully we are getting to a point where they have ramped up their resources, we are providing whatever assistance we can. We will see this -- the bottleneck that we have been experiencing over the last year -- we will see it start to wind down, hopefully, over the next six, seven, eight months.

Operator, we have time for two more questions.

Lee Cooperman, Omega Advisors.

I'm a little confused. I would appreciate (multiple speakers). Good morning to you, and thank you for taking the question. I'm a little confused about the dividend in a sense, and I think it is kind of important. A $4 dividend -- a $3 dividend, excuse me, were yielding over 4%, which is more than twice the yield of the S&P 500, more than any energy-related company I know of today.

I am just trying to figure out, who is trying to get their beak into our business and holding us back? What are the different things that are going to determine the outcome here? And how comfortable are you that this dividend will be paid in May and be paid quarterly, as you anticipate? I would just like to understand the issues. I'm a little confused.

So what has happened here is the Swiss voters voted on a referendum in 2008 that changed the tax laws here in Switzerland to make dividends out of APIC free of Swiss withholding tax. So that vote took place back in 2008.

Here in the first few months of 2011 the Swiss authorities, the tax authorities, have come out and made noises about how that tax law change is going to have an effect on Swiss tax revenues. So you have a reaction then to that kind of commentary coming out of the Swiss tax authorities.

It is a general reaction. It has nothing to do specifically with Transocean. We are not the only company that is making use of this change in Swiss tax laws. There are a number of companies that are pursuing the same path we are pursuing. (multiple speakers).

Are they looking then to tax dividends paid by the Company to their shareholders?

Well, what the initial debate has centered around is the possibility of reinstating the withholding tax on dividends out of APIX.

Got you.

And that is one alternative that has been debated in the parliament.

Okay.

So what form that debate ultimately takes, whether it actually ultimately results in any change to the laws is pure speculation at this point.

If that happened, do you have a recourse of leaving their tax jurisdiction or that is not practical?

Well, if things got too painful for us that is certainly something we would consider, but I would tell you today we are a long way from that.

So what are the other considerations in paying a dividend? In other words, they are going not going to stop you from paying a dividend, they would just be withholding on a dividend?

That is correct. That is the only impact it would have is to reinstate the 35% Swiss withholding tax.

Are there any other issues then surrounding the dividend?

Shareholder approval is an issue, but we are confident that the shareholders will support us in that resolution.

Well, they did last year, didn't they?

Yes, they did.

So, then when the shareholders vote then you will have a dividend declaration date for the next date, like every other company has?

Yes. Yes, exactly.

Okay, thank you for clarifying that. I appreciate it. And I assume the dividend was set at a level that you feel constable that it was sustainable going forward based upon your expectation of future earnings.

Yes, when we engaged our Board in the conversations over the last couple of years as we have talked about returning cash, we have looked at a number of scenarios. And, obviously, since Macondo we have had to factor Macondo into that scenario planning as well. But that is the way we want to think about it is as a dividend that we can sustain going forward.

Thank you very much. Good luck. I appreciate your answers.

Geoff Kieburtz, Weeden & Company.

I guess two questions actually. One on the vendor constraint topic again. I think you made it clear earlier that you have sort of accelerated some of your shipyard projects. I guess I am -- did you kind of make your vendors suffer a bit greater capacity constraits by accelerating your program?

The only area where we really accelerated shipyards was in the Gulf of Mexico. And that was in response to ongoing conversations with our customers about how to mitigate the impacts of the moratorium and the slow release of permits. So the rigs would have had to go through BOP recertification anyway. We just chose to do the SPS related work, the special periodic survey related work, in addition to the BOP recertification.

So we didn't accelerate BOP recertification. That was a function of NTL-05, and we had nothing to do with that. So we were constrained by NTL-05. We just chose to do some other work in addition to BOP recertification.

Presumably, your competitors did much the same sort of thing. Is that part of the reason you've got this confidence that over the next six to nine months the bottlenecks are going to relieve, because, obviously, the Gulf of Mexico stuff is a bit kind of one-time?

Yes. I think we are in a temporary situation where people have scrambled to respond to either regulatory requirements in the case of the Gulf of Mexico or customer requirements outside the Gulf of Mexico that have overwhelmed the ability of the subsea equipment vendors to respond. So I think it is a temporary situation as we work through this over the next six or nine months.

Okay, my other question had to do with the reactivation. You gave us on both the floaters and the jackups a sort of one-third, one-third, one-third breakdown. But based on a couple of contacts that you've entered into here recently, it seems that you're willing to go into to a reactivation commitment with a contract that is something less than a full payout, correct?

Yes, and I rely on our marketing people to give me an assessment of their ability to find follow-on work. So it is a well-informed decision, but it is not a dogmatic requirement that we return the entire 100% of the reactivation costs with the first contract.

So there is no -- there is no kind of simple rule that you could share with us -- I mean, with the newbuild it seems pretty clear that you're not going to make a newbuild commitment -- it is obviously a much greater capital commitment than a reactivation -- but you're not going to make a newbuild commitment without some very high percentage contract payout on the initial term. Is there anything analogous that you can share with us in regards to your decision to reactivate?

Not anything that is as crisply articulated as the 80% simple payback we look for in an ultra-deepwater floater newbuild project. There isn't anything that simplistic that we applied to our reactivation decision.

Okay. All right, great. Thank you very much.

Thank you all for your interest, and we will talk to you next quarter.

Thank you. That concludes our conference for today. We thank you all for your participation.