Transocean Ltd (RIG) 2011 Q3 法說會逐字稿

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

Thank you, Kim. Welcome to Transocean's third-quarter 2011 earnings conference call. A copy of the press release covering our financial results, along with supporting statements and schedules, is posted on the Company's website at Deepwater.com. We've also posted a file containing 4 charts that will be discussed during this morning's call. That file can be found on the Company's web site by selecting Investor Relations, Quarterly Tool Kits and then Power Point Chart. The charts include average contracted day rate by rig type, out of service rig months, operating and maintenance cost trends, free cash flow from backlog and debt maturities. The quarterly tool kit also has 4 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. Please note that to aid you in the analysis of our performance, we have expanded the table containing daily operating and maintenance costs to include data for each of our 6 major rig types.

Joining me on this morning's call are Steven Newman, Chief Executive Officer, Ricardo Rosa, Executive Vice President and Chief Financial Officer, and Terry Bonno, Senior 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 will 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, 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 each 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 and more of these risks and 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 developments which differ from those anticipated.

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 a required supplemental financial disclosure for these measures, including the most directly-comparable GAAP measure and associated reconciliation on our web site at Deepwater.com under investor relations quarterly tool kit, and non-GAAP financial measures and reconciliations.

Finally, to give more people an opportunity to participate in this call, please limit your questions to 1 initial question and 1 follow-up. Thank you. I'm now going to turn the call over to Steven Newman. Steven?

Thanks, Thad. Hello, everyone, and thank you for joining us today. Let me say at the outset how disappointed I am with the third-quarter results. While there were some real positives on the marketing side of the business, we simply did not deliver the operational results we wanted. For the third quarter, we reported a net loss of $0.22 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 $0.03. This compares to $0.59 for the second quarter of 2011.

When compared with the second quarter, the third quarter's adjusted results were impacted by lower revenues, higher costs, and an increase in our effective tax rate. Before turning the call over to Ricardo and then Terry, let me make a few comments on revenues and costs. As you will see from the published results, revenue efficiency of 89.5% during the third quarter deteriorated from the 92.1% we reported in the second quarter. While the revenue efficiency trend was favorable through August, we suffered a significant setback in September.

Among our ultra-deepwater rigs, we had 5 rigs that significantly under performed during the quarter. The Deepwater Expedition, which we have elected to take out of service to overhaul the BOP control system. The Jack Ryan, which is undergoing significant maintenance to its BOP control system on location in Nigeria. The Discoverer of Spirit, which generated lower revenues while undergoing mobilization to West Africa from the Gulf of Mexico, and also underwent repairs to its BOP control system. The GSF Explorer, which underwent repairs to its BOP and the Discoverer Enterprise, which underwent extensive acceptance testing by BP following an out-of-service project earlier this year. The Explorer, Spirit, and Enterprise returned to operating rate in October, while the Jack Ryan and the Expedition are scheduled to return to operation in November and December respectively.

As you know, we've been focused on the issue of revenue efficiency for several quarters now. As a reminder of the main components of our improvement program, we are focused on continually enhancing equipment reliability, which involves thorough inspections by Transocean and the 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. Based on our performance in the second quarter and the early portion of the third quarter, I am confident that we are doing the things that best position Transocean for success over the long term.

That said, the recertification of the BOP is oftentimes the critical path for returning the rig to service. Based on continuing discussions with our key pressure control OEMs, I remain concerned about their ability to adequately respond in a timely manner to the change in requirements and the significantly increased work load imposed by Transocean and the rest of the offshore drilling industry. Even with the additional demand planning and quality control support we have provided in over 45 vendor facilities around the world, vendor capacity constraints continue to adversely impact our revenue-generating ability, while driving high are costs. We will continue to explore every means available to us to assist these key vendors in coping with the new reality. However, while I remain very confident that we have the correct plan and team in place to address these critical issues and achieve historical levels of revenue efficiency, it now seems likely it will take longer than I originally anticipated to reach this goal.

Regarding the increase in operating costs, the third quarter reflected increased spending on BOP maintenance and overhaul activity. The third quarter was also negatively impacted by a significant increase in effective tax rates, which is a direct result of our operating performance in the period. Ricardo will provide insight into the main drivers for this in his comments. For the last several quarters, we have reported results below our and the Street's expectations. I believe there are 2 primary reasons for this, both of which we are diligently working to address.

The first is, of course, our disappointing operational performance, and I have regularly outlined the steps we are taking to correct this. The other relates to the challenges the analyst and investor community face in modeling our financial performance. Recognizing the fundamental role we play in this, we have recently made enhancements to the information we disclose to provide more insight into the key drivers of Transocean's performance. These include out-of-service time, revenue efficiency, and asset class-specific operating costs.

On a more positive note, I am pleased that we have closed the acquisition of Aker Drilling and I'll take this opportunity to welcome the Aker Drilling personnel to the Company. The transaction was executed very efficiently by our team, and the integration is proceeding smoothly. The acquisition strengthens our industry leadership position in the harsh environment in ultra-deepwater markets. The 2 drill ships under construction in Korea are already generating considerable interest among our customers. We also recently celebrated the naming of the Transocean Honor, the first of 4 high-specifications jackups we have under construction in Singapore. These are concrete examples of our asset strategy, which is focused on increasing our exposure to high-specification assets, both floaters and jackups, and reducing our exposure to low-spec or commodity rigs.

In the third quarter, we sold 4 rigs and divested our interest in the joint venture that owns the research vessel JOIDES Resolution, for net proceeds of $106 million. Subsequent to the close of the quarter, we divested certain other oil and gas properties for net proceeds of about $50 million. Our efforts to divest non-core assets continue, and there remains significant interest from third parties to acquire Transocean rigs. Additionally, we are exploring options for larger-scale transactions options to accelerate the high-grading of the fleet.

I won't spend much time on the market, recognizing that Terry will give you a thorough review of each asset class, but let me say that we continue to see increased demand across all rig classes. The ultra-deepwater market continues to tighten. We're discussing with customers opportunities to reactivate deepwater rigs like the Transocean Richardson and the Discoverer 534. The midwater market remains pretty good, and the jackup market, including the low-spec standard jackup space, is improving.

Finally, regarding the ongoing litigation related to the Macondo Well incident, we recently filed a claim in the multi-district litigation asking the Court for partial summary judgment on the contractual indemnity which BP owes us. Throughout the incident, BP has repeatedly and publicly proclaimed that it will make this right, and that it will pay all legitimate claims. Moreover, following the recent BP-Anadarko settlement, BP complimented Anadarko for recognizing its responsibilities and meeting its obligations under the Mississippi Canyon 252 joint operating agreement. Similarly, we expect BP to live up to its word and make this right by recognizing our legitimate claim and meeting their obligations under the contract for the Deepwater Horizon. 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 a net loss of $71 million or $0.22 per diluted share for the third quarter of 2011. Excluding $81 million in certain net unfavorable items, the largest of which was a $78 million exchange loss related to the acquisition of Aker Drilling, our adjusted diluted earnings were $0.03 per share. This compares with adjusted earnings of $0.59 per diluted share in the second quarter.

The exchange loss resulted from a forward foreign exchange contract, executed to lock in the economics of the Aker Drilling transaction in an environment of high currency volatility during the 6-week period prior to acquiring the Norwegian-krone denominated shares of Aker Drilling. During this period, the US dollar strengthened materially relative to the krone, generating this loss. $5 million in other costs related to the Aker transaction were also incurred in this quarter. The remaining net unfavorable items pertain mainly to discontinued operations and to assets either sold in the quarter or held for sale as we execute our strategy to dispose of non-core drilling units and other assets.

I will now comment on the drivers underlying our disappointing operational performance in the quarter. The ultra-deepwater and deepwater rig categories both saw lower utilization and lower revenue efficiency in the quarter. This, combined with an increase of $48 million in operating and maintenance expenses, and a higher effective tax rate, resulted in the significant decline in earnings compared to the second quarter. Revenue efficiency was $89.5%, compared with 92.1% in the previous quarter, resulting in a $50 million revenue reduction. Steven has already addressed the drivers of the deterioration in the ultra-deepwater fleet efficiency which fell to 86% from 89% in the second quarter. The efficiency of the deepwater units fell 6 percentage points to 88%, due largely to the Transocean Rather in Angola and the Sedco 710 in Brazil.

Overall fleet utilization improved 3 percentage points in the quarter to 58% from 55%, due to fewer idle rigs, primarily 4 standard jackups, 1 high-specification jackup, and 1 midwater floater, but was lower than we expected as shipyard-related out-of-service time rose to 33 rig months from a projected 24 rig months. This was largely attributable to the hull repair of the Marianas, following the anchor handling incident in early July, the M.G. Hulme contract preparation and mobilization to India and the Deepwater Expedition shipyard. The impact of this additional out-of-service time was approximately $95 million, but more than offset the $80 million improvement in revenue that resulted partly from the Deepwater Discovery, which operated for the entire quarter, following an extended shipyard.

The increase in total operating and maintenance expenses compared to the second quarter resulted in part from an increase in costs from BOP and well control equipment recertification. These costs were incurred mostly during shipyard projects, and largely depend on the timing of the equipment overhauls and the individual rigs involved. Stringent standards imposed by our customers and vendors to comply with NTL-05 regulation significantly increased the quantity and costs of spare parts required in the process. These costs are indicative of the high level of maintenance expense required for such equipment in the future.

The effective tax rate of 212.8% incurred in the quarter compared to 33.5% in the second quarter. The annual effective tax rate for 2011, which excludes various discrete items, was 82.6% in the third quarter compared to 25.6% in the second quarter. The increase in the annual effective tax rate is primarily due to reduced profitability in certain jurisdictions, where activities are either taxed on a profit basis or subject to lower tax rates. The third-quarter amounts are also impacted by the approximately $60 million catch-up adjustment required to reflect the change in the forecasted annual effective tax rate for first and second quarter activities. The increase in the third quarter effective tax rate is primarily due to the items noted earlier, as well as the impact of the $78 million loss on the forward foreign exchange contract, which provided no tax benefits. This adjustment to the annual effective tax rate does not reflect any significant new tax exposure.

Net cash flow generated from operations amounted to $492 million in the quarter, an improvement of $152 million compared to the second quarter, and is largely attributable to a reduction in working capital, however, cash on hand at the quarter end diminished by $103 million due to the acquisition of the initial interest in Aker Drilling for $199 million, the $78 million settlement of the forward foreign exchange contract, and the payment in September of the second installment of the dividend, amounting to $254 million. Capital expenditures totaled $137 million, down from $293 million in the second quarter, due to the timing of shipyard milestone payments associated with our new-build construction program, and were partly offset by $88 million in proceeds from asset sales.

Cash at September 30th was $3.3 billion but will decline in the fourth quarter due to the acquisition of the remaining shares in Aker Drilling for approximately $1.2 billion. We have renewed our revolving credit facility effective November 1st for a further 5 years, and we expect the $1.7 billion in outstanding Series B senior convertible notes to be put to us in the fourth quarter, and we are evaluating alternatives to fund the repayments.

I would now like to provide you with some updates to our guidance for the remainder of 2011. Other revenues are now projected to amount to approximately $650 million, reflecting improved activity for our drilling management services. Looking at expenses, we are revising our previous guidance of $5.6 billion to $5.8 billion for operating and maintenance expenses, upward to $5.8 billion to $6 billion, with the increase attributable to the consolidation of Aker Drilling's results and to higher shipyard and daily operating expenses, driven in part by well control equipment recertification costs. These expenses are offset to some degree by a reduction of forecasted expenses related to the Macondo well incident, which are now estimated to be about $100 million, down from $135 million previously forecasted, but subject to court rulings associated with the inter-pleader filed by our underwriters.

Depreciation is forecasted at the lower end of the $1.5 billion to $1.6 billion range, inclusive of the 2 semi-submersibles acquired from Aker Drilling, while general and administrative expenses are projected to fall between $260 million and $270 million for the year, excluding Aker acquisition costs. Net interest expense is now expected to range between $570 million and $580 million, with the consolidation of Aker net debt of approximately $1.1 billion in the fourth quarter.

The annual effective tax rate is now projected at between 33% and 35%, a 12 percentage point increase from previous guidance for the reasons I have already highlighted. Income attributable to non-controlling interests, which relates mainly to our TPDI and ADDCL joint ventures is forecast to range between $70 million and $75 million. Our forecast for capital expenditures is unchanged at $1.1 billion. With respect to the Aker acquisition, we will be incurring certain 1-time expenses in the fourth quarter of 2011, which we estimate at between $35 million and $40 million.

These expenses include professional fees relating to the transaction, as well as certain integration costs and about $30 million will be recorded in G&A. As explained in the 10-Q, certain fair value measurements have not been completed yet, and the purchase price allocation remains preliminary due to the timing of the acquisition and due to the number of assets acquired and liabilities assumed. Key among the preliminary fair values are current assets of $341 million, property and equipment at $1.8 billion, other assets at $738 million, current liabilities of $205 million, including short-term debt of $176 million. Long-term debt of $1.8 billion and goodwill of $397 million. The figures for current and other assets that I have mentioned above include $970 million of cash investments restricted to the payments of certain assumed debt instruments.

We would not normally provide guidance on 2012 until next February, but given the significant amount of uncertainty in today's challenging post-Macondo operating environment, we wish to share some initial insights as to how we are currently viewing the coming year. Because our budget process is not yet complete, I want to emphasize this is only an initial view, and we will revisit this guidance when we report our fourth-quarter and year-end results. As discussed in our last earnings call, we expect shipyard activity to be concentrated on deepwater midwater rigs rather than ultra-deepwater rigs. As a result, we expect lower revenue losses from out-of-service time, even though shipyard expenditures are unlikely to decline compared to 2011. We anticipate operating and maintenance costs to fall into a highly preliminary range of $6.2 billion to $6.5 billion in 2012, reflecting higher utilization, a full-year's activity to the Aker drilling semi-submersibles, continued well control equipment specification costs, Macondo expenses, and general inflationary pressures, particularly on personnel costs.

As it relates to Aker, we are not expecting cash operating expenses of the acquired company to change significantly in 2012. The operating expenses are mainly comprised of the 2 semi-submersibles operating in Norway and we currently assume no significant synergies or cost savings. At this time, we do not expect depreciation or general and administrative expenses in 2012 to change significantly from 2011. We currently expect that the annual effective tax rate will fall from a projected 34% in 2011 to the upper 20s in 2012, as profitability in certain [deemed] profit and low tax jurisdictions improve. Absent additional new-build commitments, capital expenditures are expected to stay within the $1 billion to $1.5 billion range. With that, I will hand it over to Terry to update you on the markets.

Thanks, Ricardo, and hello to everyone. Before we cover specific markets, I would like to make a few general comments. 2011 continues to be an exciting year for Transocean with the recent acquisition of Aker Drilling strengthening our position in the Norwegian market and expanding our ultra-deepwater fleet with 2 DSME-designed drill ships under construction. In addition, we executed leading day rate contracts, totaling approximately $1.2 billion since our last earnings call, and $5.8 billion year-to-date.

Since the last earnings call, we've successfully executed 3 high-spec floater contracts, 11 midwater floater contracts, 3 high-spec and 11 standard jackup contracts. Even more significant is our ability to build to contract 1 more new build jackup, extending 1 of our existing fifth generation 7,500-foot floaters at leading edge rates of $500,000 a day and return 3 idle jackups to the market. Despite the recent uncertainty in the global economy, tendering and contracting activity in the ultra-deepwater market has continued to strengthen with customers contracting units at a brisk pace.

With little to no global availability remaining for 2011, we are now seeing the available 2012 rigs quickly being absorbed by the market. Although still our softest segment, tendering and contracting in the deepwater market is improving, with long-term fixtures in Australia and in Brazil, our Petrobras current 1,200 and 1,500 meter tenders are ready to absorb additional units. midwater activity increased substantially in the third quarter, with multiple fixtures, especially in the UK and Norwegian sectors of the North Sea. Known demand for UK and Norway exceeds available supply and we expect upward pressure on pricing in these markets. Premium and standard jackups are enjoying in increase in utilization over the previous quarter, and strong demand is leading to the reactivation of some of the world's idle standard jackups. Demand continues to improve in Southeast Asia, West Africa, Saudi Arabia and Mexico.

Let's now look at the various market segments, beginning with the ultra-deepwater. US Gulf of Mexico, Brazil and West Africa remain the hot beds of ultra-deepwater activity. Limited availability in 2011 and 2012 is pushing the rates up as evidenced by multiple fixtures well above the $500,000 a day level. As outlined previously, the US Gulf of Mexico demand is increasing, indicating our customers' intent to implement their delayed exploration and development programs. This, coupled with Petrobras' additional demand as demonstrated in the recent 1,200 and 1,500 meter tenders, along with a new 2,000 meter tender, further improved the supply and demand balance on a worldwide basis.

Indicative of this positive market sentiment, we have been able to execute a 6-month contract extension for the Sedco Express 7,500 semi-submersible at $500,000 a day with Noble Energy in Israel. Based on our bullish sentiment on the ultra-deepwater market, we believe we are well positioned to further benefit from opportunities in late 2012 and 2013 at attractive rates for the limited number of units that are scheduled to be available in our fleet. The newest additions to our fleet, the 2 DSME-designed ultra-deepwater drill ships under construction are drawing interest from our customers as they begin to explore their needs for 2013 and beyond. With new discoveries in the Golden Triangle, coupled with the emerging markets of Australia, French Guyana, Sierra Leone, Ghana, Liberia, Tanzania, Mozambique and Mexico, we remain confident about the future of the ultra-deepwater and our ability to capitalize on the opportunities.

Turning to the Deepwater market, tendering and contracting activity has picked up slightly from the previous quarter, with 10 fixtures in the last 2 months with most activity occurring in Australia. We see demand improving in this segment, due to the continuing tightness in the ultra-deepwater market, so much that Transocean had no active availability in 2011 after extending the Discoverer Seven Seas through the end of 2011. We are in advanced discussions with multiple customers on our active deepwater units remaining available in 2012, and are confident to close these out in the near future. Petrobras' recent tender will also absorb additional global supply, further improving the outlook in the deepwater segment, and potentially providing the opportunity to reactivate a few of our idle units.

Turning our attention to the active midwater floater market, contracting activity in the Norwegian and UK sectors of the North Sea has further diminished available capacity through 2012 and 2013. The earliest availability of incumbent units in Norway's Q1 2013, providing opportunities to relocate capable capacity, which is limited, from the outside into this attractive market. Little supply remains in the UK Continental shelf for a 2012 commencement. We are in discussions with multiple operators to not only secure our remaining active units, but also to reactivate 1 of our 2-stack midwater units in the UK, the Sedco 712, during the upcoming year.

ONGC has been the driving force in India thus far, taking 3 midwater units, of which Transocean has been able to secure 1, the Actinia, at attractive terms. Since our last call, we've been able to add and secure additional 5.5 rig years in midwater class, with day rates ranging from $235,000 a day to $293,000 a day. Additionally, since our last fleet status report, we added a further 1.5 years, with day rates ranging from $250,000 a day to $273,000 a day. Based on our discussions with multiple operators in Norway, the UK, West Africa and Southeast Asia, we remain optimistic to secure further contracting opportunities through 2011 and 2012.

Moving to the jackup market, the tendering and contracting pace for premium and standard jackups remains strong. As we predicted, the undersupply in the high-spec segment has caused demand to spill over into the standing units, causing utilization and market day rate levels to rise. In this improved market environment and since our last earnings call, we've been able to secure multiple contracts across our jackup fleet of about 8 rig years with day rates ranging from $63,000 a day for the lower-spec jack ups to $191,000 a day for the premium units. Additionally, since our last fleet status report, we added more than a rig year, with day rates ranging from $63,000 a day for the low-spec unit to $130,000 a day for the standard jackup.

Most notably, we were able to execute a contract with Chevron and Thailand for delivery of a third new build jackup for a 3-year term at $145,000 a day. In addition, we were able to execute an extension of the GlobalSantaFe Galaxy 2 with Gaz de France, who has for 3 wells at $191,000 a day in the UK. We are confident that the additional demand from our customers for premium and standard jackups will lead to further contract execution for our active fleet and provide opportunities to reactivate some of our stacked assets. In conclusion, we continue to experience strong demand across all market segments and all major oil and gas provinces in emerging markets, which reinforces our view that utilization and day rates will continue to improve.

Transocean has been at the forefront of this cycle in adding significant contract backlog at market leading rates and putting some of our stacked assets back to work at attractive returns. The underlying market strength, combined with the addition of high specification, new build jackups, harsh environment semis, and the ultra-deepwater drill ships well-positions Transocean to provide our customers with the right assets for their future programs and create a positive growth outlook. That concludes my overview of the markets. I'll turn it back to you, Steven.

With that, operator, we're ready to open up the lines for Q&A.

Thank you. (Operator Instructions). We'll pause for just a moment. Our first question today is from Angie Sedita from UBS.

Thanks. Good morning, guys. Steven, how many -- clearly, your vendors are behind in ramping up to meet the new industry standards and the demand that the contract drillers now have out there versus in times past. Is the wait time on vendors as much as 30% to 50% of the issue of what we saw here in the third quarter?

I'll tell you, Angie, it is a significant component of what we saw in the third quarter. I'm not sure I can be crisp enough to give you a specific percentage. If we went rig by rig, which would be way too detailed for this kind of a conversation, I could tell you what the issues were on each rig but how to distill that into an overall fleet percentage, I think, would be just a bit tough. It was a significant component.

Okay, okay. And then are you incurring any cost for BOP standards on a global basis that your peers are not? I'm trying to understand why your cost and registration fees could more impacted than your peers, obviously for certain reasons, but are you taking any actions that you are taking on your BOPs that others may not be on a global basis?

I don't think from an industrial perspective, Angie. I don't think the standards are any different. We may have taken a bit more of a proactive approach, taking advantage of opportunities, where we had already scheduled a special periodic survey or were already in the process of mobilizing a rig from one location to another. We may have taken an already planned out-of-service period like to incur the incremental cost of recertifying the BOP. As far as the recertification standards themselves, that's an industry-wide issue.

All right, okay. Fair enough. Just 1 quick one for Terry. Certainly, the ultra-deepwater markets are encouraging here. How much ability do you think the industry has to push for higher rates in 2012? Do you think that rates generally stay here in the low $500,000s, or is there a possibility we could move into the mid-$500,000s in 2012?

Angie, I think if you look at the availability that is rumored to be left for 2012, I think it's only about 5 units. I think you are going to see the rates being pushed up. The demand is clearly out there, we're in a lot of conversations where the customers simply don't have a rig for a 2012 program that they're trying to enact. So I think you're going to see upward pressure.

Okay. All right. Thanks. Fair enough.

Thanks, Angie.

Moving on, our next question is from Collin Gerry from Raymond James.

Good morning, everybody. I want to follow up on the BOP topic. Seems that's highly -- the bigger cause here for some of the operational stuff. Maybe you can talk to us about the progress through the fleet. You highlighted 5 rigs that are go in repair or recertification, as it would be. If you looked at your ultra-deep fleet, how would you qualify your progress there? Are we 25% through the fleet, based on these new standards? Is it 75%? Maybe just give us a better sense of where we are.

Yes, it's going to be tough for me to give you a crisp number but if you look at the 27 operating ultra-deepwater rigs today, 10 of those are new builds, so there's really no issue there. Another significant percentage, and I don't know what the number is, probably 5 or 6 of those operate in the Gulf of Mexico, and have already been through NTL-05 recertification, there are another couple that I identified as part of the issues we're experiencing in the third quarter, and they've either gone back to work or will go back to work shortly here in the fourth quarter. So if you just look at the 27 ultra-deepwater rigs, I would wager we're more than 50% of the way through, but still some work to do.

Okay. That's very helpful. And then I want to switch gears a little bit to the revenue efficiency side. Steven, you mentioned in your comments that it's going to take longer than you originally thought. Maybe you could kind of qualify that, numerically, specifically. If we look, your progress went from 89% to 90% to 92% and then back down this quarter. How long do you think, until we are back in the 90% range?

Let me try and give you a perspective on it, Colin. I think there are 3 issues we're facing. 1 of them is the broad industrial perspective. That's just the result of the post-Macondo environment. That's higher expectations, more scrutiny, less tolerance on the part of our customers, on the part of the regulators. That's here to stay. While that situation continues to evolve, I think our industry-leading operating experience and our subject matter expert and our technical capabilities put us in a very good position.

I would argue that it's an advantage for Transocean. As that environment continues to evolve, we're in a good position to respond to that. I have no concerns at all about our ability to compete and perform in this post-Macondo environment. It's here to stay, but I'm confident we'll be able to respond to that.

Second key issue that we're facing is just Transocean's continuous improvement program, always improving our operating procedures, our maintenance protocols, and our standards and our policies. Based on what we saw in the first and second quarter and the early part of the third quarter, we've made very good progress there, and I'm confident we'll continue to see progress there.

The third issue is kind of the one that's in between, and that's the industry's reliance on this small cadre of key vendors. If you look back over the last 10 or 12 years, Collin, we've seen this a couple of times in the past. It happened in 2000, 2001, and it happened in about 2006 and 2007, where the vendor community just got overwhelmed. They've responded to it every time in the past. The frustrating aspect of that is that it takes time.

So the situation we're in is going to, I think it's going to endure into 2012. I think we will be able to regularly demonstrate progress, but as we saw in September, it's not linear. It's not clean. It tends to be frustrating at times, as September clearly was. So I'm confident, Collin, that we'll be able to continue to demonstrate progress for the analyst and investor community.

Okay, guys. Thanks.

Our next question today is from Kurt Hallead from RBC.

Hi, good morning.

Hi, Kurt.

I'm going to ask somewhat of an unfair question, but if you were to put a probability on 2012 earnings higher or lower than $4 per share, which way do you think it would lean, higher than $4 or lower than $4 at this point, based on what you know, and I won't hold to you it as the quarter goes on.

Good.

You know that it's not our practice to give any form of guidance of that nature. We have stepped up to the plate. We talked about our initial perceptions of what we can expect in 2012. We believe that the guidance that we've provided there will provide you a reasonable basis for starting to model 2012 with more accuracy.

Okay. Fair enough. My follow-up question is on the vendor front, Steven, you mentioned you expect that to endure throughout the course of 2012 with progress being made. So that's all duly noted. You have also mentioned, I think in the past, that you guys have taken some action on your own to get some Transocean people in the facilities of the vendors and so on.

So could you update us on how that has progressed? What kind of improvements you've been able to garner from that approach, and from the vendor standpoint itself, how quickly do you think they are trying to address this issue? Because in a certain extent, kind of the bigger backlogs they have, gives them maybe some opportunity to get bigger pricing and margins on their fronts, so I don't know if their interests are necessarily aligned with yours.

Kurt, I think you've hit on a key issue for us. We have Transocean personnel in over 45 vendor facilities around the world. Since we embarked on that effort, in terms of helping the vendors, supporting the vendors with demand and capacity planning, and QA-QC, we've seen concrete examples of where we've had an impact on the ability of the vendors to meet our expectations. The challenge is there's only so much capacity. It takes time for the likes of the NOVs and GE Oil and Gas, and Cameron to construct new facilities, and buy and install new machine tools and train new machinists and welders, and that's the significant effort that those vendors are going through right now.

We've had an opportunity over the last several weeks to meet with many of those folks and review their plans and try and provide as much incentive as we can to those plans to be implemented as quickly and efficiently as possible. As I've said, we've seen them do it in the past so I have no doubt about their ability to do it this time around. I'm just really frustrated with the amount of time it's taking. Your point about their backlog and ability to push prices is well-noted, and we push against that every chance we get.

Okay. So do you think then -- all right. That's a fair enough. Just 1 additional follow-up here. The challenge for all involved in this process and including where you guys sit, in your fleet status reports. You provide us with some real extensive information and you try to give us some sense of what the out-of-service time's going to be, or planned out-of-service time's going to be. Over the last 2 quarters, it's been over 1,000 days, and for the fourth quarter, it's mapping out to be around 500. When you've provided your guidance, in your operating costs and yard numbers, are you going strictly by what's in the fleet status or are you providing some sort of margin of error in that out-of-service time? As I'm trying to calibrate it myself at this juncture, I want to get a sense on how you guys go about that process.

This is Ricardo again. As you know, we've extended the visibility of our out-of-service time in the fleet status report and we've pushed it out through to the end of 2012.

Yes.

We include those shipyards or major projects where we have a high level of confidence that they will take place, and clearly our level of visibility diminishes as we look farther out through the course of the next 15 months. So we share with our investors what the out-of-service time that we expect to incur, and we review that very regularly, effectively monthly, and prior to the reissuance of the monthly fleet status report.

So we respond effectively to changing circumstances, to the developments that have affected each one of the individual rigs. And in evaluating the projects that are included in this out-of-service time, we clearly look at -- we always have an element of contingency in our evaluations. The level of accuracy clearly depends on the expectations that we have from various external factors.

And just for clarity, that does what your expectations are for BOP recertification and so on and so forth, right?

BOP recertification is an integral part of the project process.

Okay, great. Thank you.

(Operator Instructions). 1 other note, please limit yourself to 1 question and 1 follow-up question. We'll go next to Geoff Kieburtz from Weeden & Company.

Thanks. Just to clarify here a little bit more on the subsea expenses. Are we talking about essentially an event, a 1-time event of recertification or is there an element of ongoing operation to maintenance expense increase related to subsea systems?

The significant aspect to it, Geoff, is the 1-time recertification. As I mentioned, we're also continuing to enhance our operating standards and our maintenance protocols, and there so will be some upward bias to the overall cash operating costs of the rigs in response to that, but that's not going to be material relative to the 1-time expenditure necessary to recertify the BOP. Okay.

Steven, earlier, you responded to the question about why is Transocean having this increased problem that we're not seeing, at least so far in your peer group. And I think your answer was perhaps Transocean was being more proactive in taking advantage of planned shipyard time to get everything done. Yet, it appears as if there was some sort of communication problem between Transocean and its vendors because they're not ready to do this in the timely fashion that you expected. Can you elaborate on that a little bit?

Well, I met with one of our key pressure control OEMs about 10 days ago. They showed me a chart of the average amount of work Transocean had given them in the prior 5 years compared to the amount of work we've given them in the last 12 months. It is a significant increase, and absent the facilities to accommodate that, it overwhelmed their capacity and so, when you talk to those guys, they describe it in terms of roof lines. The addition of roof line to their statistics takes time.

Let me give you 1 other perspective, Jeff, on why I think it is disproportionately affecting Transocean. If you think about Transocean's historical leadership in ultra-deepwater, more of our rigs, relative to our ultra-deepwater fleet came from prior new build cycles. Two-thirds of our fleet comes from prior new build cycles. As far as the peer group is concerned, only one-third of their fleet comes from prior new build cycle. That's reflective of Transocean's historical leadership in ultra-deepwater drilling. Everybody else is a bit later to the game than we are. Consequently, as these issues manifest themselves in ultra-deepwater mucks, subsea BOP control systems, we're going to be impacted disproportionately by it.

Fair enough. Thank you very much.

Moving on, our next question is from Ian Macpherson from Simmons.

Hi. Thanks. Ricardo, do you see your second half 2012 costs lower than the first half? Based on the evolution of the up front work we've been talking about on recertifications, et cetera?

In the guidance I gave in 2012, I did indicate that there will be a shift in the mix of major projects between 2011 and 2012, away from the ultra-deepwater rigs into more of the deepwater and the midwater fleet. This will result in reduced -- we expect it to result in reduced loss of revenue due to out-of-service time. In terms of costs, it's relatively difficult to say because even if -- because the project, even though it may take shorter and may take less time could involve a higher cost per day incurred, depending on the state of each individual rig that is being brought into shipyards. So I hesitate at this very preliminary stage to indicate that it's going to be lower in the second half of 2012.

Okay. My follow-up would be, the Richardson and the 534 were mentioned in the opening comments. Has any of your reactivation work begun ahead of contracts for those that may have shown up in your third-quarter costs or your fourth-quarter costs, and/or CapEx. And can you -- is there any color that can be provided or elaboration on the prospects for those 2 units? Thanks.

Ian, I'll talk about the costs and punt to Terry on the prospects. I don't think that anything we've done to those rigs in the third quarter would necessarily qualify as reactivation. The 534, we have kept enough of a crew on there to keep the high-tech systems, the DP system and the power management system alive and well. I wouldn't call that reactivation, but it's certainly going to aid in the reactivation of the rig when the time comes. We've not spent any significant money at all on Richardson.

Just to give you a little bit of color on both of the rigs. We actually have both of them bid into some of the open tendering. You may have seen that the Richardson is the number 2 rig on 1 of the Petrobras tenders. So we're in the number 2 spot and we fully believe that we'll be in conversation regarding the Richardson's opportunity in Petrobras in Brazil. Also, we're seeing a lot of interest from Norway, that potentially, to upgrade the rig to take her to Norway. So we're very optimistic to returning the Richardson back to work.

The 534, also there's been some interest from Petrobras and an inquiry for some workover work, and that hasn't been made public. Those tenders have -- the inquiry has been opened, but we're just going have to wait and see on that one. Again, we think they are both opportunities, and we are hopeful that we can reactivate those this year. Or start the process.

We'll take our next question from Douglas Clifford from Omega Advisors.

Good morning. This is an accounting question on your cost side. Were there some costs in shipyard during the quarter that management had thought would be capitalized that ended up getting expensed to sort of explain the surprise element on the costs?

Doug, this is Ricardo. We, in the quarter, we had a very close look at our expenditures on recertification of BOP and related well equipment, well-control equipment. And the -- there was a -- and we upgraded our, and reviewed our guidelines in respect of that. We haven't placed a policy that is clear as to the costs of the deferred as opposed to expense, and we have effectively, the third quarter was partially affected by some increased costs from BOP certification. Some of those costs, approximately $50 million relates back to prior quarters of this year. So there was a slight uptick, as a result of a closer review of our guidelines and implementation of the policy.

And how much related -- was there an effect on the third quarter also, $50 million on prior quarters and another number for this?

There were expenditures incurred on BOP recertification in the third quarter of approximately $30 million, yes.

And Steven, does this quarter affect any way your outlook for Transocean's dividend and the sustainability of it?

Yes. I anticipated that question would come up at some point during the discussion today. Doug, I'll tell you, we will continue to engage the Board in a thorough review of the dividend issue. The Board will take the same things into consideration that they always take into consideration, which is our outlook for the business. The prospects for cash flow generation, the opportunities to redeploy cash in our business, and it'll be a thorough review. We'll start that review as it relates to the 2012 dividend again with the Board when we meet here in a couple weeks' time. The board will make a final decision at the February board meeting.

Mark Lacey from Investec Asset Management has our next question.

Hi. Can you hear me, guys?

Yes, Mark.

All right. Thank you. I'm not going to ask you whether you're going to earn $4 for next year. It's more of a strategic question more than anything else. Given you knew you had the out-of-service rig months for 2012, given you knew the issues with Macondo and given the dividend of such an important factor for Transocean as a demonstration of its ability to generate free cash in this difficult time, what drove the decision to actually buy Aker Drilling? As a shareholder, we just can't see the logic of this decision. Can you give me some comfort on what drove that decision by this very, very difficult time?

Mark, I think 1 of the things that shareholders want us to do is to redeploy -- to identify opportunities to redeploy capital in our business at attractive rates of return. The opportunity to acquire Aker Drilling and expand the Company's presence and leadership in the harsh environment market and the ultra-deepwater market, to bring 2 additional ultra-deepwater drill ships into the fleet at fair valuation was an attractive opportunity for us. So we chose to pursue that. We're going to continue to look for opportunities to redeploy capital in our business at attractive rates of return.

But Steven, the problem with this is you've still got a $1.9 billion debt maturity that you know you have outstanding. With all of the moving parts that you have, doesn't it make a fair transaction marginal?

I'm not sure what you mean by making a fair transaction marginal. The assessment of the opportunity in our minds was that this was an attractive opportunity for us to redeploy capital and grow our business, particularly the strategic elements of our business.

You don't have any problems with debt maturity then, in terms of paying the final $1.9 billion?

Mark this is Ricardo. You know, we highlighted that we have a number of options that we're looking at. We've just renewed our revolving credit facility of $2 billion for a further 5 years. We have even after the acquisition of the shares of Aker Drilling, we have significant cash on the balance sheet, and we continue to be cash flow positive, significantly cash flow positive at the operating level. So we're not in a situation where this is causing us undue concern.

Okay.

We have options available, and we're evaluating them at present.

So Ricardo, to turn that then from a shareholder's point of view, what you're telling me is that the revolver is unlikely to be used for debt maturities, and secondly, the dividend is more than comfortable for 2012?

No, Mark, I think you're putting words into my mouth there. I would say as far as the dividend is concerned it's something that has to be approved by shareholders every year.

Yes.

It's subject to review both by management and by the Board in the light of all of the various factors. We have indicated that we are committed to a sustained dividend, but clearly, we have to take all of the externalities into account. As I said, we have had in 2010, we had access to the capital markets. We believe we still have access, so I think the options that existed then still exist for us today.

Our next question today is from Dmitry Baron from Decade Capital.

Yes, hi. Thanks for taking my questions. If I missed it, I apologize, but have you exercised Aker's option to order 2 more UDWs which was due, I believe, at the end of October, and also for Ricardo, probably from the bigger picture perspective and also to follow up on the prior question, is the commitment to maintain a few billion of cash as inclusion on balance sheet still in place, and how do you expect to accomplish it between the portable converts and the recent payment for Aker? I understand that you are reviewing different options, but if you could elaborate on that, I would appreciate it. Thank you.

So I'll take the first part of that question, Dmitry, with respect to the 2 options that came along with the acquisition of Aker Drilling. The nominal exploration of those options was earlier this week on the 31st of October. We had engaged in discussions with the SME. That date, that option expiry date passed without any formal action on our part.

Okay. Thank you.

Dmitry, this is Ricardo. With regard to your question on cash flow and the ability to meet the obligations in the short term, I don't think there's much more I can add to the comments that I gave to Mark. We were looking at all of the -- we were looking at a number of options that we have, and we are still generating a significant amount of cash and we have renewed the revolving credit facility.

Is it still the goal to maintain a few billion dollars as inclusion of cash on hand?

That still remains our goal, yes.

Operator, we'll take 1 more question from the audience, thank you.

And that question will come from Andreas Stubsrud from Pareto Securities.

Good afternoon. Can you just remind us on the average cost of reactivating your standard jackups?

Yes. When I talk about the stacked standard jackup fleet, Andreas, I always break it down into a third, a third, a third.

Exactly.

The easiest third to reactivate can probably be reactivated for something around $20 million. Broad range, $20 million. The other third that's at the other end of the spectrum, I'm not sure we would contemplate reactivating. It might be attractive reactivation candidates for somebody else, but the costs for us would probably be prohibitive. The middle third is somewhere in between there, somewhere between maybe $30 million at the low end and $50 million or $60 million at the high end.

Okay. Just 1 quick follow-up. For the 5 deepwater floaters, is there a significant CapEx you need to put into those or investments put into those 5 floaters, if you want to reactivate them such as Discoverer 534?

It's probably a similar sort of breakdown, though the numbers would be a little bit different. Rigs like the 534 and the Richardson would be relatively straightforward reactivation candidates. Now there's going to be some significant capital or some significant expenditure required to reactivate them, but we think the economics and the deepwater market, we think we would be able to find opportunities that those economics. There are probably a couple at the end of the spectrum that would be significant reactivation expenditures, that for that reason are not being actively marketed today at all.

Okay. Very good. Thank you so much.

That's all the time we have for questions. Turning the conference back to you.

Great. We appreciate the continuing interest in the Company and we'll talk to you next quarter.

That does conclude our conference for today. Thank you all for your participation.