Transocean Ltd (RIG) 2011 Q2 法說會逐字稿

Good day, everyone, and welcome to the second-quarter 2011 results call for Transocean Limited. Today's conference is being recorded. At this time, for opening remarks and introductions, I would like to turn the conference over to Mr. Thad Vayda, Vice President of Investor Relations. Please go ahead, sir.

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

We've also posted a file containing four charts that may be referenced during this morning's call. That file can be found on the Company's website by selecting Investor Relations, Quarterly Tool Kit, and then PowerPoint Charts. The charts include average contracted day rate by rig type, out-of-service rig months, operating and maintenance costs trends, free cash flow from backlog, and debt maturity. The Quarterly Tool Kit also has four additional financial tables for your convenience, covering, first, revenue efficiency, and then other revenue details; daily operating and maintenance costs by rig type; and contract intangible revenues.

Joining me this morning are Steven Newman, Chief Executive Officer; Ricardo Rosa, Senior Vice President and Chief Financial Officer; and Terry Bonno, Vice President, Marketing.

Before I turn the call over to Steven, I'd like to point out that during the course of this call, participants may make certain forward-looking statements regarding various matters related to our business and Company that are not historical facts, including future financial performance, operating results, and the prospects for the contract drilling business. Such statements are based on the current expectations and certain assumptions of management's, and are, therefore, subject to certain risks and uncertainties.

As you know, it's 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 or uncertainties materialize or underlying assumptions prove incorrect, actual results may vary materially from those indicated. Transocean neither intends to nor assumes any obligation to update or revise these forward-looking statements in light of the developments which differ from those anticipated.

Also note that we may use various numerical methods measures on the call today that are or may be considered non-GAAP financial measures under Reg. 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 Tool Kits, and Non-GAAP Financial Measures and Reconciliations.

Finally, to give more people an opportunity to participate on this call, please limit your questions to one initial question and one follow-up.

Thank you for your time. I'll now turn the call over to Steven Newman. Steven?

Thanks, Thad. Hello, everyone, and thank you for joining us today. At the outset, I'd like to take a second to officially welcome Thad, who has taken over the Investor Relations function. Thad brings with him a wealth of experience while working on the sell-side, and is a former Transocean employee who we're excited to have back on the team. He'll be getting to know many of you going forward.

Now on to our results.

Our reported second-quarter earnings were $0.48 per diluted share. After adjusting for discontinued operations and the other items noted in our press release, adjusted diluted earnings per share would have been $0.59, which does not take into account the impact of Macondo-related items. This compared to $0.53 for the first quarter of 2011. Adjusted earnings per share were up $0.06 sequentially, as increased revenues more than offset increased costs and a higher annual effective tax rate.

Ricardo will walk you through 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.

During the second quarter, we saw continued improvement in the underlying fundamentals of our business, as strong commodity prices supported continued improvements and demand throughout the market. We built on the first quarter's strong contracting performance with an additional $1.5 billion in new contracts between our April and July fleet status reports. We are encouraged by contract awards and extensions across Transocean's entire fleet, and I expect recent discoveries offshore Ghana, Brazil, Vietnam, and the US Gulf of Mexico, will drive global drilling and demand for our rigs.

While Terry will give you more details on the worldwide market and the various asset classes shortly, there are a couple of key fixtures I'd like to highlight. Reflective of the tightening ultra-deepwater market and our continuing strong operating relationship with BP, BP has exercised their six-month option on the Discoverer Enterprise, and agreed on an additional one-year extension, with the one-year extension at a rate of $492,000 a day.

During the quarter, the Key Gibraltar went back to work for Chevron in Thailand following her reactivation. We signed a three-well contract with ONGC in India for the M.G. Hulme. And Rig 141 secured a two-year contract with GUPCO, a BP joint venture in Egypt. These are just a few examples of returning idle equipment back to work, and further support our view of the continuing recovery in the offshore markets.

I am also pleased to announce that during the second quarter, our revenue efficiency improved to 92.1%, 2 percentage points higher than what we reported in the first quarter. We have been focused on this area for several quarters now, and our comprehensive improvement program is delivering measurable results.

As a reminder of the main components of the program, we are focused on continually enhancing 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. As the numbers to show, we are seeing meaningful progress towards our objective of being back to historical levels by the end of this year.

As part of our plan to strategically position Transocean for the long-term, during the quarter, we also continued to make progress in our efforts to optimize the competitive makeup of our fleet. Over the last couple of months, we have finalized deals to sell three jackups and a swamp barge, with other divestiture opportunities at various stages of progress. We also exercised an option at Keppel FELS for the construction of a third Super B Class High Spec jackup. And we're in advanced discussions with a customer to finalize a contract for this unit. This brings our High Spec Jackup Newbuild Construction Program to four units.

Now to an area that we've received a number of investor questions on in the past couple of quarters. As we have said before, we remain firm in our belief that building on speculation is not good for the industry or Transocean, and that excess supply will have a negative impact on day rates and asset utilization. In addition to the impact on the supply and demand dynamic, customers have consistently voiced their desire to have rigs built to their exact specifications, based on identified future work and operating environments. And our preference is to build something that closely meets our customers' needs and expectations.

Just as important as the assets being built is having the teams in place to run them. And we pride ourselves on having the best people in our business. This depth of expertise, combined with our strong balance sheet, will provide us the flexibility to take advantage of potential opportunities as they arise in the market. Finally, it's important to keep in mind that we just completed a 10-rig, $7 billion newbuild program that positions us well in the ultra-deepwater market for the long-term, as it gives us the world's largest high spec fleet and a true competitive advantage in the marketplace.

We will continue to look for opportunities to reinvest in our business while remaining disciplined in how we deploy our capital. Even with our strict criteria for contract-backed newbuilds, we've successfully built an unparalleled leadership position in our business, and I see no reason why remaining disciplined going forward will force us to abandon our leadership role.

In addition to our ongoing reinvestment in our business, in June, we made our first quarterly distribution of the approximately $1 billion annual dividend our shareholders approved at the main shareholders' meeting. Our ability to continue to invest in our business and return excess cash to our shareholders reflects our long-held, disciplined approach to capital deployment, underpinned by strengthening market fundamentals.

Before turning the call over to Ricardo, I do want to make some brief comments on Macondo.

First, in early June, we filed a response to the Coast Guard's preliminary report. That preliminary report was critical of all parties involved with the Macondo well, including Transocean. In our response, we disputed four key assertions made by the US Coast Guard. Specifically, we concluded the following -- ignition did not result from poorly maintained equipment. The BOP was properly maintained. The engines on the rig did not fail to shut down upon detection of gas, and the general alarm did not fail to operate automatically. We hope that the US Coast Guard will take our recommendations, which were supported by the findings of our internal investigation, into account for their final report. Our full response to the Coast Guard can be found on our website.

Second, on June 22, we released our Internal Investigation Report, which confirmed that the Macondo incident was the result of a succession of interrelated, well-designed and construction decisions that compromised the integrity of the well and compounded the risk of its failure. I'd like to extend my sincere thanks to everyone who contributed to the preparation and delivery of this Report.

Finally, we continue to believe that, through a legally-binding contract with Transocean, BP agreed to assume full responsibility for the costs and liability of any pollution, contamination, and environmental damage caused by hydrocarbons that leaked from the Macondo well. That contract indemnifies Transocean against all such claims.

Let me conclude by thanking the worldwide team of Transocean employees. Our operating results are improving, and we continue to make progress towards our vision of an incident-free workplace. I appreciate your efforts and focus on safe and efficient operations.

With that, I'll turn the call over to Ricardo to take you through the numbers. Ricardo?

Thank you, Steven, and good morning, everyone. As Steven mentioned, we reported net income of $155 million, or $0.48 per diluted share for the second quarter of 2011. Excluding the $25 million loss on impairments relating to three jackups reclassified as held-for-sale; $13 million of net charges relating to discreet tax items; and $2 million in income from discontinued operations, our adjusted diluted earnings were $0.59 per share. This represents an improvement of $0.06 per share versus adjusted earnings in the previous quarter.

Increased revenue from ultra-deepwater rigs led to improved profitability this quarter and largely reflects three primary drivers. First, higher activity in the Gulf of Mexico, with all BOP recertifications now complete; the absence of special standby rates; and the Deepwater Pathfinder operating throughout the quarter.

Second, the commencement of operations of the newbuild deepwater Champion at 100% efficiency in the Black Sea. And third, a 4 and 6 percentage point improvement in revenue efficiency for the ultra-deepwater and deepwater rig categories, respectively, compared with the first quarter, reflecting the impact of the initiatives that Steven discussed earlier.

32-rig months of shipyard out-of-service time in the quarter was three months lower than in the first quarter, but remained higher than we anticipated, due to extended projects impacting a number of rigs, including the Deepwater Discovery, combined with increased contract preparation work, mainly in response to new contracts in West Africa. Delays incurred by the original equipment manufacturers conducting BOP recertifications are having an ongoing impact.

Total operating and maintenance expenses increased $133 million compared with the first quarter, including $104 million related to contract drilling, due to higher maintenance costs on several rigs, combined with annual pay rises in contract preparation shipyards. The remaining $29 million increase was due mainly to higher drilling management services activity. The non-cash $25 million impairment loss on the three standard jackups held-for-sale does not signal a pattern of losses on future asset sales. More importantly, it reflects our continued efforts to execute our strategy of disposing of non-core assets.

The second quarter was also adversely impacted by an adjustment to our year-to-date annual effective tax rate to 22.6%, up from 19.3%. The adjustment reflects lower margins and certain lower tax rates in deemed profit locations, due in part to out-of-service time in addition to increased activity in some higher tax jurisdictions. The increased annual effective tax rate compared to the first quarter impacted diluted earnings per share by $0.05 in the second quarter.

Looking beyond the second quarter, revenue efficiency and shipyard-related out-of-service time remained critical factors in improving our profitability. Steven has already discussed our focus on improving revenue efficiency. Now I will provide some color on future shipyard activity.

As you'll remember, in previous calls, I provided some directional guidance on higher anticipated out-of-service days for certain rig categories, including our expectations that the relative mix of out-of-service time would be more heavily weighted toward our ultra-deepwater floaters, due to the timing of the 10-year special periodic surveys required by several units. These and other factors have carried through multiple reporting periods, including the second quarter.

In addition to the special periodic survey work, we have completed a number of life enhancements, conducted BOP-related work imposed by [NCL05] and other BOP projects, as well as riser overhauls, thruster change-outs, and contract preparation to meet customer specifications. Furthermore, as you know, we are coming through an exceptional period in which we have felt the impact of a lingering post-Macondo environment, driving up out-of-service time and costs, much of which relates to the ultra-deepwater category. We believe that shipyard work required by our ultra-deepwater rigs will be reduced in the second half, and the focus of our efforts will be more on certain deepwater and mid-water units.

Our website chart number two reflects the projected out-of-service time reported in our last fleet status report at July 13, and highlights that we are expecting out-of-service time to decrease in the third and fourth quarters of 2011. These projections are directionally correct, but need to be adjusted for approximately three months of pontoon repairs on the Marianas, following the unexpected anchor-handling incident in Ghana, as well as shipyard extensions totaling approximately five months, which impacts certain high-specification floaters, and will be spread across third and fourth quarters. The projections do not include any rig reactivations which may result from new contract awards.

Looking into 2012, we currently expect revenue losses from out-of-service days to be lower when compared to 2011, as the mix of special periodic surveys and major shipyard's favor non-ultra-deepwater rigs. However, assuming demand continues to strengthen, the number of reactivations is expected to increase, and may include certain mid-water and deepwater units with higher reactivation costs than jackups. As a result, we believe total shipyard expenditures are unlikely to decline in 2012.

I now would like to provide you with some updates to our cost guidance for the remainder of 2011. We are now projecting our operating and maintenance expenses to increase from the upper end of the range of $5.4 billion to $5.7 billion to the range of $5.6 billion to $5.8 billion, due mainly to the combined impact of, first, the cost of the previously-mentioned shipyard extensions and the unplanned repair of the Marianas; second, wage increases and other inflationary pressures on our in-service rig operating costs in certain countries, including Brazil, Angola and United Kingdom.

Included in the operating and maintenance expense for the second quarter is $26 million in Macondo well-related costs. We are prudently revising our 2011 guidance for these costs from $100 million to $135 million, in view of the uncertainties surrounding the outcome of the interpleader filed by our Excess Liability underwriters with the multi-district litigation. This increase is included in the revised total-year range I have just provided of $5.6 billion to $5.8 billion.

Moving down the statement of operations, we expect the range of net interest expense to be between $550 million and $570 million compared to the previous guidance of $570 million to $590 million, mainly due to recent measures to rebalance the mix of fixed and floating rate debt. Our annual effective tax rate is expected to be in the range of 21% to 23%, up 2 percentage points from our previous guidance of 19% to 21% for the reasons I articulated earlier.

Capital expenditures are projected to remain unchanged at approximately $1.1 billion. Cash flow generated by operations in the quarter was $340 million, adversely impacted by a $230 million net increase in working capital. We expect operating cash flow to improve in the second half of this year, with fewer out-of-service days and improving efficiency. Our cash flow will also benefit from the proceeds of our non-core asset disposal. Our liquidity remains strong with a consolidated cash balance of $3.4 billion and an undrawn $2 billion revolving credit facility. We continue to pay down our debt obligations, in line with our long-term balance sheet strategy.

With that, I will hand it over to Terry to update you on the markets.

Thanks, Ricardo, and hello to everyone. Before I get started, I'd like to say that if we had delayed the call by just an hour or so, we may have had even more positive news to report, because as of today, we've already received two contracts. So it's been a high level of activity, for sure. I'd also like to say that the contract backlog that I'm going to report is from the period of January 1 through today. So with that, I'd like to make a few general comments.

2011 has been an exciting year thus far, with continued successes for Transocean in contracting our worldwide fleet. Year-to-date, we've executed over $4.5 billion of contracts with $2 billion executed since the last earnings call. And from ongoing discussions with our customers, we expect this positive trend to continue through the remainder of the year. Tendering and contracting activity in the worldwide ultra-deepwater market has been very strong, and more than a dozen fixtures in the last quarter.

Petrobras is again in the market looking to fulfill its long-term demand, and coupled with the return of the US Gulf of Mexico to a somewhat normal activity level, has led to a substantial firming up of this market segment, with less than a handful of units being available globally through the end of 2011. Contracting activity in the deepwater market has picked up slightly from first-quarter levels. And while there is continued rig availability, especially more units, we believe that as the remaining ultra-deepwater capacity is committed, utilization and rates should improve -- further improve in this segment.

Mid-water activity increased during the second quarter with multiple fixtures, especially in the UK and Norwegian sectors of the North Sea. Based on the outstanding tenders and inquiries received, we believe this trend should continue, not only in the North Sea, but also in India and Southeast Asia.

Saudi Aramco and PEMEX continue to lead the charge in tendering and contracting activity in the premium and standard jackup market segments. This, combined with strong demand in Southeast Asia and the North Sea, has led to unfulfilled requirements for certain programs, helping to firm up dayrates and creating new opportunities for standard units, which could lead to reactivation of some of our cold stacked units.

Let's now look at the various market segments, beginning with the ultra-deepwater market. The Gulf of Mexico, Brazil, and West Africa continue to be at the forefront of ultra-deepwater activity. In the last few months, more than a dozen fixtures have been reported with dayrates generally ranging from 450,000 to 500,000. Tendering activity has risen sharply with 26 tenders and inquiries currently outstanding.

After securing three ultra-deepwater units in previous tender exercises, Petrobras has issued another three tenders -- one for 21 ultra-deepwater units to be built in Brazil for pre-salt development; a second tender for 1,200-meter units; and a third tender for 1,500-meter units. We expect Petrobras to take up to four units from the international fleet for these programs.

We are also pleased to see an improving view of future opportunities in the US Gulf of Mexico, as evidenced by our ability to close the fixture on the enterprise that Steven mentioned earlier. Demonstrating the continued strength of the West Africa ultra-deepwater market, we recently executed a contract on the Sedco Energy for two years at $440,000 a day in Ghana. We are very bullish on the ultra-deepwater market and we are now in discussions for opportunity in late 2012 and beyond.

Turning to the deepwater market, contracting activity remains light. However, we expect improving demand in the second half of 2011, with Brazil, West Africa, and Australia providing opportunities for our available deepwater fleet. As a reflection of the low level of tendering in deepwater, we secured a mid-water opportunity for the M.G. Hulme -- which, as you know, is a deepwater unit in India -- for three wells, approximately one year of work, at $260,000 a day. Additionally, we have just extended the Discoverer Seven Seas for 173 days at $295,000 a day, bridging the gap until the upcoming tendering opportunity in India.

Turning our attention to the worldwide mid-water floater market, the tendering and contracting activity has continued at a brisk pace throughout the second quarter. We are seeing high tendering activity in the North Sea, India, and Southeast Asia. There is limited availability in the UK and Norway, and demand continues to outpace supply. After discussions with several customers for our only available harsh-environment semi in Norway in 2012, we contracted the Transocean Winner for one year at $455,000 a day.

Additionally, since our last call, we've been able to secure the following significant fixtures -- the Transocean Prospect, 18 months at $245,000 a day in the UK, and this is the first long-term fixture since 2008; Transocean Arctic -- four wells that are approximately 240 days at $395,000 in Norway; Sedco 714, one year at [$255,000] a day in the UK; Transocean Amirante -- five wells, approximately 300 days at $247,000 in Egypt; Actinia -- two wells, approximately 100 days at $190,000 in Malaysia. We are also in advanced discussions on multiple mid-water units with our customers in the UK, West Africa, Asia, and Australia, and expect to close on these prospects shortly. This confirms our belief that the mid-water market tendering pace will continue to be strong over the remainder of 2011.

Moving to the jackup market, as we discussed last quarter, the contracting pace in this segment, especially the premium market, has significantly picked up. This has not only exerted upward pressure on the dayrate for premium equipment, but has also provided contracting opportunities for the standard jackups. This positive development is underscored by us being able to secure a significant number of contracts across our jackup fleet, adding $684 million in contract extensions during the quarter. This reflects a total of five rigs returning to active duty for the second quarter 2011.

Based on ongoing discussions with our customers, we're very confident that this trend will continue, and we will be able to secure additional contracts for active fleet, as well as reactivate some of our stacked units under attractive commercial conditions.

In conclusion, tendering, contracting, and overall demand activities for the first half of 2011 has exceeded our expectations. And we believe that strong commodity pricing will continue to provide opportunities for all rig classes for the second half of 2011 and '12. We continue to execute leading-edge dayrates in all asset classes. Additionally, our year-to-date contracted backlog of $4.5 billion is representative of 19 countries, with the top five countries located outside of the Golden Triangle, demonstrating our ability to differentiate with the depth of global offerings that meets the needs of our diverse customer base, with our focus on service delivery. Our global footprint, versatile fleet portfolio, and industry-leading position, uniquely provides us with a strong competitive advantage to further benefit in this market.

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

Thank you very much. Operator, we're now ready to take some questions.

(Operator Instructions). Kurt Hallead, RBC Capital Markets.

(multiple speakers) I wanted to focus initially here on the revenue efficiency factor. So, Steven, you had referenced this as a primary focal point a few quarters back. And you've gone from, I guess, under 90% now to 92% -- good progress. What's the ultimate target that you think is realistically achievable?

Well, I think we do a pretty good job with our fleet status reports and our quarterly results of showing you our historical performance in revenue efficiency. And so that's what I've tried to guide the analysts and investors to think about, is getting back to that historical level of efficiency.

Okay. And then, Terry, from a market standpoint, it sounded very upbeat. You kind of teased us there with a couple of contracts. If they've already been signed, is there anything that you can expand upon on that?

Well, just to reiterate, the fact that it's been incredibly active for us. I mean, we signed, this quarter, 28 contracts. And that's from our last earnings call to today. So, for us, it's been incredibly active. And just to give you a little bit of a breakdown there, 17 of those were jackups. So we've got a lot of opportunity out there. Customers are urgent. And we think it's a very positive as we move forward into the second half of '11 and into '12.

Okay. And then was just wondering if there was any updates -- I guess the Swiss authorities were looking at potentially changing the tax rates over there and how that may impact your dividend. Any updates on that front?

No, Kurt. We continue to monitor the regulatory framework here in Switzerland and what's happening in the legislature. There hasn't been any real movement since what we have been talking about over the last quarter or so.

Okay. Great. (multiple speakers) That's it for me. Thank you.

Arun Jayaram, Credit Suisse.

Terry or Steven, I wanted to ask you a little bit about Mexico. You guys sit here with quite a few jackups idle internationally and Mexico has what appears to be a pretty large shortage. And they are offering some term. So the question for you would be why isn't Transocean participating in some of the PEMEX tenders?

Hi, Arun. Good to hear from you. Well, what we're doing is we have tried to get into Mexico on a couple of occasions. And we haven't had the right equipment available at the right time. As you know, it's a very specific window to get in there. So you have to hit a window, and we haven't had a rig that we have been able to hit that window that doesn't attract significant penalty.

However, what we're seeing -- and I think it's very interesting and we're following it closely -- is that they're now contacting the contractors directly saying, look, with our increased demand, we're looking for ways that we can meet our demands that we need. So there may be a little flexibility. We're hoping for that so that we can participate in that market. It's not that we don't want to; we do. We very much do, because we see it as an opportunity leading into deepwater markets. So we're looking at it very hard and we hope that we'll be able to have some success there.

(multiple speakers) A.J., you've touched on a key opportunity for us. Mexico is a big market and we're not currently present there. So we've spent a lot of time evaluating how to get into Mexico. And we have a -- I think we have a really active and productive dialogue with PEMEX. We've told them we want to be there and they've told us they want us there. We're just looking for the right opportunity -- the right vehicle to get in there.

Okay. It sounds like you may be a participating going forward.

Second question, Steven, Terry just mentioned that some of the leading edge rates in the ultra-deepwater now pushing close to [$500,000]. Just looking at your valuation relative to some of the ultra-deepwater peers such as Seadrill illustrates that you have a very depressed valuation. So I was wondering if you and the Board are looking at perhaps some more optimal structures where you can capture the value of your backlog, and the inherent asset value of your ultra-deepwater fleet.

Yes, I'm not sure what you have in mind when you talk about optimal structure -- it's an ongoing dialogue with the Board. And we recognize that there are -- that we think there are opportunities out there. And our stock price doesn't reflect what we think the underlying valuation of the Company. It doesn't reflect the underlying fundamentals. So there are things that we're in active discussions with the Board about how to address them.

I mean, could this include maybe a spinoff of more of the commodity assets versus your really high-spec and frontier kind of assets?

Yes, I don't want to hedge the Board in on the wide-ranging discussion they're having, but we've been pretty vocal about our desire to rationalize the Transocean fleet. We want to be focused on high-specification drilling -- high-spec floating and high-spec jackups. And so I think, in the last couple of quarters, we've demonstrated our efforts to execute against that strategy. And so the Board has endorsed the strategy. And what we continue to discuss with the Board are the alternative means of executing that strategy most efficiently.

Okay. Fair enough. Thank you very much.

Angie Sedita, UBS.

Terry, to get a little thought and some of your thoughts on rate expectation for the ultra-deepwater markets. Obviously, we're moving a little bit towards $500,000, but do you think to move to $500,000 or even beyond, that we need to see both a pickup of permitting in the Gulf of Mexico and also Petrobras picking up a number of incremental rigs? Give us your thoughts on rates leading into the back half of the year and early next year.

Well, Angie, thanks for the question. Good to have you on the call. If you look at what currently is available out there to pick up in the market, I think it's about seven rigs as we finish up this year. And then you're going to have some more certainly become available in 2012.

Right now, with the programs out there, they certainly can absorb that fleet. It's going to depend on customer urgency. Now, I believe that we're about to see a $500,000 fixture in the next couple of weeks. And I think it's imminent, because I believe that a few of our customers need to have some of their programs drilled in a timely manner.

I also believe that there's certainly some demand that needs to be fulfilled in the US Gulf of Mexico. And you can certainly see that with -- as we look at the major discovery that happened in the Gulf of Mexico with Exxon Mobil and Hadrian. That was with a farm-out rig. So you've got some really, really positive news there, that certainly, the US Gulf of Mexico has great opportunity for the customer base. And they're slowly becoming more familiar with the process to get their permits through. And I think that it's just going to take a little bit of time and we'll be back to a -- it won't be the old normal but it will be a new normal. And there's a lot of opportunity. So I think that it's looking very positive.

Alright. And then as a follow-up to that, are you concerned by the slowing of permitting in the Gulf of Mexico as of late? And is there any risk that rigs that are working today could become idle if we don't see a pickup in permits?

And then second, you also mentioned reactivating some cold-stacked rigs. Is that focused on jackups as well as floaters? I would assume that's more of a 2012 event as far as a large quantity of rigs and specific regions.

Okay. Well, to answer the first question, I can only speak from our customer base and our conversations that we have with our customers. And they're confident that we can work through 2011. And the rigs that we currently have on full standby are those that are waiting to go back to work with some permits. So, from our perspective, the customers are saying that -- they're going to be able to get some permits.

Then your second question was about the cold-stacked fleet. We are looking at opportunities -- things are picking up, and we can see that in the deepwater fleet that there is some opportunity out there -- and some long-term opportunity. So we're looking at some growth areas where we feel like we can reactivate. And then in the jackups, we've got some opportunities where there are some jackups that we can also reactivate. So as we said, things are really picking up. It's obviously profitable reactivation and we're very encouraged.

All right. Thanks, guys.

Thank you.

Collin Gerry, Raymond James.

So I wanted to follow-up on the cost side. The addendum that you have -- which is very helpful, by the way -- it looks like daily operating costs -- like, if I just look at high-spec floaters or mid-water floaters -- went up in the quarter. And I guess I'm trying to understand that a little bit. Does that have to do with labor? Or is it some of these -- this downtime or kind of the revenue efficiency stuff showing up in the cost line, too? Maybe help me understand that a little bit more.

Hello, Collin. This is Ricardo. As far as the high-specification floaters are concerned -- and I'm assuming you're looking at the schedule on daily operating and maintenance costs --?

Right.

-- the -- what it is, is a combination of the higher maintenance costs that we saw in the last quarter. The cost of fleet had affected several rigs, and is attributable largely to the timing of certain maintenance projects that take place whilst the rigs are active. And there tends to be an uptick in general in the second quarter as compared to the first.

In addition to that, what you have is a change in -- a slight change in rig mix. Because we're seeing now a greater weight in favor of the ultra-deepwater units that are now are all active with the newbuilds all commissioned and working. And, of course, we have a reduction in the active rig count of the lower-spec deepwater assets.

There are two certain cost pressures that we're seeing and that we had warned our investors about, that they would take place in the course of the year. And they relate very much to the wage pressures that I highlighted in my prepared comments, and that are beginning to flow through our costs effective the second quarter. And I think the question of maintenance and the pressure of wage increases, compounded as well with the weak dollar and the exchange rate effect there, is being reflected in the increased average daily operating costs for both rig categories.

Okay. Just to follow-up -- it looks like they went up in every rig category -- jackups, mid-water and the floater side or the high-spec side. Does your new cost guidance assume that those are flat for the balance of the year? Or are we assuming in that cost guidance that those daily operating costs come back down? In other words, was this a one-time issue? Or is that the new normal in your cost guidance?

I hesitate to say that it's the new normal. What you will see, however, is an uptick compared to the costs that we incurred in the first quarter. I mean, our revenue guidance -- I beg your pardon -- our cost guidance for the second half of the year takes into account the increased expenses associated with Macondo, as I highlighted in my comments, and also includes continued relatively high levels of shipyard expenses, and increased activity from our drilling management services. So I would say that the in-service costs will have a slight uptick, yes, but it won't be significant.

Okay. And then the last one for me, I want to stay kind of on the income statement. This might be somewhat of a dumb question, but when you reactivate a rig -- and maybe it cost $20 million for a jackup or $50 million for a floater, I'm not sure how much it would be -- does that cost show up on the operating expense side in the income statement? Or is that a capital cost that flows through the balance sheet?

There are three -- we have three accounting treatments with respect to the reactivation cost of a rig. It depends on the nature of the costs incurred. We have upgrade costs where we're actually improving the specifications of the rig. Those tend to be capitalized. We have costs that are specifically attributable to the contract that we're preparing the rig for. And those we refer to as contract preparation costs, and they will be deferred over the life of the contract. And then there's that what I'll describe as catch-up maintenance, getting the rig ready to go back to work and be accepted by the customer. And that would be treated as expense.

Right. So just kind of synthesizing that, like, in the event that you were to reactivate a handful of rigs, it's not like -- will we see $150 million or $100 million -- like a big spike in operating expenses that quarter? Or would it be a little more muted as they would be allocated in those various buckets?

It's difficult to give you any firm guidance on that, because it really depends on the mix of expense, whether it's upgrade as opposed to maintenance or contract prep. What I would say is that there is a tendency when you reactivate a rig to have upfront expenditures -- upfront expenses.

Okay. That's it for me. Thanks so much, guys.

Robin Shoemaker, Citi.

Steven, wanted to ask you about this issue that's come up regarding this additional out-of-service time. How forcefully can you push your customers in terms of sharing the cost of these enhanced safety upgrades and equipment efficiency standards that we see applying across the board, in the case of existing contracts, which may not have provisions for this, but on new contracts as well?

Yes, I think that's an excellent question, Robin. And it really boils down to a case-by-case basis. It depends on the negotiating dynamic. It depends on what the driver is for the enhancements.

So if we're operating under an existing contract and the regulator changes regulations, and we have a change in regulations clause in the contract, we'd be in a very good position to get our customers to help bear the cost of that. If it's a new contract and the customer sets that expectation upfront, and we know it going into the negotiations, we might not get it covered in the way of a lump-sum reimbursement, but we might get it built into the dayrate.

So it just really depends on, number one, what the driver is for those enhancements, and number two, are we talking about a new contract or an existing contract? Where's the negotiating dynamic? Who's got the leverage? It's difficult to give you a very comprehensive, crisp, one-size-fits-all answer.

Okay. Because you cited some cases where an OEM manufacturer couldn't recertify and do work on the BOP required. So I guess in those cases where you have -- you go to zero dayrate, then it's kind of on your dime as opposed to the customer, in most cases.

Yes, I mean if -- yes. There are circumstances where, in order for us to put the rig to work, we've got to incur some incremental expenditure that we weren't planning on.

Okay. So one other question then. On your decision to exercise the option to build a third jackup at Keppel FELS, is there another opportunity with Chevron like you did with the first two? Or is that -- how did you arrive at the decision to exercise that option? And are there any more options related to jackups at K. FELS?

Well, on the first part of your question, Robin, I'll give you two perspectives. Knowing how we feel about building on spec, you can take some comfort in the fact that there was a very well-developed opportunity there. The other thing you ought to know about us is that we don't talk about a contract until it's done, dusted, and signed. So there's an opportunity there, and once we get the contract signed, we'll be happy to alert all of you to it.

There are additional options available at Keppel FELS. And as those option dates approach, we'll take into consideration just how comfortable we are that we'd be able to execute a contract.

Okay. All right. Thank you, Steven.

Joe Hill, Tudor Pickering.

Guys, I apologize if I missed this, but Ricardo, did you give DD&A and G&A guidance for the back half?

No, I didn't, Joe.

Would you care to?

No, the guidance remains the same as was given at the beginning of the year. It remains unchanged. And that's my comment on it.

Okay. Fair enough. When I think about the maintenance work and quality assurance work that's been going on for the last several months for the fleet, are there any takeaways with regards to both what you're seeing in the third-party certs on the BOPs and what you're seeing in other areas of repair and maintenance? Are there any general trends or observations you can make?

That's an interesting question, Joe. I think the observation I would make is that the more we can do to help our vendors plan for work and manage work, and then deliver work, the better off we are. So, in terms of bringing more vendors into our discussions about asset management and fleet planning, and our anticipated schedules for major maintenance work and overhauls, the more they know about that, the better off they are in terms of allowing for and preparing for their own resource needs.

Once our equipment gets into their shop, the more we can do to help them expedite work to make sure that things remain on track within their work planning streams, the better off we are. And if we've got people at the back end of their shop, when the vendor tells us that a particular piece of equipment is ready to go, if our people have been there and been active participants in the factory acceptance testing, then we're that much more confident that when the piece of kit arrives on our rig, it really is ready to go. So that's a key takeaway I would give you. The more we can do to help our vendors plan for, execute, and deliver quality work, the better off we are.

Okay. And then this last question here is a little bit of Kentucky windage -- but with regards to the tender pipeline you're seeing today, obviously, it's strengthened; it's pretty active. The market, obviously, is rolling over here -- I think we're around $90 in crude now. At what price would you anticipate your customers begin backing off tendering activity -- is it $85? Is it $80? Are we there yet? Do you have any opinions on that?

Yes, I think we probably would have to ask our customers that question. As far as an opinion, we started seeing this increase in activity when they gain confidence in the $80 a barrel mark. Once they had a full year of it, then the demand started coming out. So I think it was a confidence boost. So each customer has a different return that he's looking for, so -- and they're all very dependent upon the parts of the world that they work in, as you know. So I think that the comfort level was $80 for most of them and that's when we started seeing a demand.

Okay. And then, Terry, this last question is for you. The Seven Seas you got resigned for a little bit. Any update on the equipment you had in West Africa that rolled off the Sedneth, the 140, the 135?

They haven't rolled off. They're still working. So, as of now, I mean, the 135 is under contract and has been on a five-month contract for a while. I don't have the paper in front of me when it comes off. But the 140 -- now I take that back -- the 140, we are in the process of moving to a shipyard. And we've got a -- we're very optimistic of follow-on work. And we really can't talk about it right now, but we are optimistic about it.

Okay, I'm sorry, the 135 rolls off at the end of the month, I think?

Yes. Yes, and just to give you a little bit more color, there are numerous opportunities out there that we have both of those rigs bid to.

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

Douglas Clifford, Omega Advisors.

Steven, could you comment on the sustainability of your dividend and how -- do you look at it as a variable dividend or something that the Board and management believes will be maintained for an extended period?

Yes, when we went into the discussions about return of cash to our shareholders, Doug, we wanted to make sure that whatever we did, we could stand behind as a sustaining activity going forward. So when we looked at that $1 billion a year distribution last year, pre-Macondo, we put it in the context of a wide variety of scenarios. And we felt comfortable that it was sustainable under that variety of scenarios.

Now, obviously, Macondo introduced the regulatory wrinkle here in Switzerland, with respect to the commercial registrars blocking our ability to execute the distribution in the form of a par value reduction. We opted for a different vehicle this year in the form of the dividend out of additional paid in capital, that doesn't have any Swiss regulatory involvement. And so we think that's a vehicle that we can avail ourselves of, even in the context of Macondo. And we think that under a variety of scenarios, it's a sustainable dividend.

Now that doesn't remove the discussion from the Boardroom. And what the Board will look at, as they prepare for making that recommendation on an annual basis to the shareholders, is, what's our outlook for the business? What's our -- what are our prospects for reinvestment in our business? What does the debt portfolio look like? But as we have prepared scenarios for the Board in the context of those discussions, the Board has been comfortable with thinking about the $1 billion dividend as a recurring, sustainable dividend.

Thank you.

Doug Becker, BofA.

Terry, you mentioned the potential for Petrobras to pick up four rigs out of the 1,200 and 1,500 meter tenders. How much of that do you view as incremental demand versus high-grading of some of the mid-water rigs? And what's the timing of announcements? Our understanding is that the bids were due yesterday.

They actually extended the tender for a couple of weeks. And I think that it's incremental. They need the rigs. I guess you're alluding to the release of the Diamond rigs --

Exactly.

-- and thinking that that may be actual replacement of some of the other mid-water fleets. But I think that what these units are, they're going to be used on the sub-salt wells that they have and that we do believe it's incremental demand. And we also believe that they're going to continue to take more ultra-deepwater rigs as their demand arises. And I know they've just come out with a five-year plan. And that's one of the footnotes, is that we will reassess our demand as the situation arises. So we're optimistic that they will continue to pull more rigs in.

Thanks. And then, Steven, do you see the market moving in a way that's going to require upgrades of four Ram BOPs or potentially adding a second BOP to existing rigs to meet new equipment standards or just reduce downtime?

I think the question about second BOPs to reduce non-productive time is an interesting one. In fact, Chevron made that decision on the newbuilds that we recently built for them. The turnaround time for between well's maintenance on the BOPs was becoming the critical path item when you move a dual-activity rig from one location to the next. So it's possible that our customers could make that kind of a commercial evaluation, and decide that it makes sense for them to incur the upfront costs of the capital required to have a second BOP on the rig.

The challenge is, do you always have a hole or a rig shape that can accommodate a full second BOP? So I'm not sure that in every case that's a practical technical solution, just because of the constraints of deck load and deck space on some of the older equipment.

The question about four Ram stacks, most of the equipment today is for Ram. And the challenge becomes how you outfit those four Rams. If the customer or the regulator wants to increase the number of sheer Rams contained in the stack, then you've got to worry about whether or not you've got enough Ram cavities available to have the flexibility and redundancy you'd want in normal pipe Rams. And that's just an ongoing conversation we have with our customers. Our customers play an integral role at the outset of every contract and almost at the outset of every well, making sure that the Ram -- that the BOP is kitted out the way they want it kitted out.

Makes sense. Thank you very much.

Operator, we're approaching the hour. We'd like to take questions from two more callers, please. Thank you.

Rob MacKenzie, FBR & Company.

A question for you, I guess, shifting away from operations, per se, again. What can you tell us, if anything, about where you stand vis-a-vis settling any kind of issues with BP and/or the government -- recognize your contract indemnifies you, but we've seen some of the other parties settle for some payments. Is that something you guys are actively exploring at this point? And where would that stand?

I don't want to be too public about the nature of those discussions. I'll tell you that there is an ongoing dialogue with BP. I think we have a responsibility as a key vendor to BP, and we certainly feel an obligation to them as one of our largest customers, to have an ongoing dialogue. And we talk about the current operations around the world that we're conducting with BP and we talk about Macondo. I don't want to say too much about exactly what we talk about when we talk about Macondo.

Fair enough. And moving on to another issue, permitting in the US Gulf, the pace, as we see it, is less than half of what it would take to sustain 30-plus rigs in the US Gulf. What are you hearing from your customers and/or the regulators, if you're speaking to them directly, about whether that's going to change anytime soon?

Well, there's been some interesting articles written about that lately, and the fact that there will be some more pressure put on the regulators in order to speed up the process, because, quite frankly, we need the jobs, we need the revenues. And now is the time to do that. But I think it's the customers going through the process of understanding what's required in order to get their permits. And again, I answered this a little bit earlier. And what our customers are saying is that they believe they will have the permits to keep our rigs working through the end of this year.

So -- and then we also have some of our other rigs that are on standby that are with BP, and they are also working to get their permits. So we don't hear a lot of the struggle that we understand some of our other peer group is saying that they're having with their customers. So our customer base is getting, I think, a bit more comfortable with the process. Now, I don't think it's going to speed up overnight, but I think that, you know, as we move along this path, that it will become a more efficient process.

Okay, thank you. And another regulatory question, if I may, since we're near the end. What have you heard about the prospect of regulators perhaps making four Ram stacks obsolete? Or, as you mentioned, very difficult to kit out with appropriate pipe Rams? Is that something you think is a high probability, low probability? How would you handicap that?

I don't know how to handicap it, Rob, but what I'll tell you is that it's not a move that I see gaining steam. There's a lot of discussion in the US about it, but I don't hear a lot about that from other international markets.

Okay. Thank you very much.

And we'll take our last question from Matt Conlan with Wells Fargo Securities.

Steve, you mentioned early in the call that you don't think your stock price reflects the value of the Company. I agree. I mean, what are the prospects of dusting off your share repurchase program? Are there any regulatory restrictions preventing you from dusting that off?

Matt, that's all part of our ongoing dialogue with the Board about returning cash to the shareholders. And so, as we think about the deployment of cash in our business, the first thing we'd like to do is reinvest in our business. And so our marketing team around the world are scouring for opportunities that meet our financial criteria, that gives us an opportunity to grow our business. We think that's the first thing the shareholders would like us to do is grow -- profitably grow our business.

Second thing we focus on is the investment-grade quality of our balance sheet. We're comfortable with the strength of the balance sheet and we want to make sure we remain investment-grade quality. And so we'll continue to pay attention to that.

And then the third thing we do -- and we've demonstrated our disciplined approach to doing this -- is returning cash to our shareholders. Now, when we get to the point of returning cash to the shareholders, then it's just a question of the vehicle we opt to do that. We're in the process now of executing approximately $1 billion that the shareholders approved in May. We've made the first quarterly installment. We expect to follow through on the remainder of that. And we'll continue to have the dialogue with the Board about opportunities for investment, quality of the balance sheet, and the vehicles for returning cash back to the shareholders.

Okay, thanks. And Terry, now that we're at the end of the hour, have you gotten any updates on those contracts whether they can be disclosed --? (laughter)

No, my cell phone didn't ping me. But it's been a great day. We had two, which is part of the report that we gave. So we were happy with the two we got before the bell.

Matt, we don't want any cell phones going off in the midst of our call. It might distract us. (laughter)

Okay, great. Thanks, guys.

Thanks, Matt.

Thank you. Thank you, all. I appreciate you joining us for our call and the continuing interest in the Company. And we'll talk to you next quarter.

Ladies and gentlemen, that does conclude today's presentation. Thank you for your attendance. You may now disconnect.