Transocean Ltd (RIG) 2011 Q4 法說會逐字稿

Good day and welcome to the Transocean fourth quarter 2011 earnings conference call. Today's conference is being recorded. At this time, for opening remarks and introductions, I would like to turn the conference over to Thad Vayda. Please go ahead.

Thank you, Tim. Good morning and welcome to Transocean's fourth quarter and full-year 2011 earnings conference call. A copy of the press release providing our financial results, along with the supporting statements and schedules, is posted on the Company's website at Deepwater.com.

We've also posted a file containing three charts that may be referenced during this morning's call. The file can be found often the Company's website by selecting Investor Relations, quarterly tool kit, and then Power Point charts. The charts include average contracted day rate by rig type, out-of-service rig months, and operating and maintenance cost trends. The quarterly tool kit includes four additional financial tables provided for your convenience covering revenue efficiency, other revenue details, daily operating and maintenance costs by rig type and contract intangible revenues. Joining me on this morning's call are Steven Newman, Chief Executive Officer; Greg Coffin, Executive Vice President and Chief Financial Officer; and Terry Bonno, Senior Vice President Marketing.

Before I turn the call over to Steven, I would 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 but not limited to, future financial performance, operating results, the prospects for the contract drilling business, and the impact of the Macondo well incident. Such statements are based upon the current expectations and certain assumptions of Management and are, therefore, subject to certain risks and uncertainties. As you know, it is inherently difficult to make projections or other forward-looking statements in a cyclical industry since the risks, assumptions and uncertainties involved in these forward-looking statements include the level of crude oil and natural gas prices, rig demand and operational and other risks which are described in the Company's most recent Form 10-K and other filings with the US Securities and Exchange Commission. Should one or more of these risks and uncertainties materialize or underlying assumptions prove incorrect, actual results may materially vary from those indicated. (technical difficulties)

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 may be considered non-GAAP financial measures under Reg G. As I indicated earlier, you will find the required supplement the financial disclosures 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 kit 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 very much and I will now turn the call over to Steven Newman. Steven?

Thanks, Thad, and thank you all for joining us today. A quick word regarding the rescheduling of our release and conference call. Based on the advice of counsel and in the context of the recent OPA and Clean Water Act ruling and the anticipated start of the trial today, we elected to accelerate the disclosure of our fourth quarter and full-year results by about a day. I apologize for any inconvenience this may have caused and appreciate your flexibility.

Before providing my overview of the quarter, and outlook for 2012, I would like to take a minute to reassure our shareholders, customers and employees that I am fully committed to addressing the issues that negatively affected the Company's performance in 2011. Throughout the organization I have stressed the urgency of improving our operational performance both in shipyards and in the field, and executing our asset strategy. We will continue to collaborate with our customers to deliver the right solutions, leveraging our resources and seasoned expertise. This includes maximizing the up-time of our rigs while achieving incident-free operations. Despite the challenges presented by the current operating environment, we will work hard to deliver the results that you expect.

I also officially welcome Greg Coffin who accepted my invitation to temporarily return to Transocean and as CFO, provide interim leadership of our finance function. The search for a permanent CFO is going well and we are fortunate to have a number of very highly qualified candidates under consideration. Following my overview of the quarter, Greg will give you the details on our fourth quarter performance and our guidance for 2012 followed by Terry who will give you color on the markets.

For the fourth quarter, we reported a net loss of $18.62 per diluted share. This net loss reflects the $5.2 billion impairment of our goodwill, which we reported earlier this month, and an estimated Macondo contingent loss of $1 billion. After consideration of these and the other items noted in our press release, adjusted earnings were $0.18 per share. The fourth quarter also reflects an additional increase in our annual effective tax rate. This change in tax rate from the third quarter resulted in a $0.14 per share adverse effect on the fourth quarter's results. Greg will talk more about this in a moment.

I am pleased that when compared to the third quarter, the fourth quarter's results reflected an increase in utilization and revenue efficiency, contributing to revenue approximately 8% higher. Revenue efficiency in the fourth quarter was 91.9%, an improvement over the 89.5% in the third quarter, and generally in line with the second quarter's results of 92.1%. During the fourth quarter, our ultra-deepwater floaters, which have the most significant impact on our overall performance, delivered revenue efficiency of 89.5%, their best of the year. I continue to believe that we are on the right track. However, I will remind you that while our revenue efficiency should gradually improve going forward through our technical and contractual efforts, the progress will not necessarily be linear. I am also extremely pleased with the results delivered by the two harsh-environment semi-submersibles we acquired from Aker Drilling which achieved a combined 98.9% revenue efficiency in the fourth quarter.

I want to make a couple of comments on the recent decision taken by the Board to not recommend a dividend at the upcoming annual general meeting. In arriving at this decision, the Board considered a number of factors, including the outlook for our business in the context of the existing operating environment for the industry and Transocean specifically, our financial flexibility and the strength of our balance sheet, and opportunities to reinvest in our fleet. I think it is important to point out that our capital deployment philosophy is unchanged. We intend to ensure the financial flexibility and strong balance sheet we need to pursue our objectives, which includes remaining an investment grade issuer, to reinvest in our business and value creating opportunities and return excess cash to our shareholders. Our Board will continuously evaluate our business in the context of this capital deployment philosophy.

We are addressing the challenges we experienced in 2011 through our operational and project excellence initiatives. Our emphasis on operational excellence includes thorough equipment inspections, enhanced maintenance, and rigorous pre-deployment testing, and we're making progress with these efforts. In conjunction with our operational initiatives, our focus on project excellence includes closer cooperation with our vendors to improve capacity planning, quality control, and more timely delivery. We have also taken steps to remove the BOP recertification process from the critical path to redelivery of rigs from the shipyard. This should, over time, significantly reduce project risk. Supporting both operational and project excellence efforts, we are rolling out a new maintenance, spares and upgrade program that is more compatible for the new rules for testing and certification and has a particular focus on rigs with complex Multiplex, or MUX BOP Control Systems.

In addition, we plan to better manage project execution risk through a five-year cycle recertification plan based on a unit exchange approach versus a traditional inspect and repair philosophy. This approach will apply to well-controlled systems during both operations and shipyard projects. Regarding our people and training solutions, we have established several subsea initiatives including a subsea center of excellence and [SWAT] teams in our major operational locations, staffed with some of the best engineers in the industry providing technical support.

2011 also had its share of encouraging progress in our asset strategy with the acquisition of Aker Drilling and the delivery of the new build jackup Transocean Honor from the shipyard plus the divestiture of several of our low spec jackups. We are committed to executing this asset strategy, increasing our exposure to high specification assets and reducing our exposure to low spec commodity class assets. With an improving secondhand market for drilling rigs we will continue to pursue single asset divestitures, sales of asset packages or other large scale transactions.

During 2011, the Company continued to lead in ultra-deepwater with the Dhirubhani Deepwater KG2 setting a new world record for drilling a well with the deepest water depth for an offshore drilling rig. I also want to thank the Transocean crews around the world for achieving substantial progress in 2011 towards our vision of incident-free operations. As Terry will tell you, the markets improving across the globe and Transocean is extremely well positioned to benefit from this improving environment.

Regarding the ongoing litigation related to the Macondo well incident, we are pleased with several recent important rulings. First, the court ruled that BP was not an additional insured party with respect to environmental damages under our excess liability policy. Second, the court ruled that BP generally owes us contractual indemnity for compensatory damages associated with the spill. The third one, which we received last week, rules that we will not be liable for OPA damages for the sub-service release of hydrocarbons and that we are not liable for Clean Water Act fines and penalties. Though we are still interested in finding an acceptable resolution that allows us to put all of the remaining uncertainty behind us, we are well prepared to argue the merits of our case at the trial which is currently scheduled to begin next week.

Regarding the incident in Brazil, I was pleased to see Chevron accept responsibility for the incident and their complimentary commentary regarding the performance of the Transocean equipment and crews. We believe that the potential claims being reported in Brazil are without merit and we will vigorously defend our position.

Let me conclude by reminding you that Transocean has always been a world-class organization with world-class people and assets, and we take pride in our ability to persevere in a tough environment. While we recognize we have a long way to go, I believe we have taken important steps to return to best-in-class operating performance. We are intensely focused in all segments of our organization on getting our rigs back to work and taking full advantage of continued strong marketing conditions. In doing so, we believe we are well positioned to deliver in 2012 and beyond. With that, I will turn the call over to Greg to take you through the numbers. Greg?

Thank you, Steven, and good morning, everyone. As Steven has mentioned, we reported a net loss of approximately $6.12 billion, or $18.62 per diluted share for the fourth quarter 2011. Excluding approximately $6.2 billion in certain net unfavorable items, our diluted earnings were $0.18 per share. This compares with similarly adjusted earnings of $0.03 per diluted share in the quarter. Net unfavorable items included an estimated non-cash charge of $5.2 billion for goodwill impairment related to our contract drilling reporting unit.

Under US GAAP, we test for goodwill impairment annually on October 1. After failing the first step of the test in the fourth quarter, we had to do a detailed analysis to estimate the value of our goodwill. This required us to determine an estimate of the market valuation of our contract drilling business and consequently an estimate of implied value of goodwill. The estimated impairment was determined by comparing the estimated implied value to the existing book value of goodwill. It is important to note that the estimated goodwill impairment is based solely on conditions on October 1 and includes the same market factors that also impacted our share price in the fourth quarter. Our estimate is subject to adjustment and will be finalized in the first quarter of 2012.

Net unfavorable items also included an estimated loss contingency of $1 billion related to the Macondo well incident that we believe is probable. The loss contingency amount is our current estimate under FAS-5 of US GAAP of the low end of the range of reasonably possible losses. As new developments occur or new information comes known, the amount of estimated loss could change and the change could be significant.

The remaining net unfavorable items are as follows. $30 million of charges related to our acquisition of Aker Drilling, specifically $17 million of charges in G&A, and a $13 million loss on Aker Securities held prior to the closing of the acquisition. $26 million in income from discontinued operations primarily related to the gain on the sale of Challenger Minerals North Sea Ltd, $18 million of favorable discrete tax items and, finally, $11 million from a gain on the sale of the GSF Adriatic XI as we continue to execute dispositions in line with our asset strategy.

The Company's overall operational performance, excluding the net unfavorable items that I have already described, improved sequentially in the fourth quarter primarily related to reduction in shipyard out-of-service time which favorably impacted revenue. The quarter also benefited from the inclusion of Aker Drilling as well as improvements in revenue efficiency and utilization. Fourth quarter also included reduced shipyard expenses with most of this savings related to a reduction in well control equipment certification costs.

Revenue for the quarter increased by $180 million, to approximately $2.4 billion. The Aker acquisition increased revenue by $100 million. Overall fleet utilization continued to improve to 61% for the fourth quarter versus 58% in the third quarter. Improved utilization increased revenue by $71 million, related primarily to reductions in shipyard time versus the third quarter. Revenue also increased by $17 million as revenue efficiency improved to 91.9% compared to 89.5% in the previous quarter.

Operating and maintenance expenses, excluding the net unfavorable items already mentioned, increased by $25 million compared to the third quarter. The acquisition of Aker Drilling increased costs by $44 million. Costs also increased by $26 million, or $0.03 per share, due to the termination of deepwater expedition contract related to both an accrual for certain disputed items as well as the immediate expensing of certain items which would have been recognized over the remaining contract period. These cost increased related to Aker Drilling in the deepwater expedition were partially offset by a net $40 million in various other favorable items with the most significant being a $25 million net reduction in well control system certification and shipyard-related costs.

Excluding the net unfavorable items described above, fourth quarter operating income was $394 million, increased by 47% compared to the third quarter and essentially represents a return to the level of operating income reported in the first and second quarters of the year. The increase in interest expense, net of amounts capitalized, in the quarter to $178 million was primarily related to the debt assumed in the acquisition of Aker Drilling as well as the new senior notes issued during the quarter. The increase in interest income to $17 million from $7 million in the third quarter was primarily due to the Aker restricted cash held to support the export finance debt assumed in the Aker transaction. Although not considered as defeased under US GAAP, this restricted cash arrangement essentially economically defeases the $889 million of export finance debt.

The Aker restricted cash is included in other current assets and other assets on the balance sheet. The effective tax rate of negative 2.2% in the fourth quarter decreased from 212.8% in the third quarter primarily due to the impact of the goodwill impairment and the loss contingency. The full-year annual effective tax rate for 2011, which excludes the $18 million of various favorable discrete items, was 41.3% for the quarter compared to 34.1% for the third quarter. The increase in the full-year annual effective tax rate is primarily due to lower level of full-year profitability than was expected in the third quarter as our marginal tax rate is significantly lower than our annual effective tax rate. Importantly, the fourth quarter income tax expense includes a true-up of $46 million, or $0.14 per diluted share, related to applying the increase in the full-year annual effective tax rate to the first three quarters of the year.

Net cash flow generated from operations amounted to $563 million in the quarter, an improvement of $71 million compared to the third quarter and is largely attributable to better operating results. Capital expenditures totaled $350 million, up from $137 million in the third quarter due to the timing of the shipyard milestone payments associated with our new build construction program. Proceeds from asset sales were $96 million. In addition, we closed the acquisition of Aker Drilling for a cost net of cash acquired of $1.05 billion and we paid the third installment of our 2011 dividend for $255 million.

As Steven has indicated, the Company remains committed to remaining an investment grade issuer. Further, that commitment we issued $2.5 billion in senior notes and $1.2 billion in equity during the fourth quarter. The proceeds were used to repay the series B convertible notes and to replenish cash used to finance Aker. The net result of the above was an increase in cash on hand to $4 billion from $3.3 billion at the end of the third quarter.

Turning to 2012, I would like to now update our full-year 2012 guidance. As reported on our latest fleet status report and subsequent update, we expect fewer out-of-service days related to shipyards in 2012. We also expect a more favorable mix of shipyard comprising fewer high revenue generating ultra-deepwater and deepwater rigs. As a result, we expect lower revenue losses in 2012 from shipyards as compared to 2011.

Because of the reduction in planned shipyards, the change in mix of rigs and the various operational initiatives Steven has highlighted, we expect a lower risk of shipyard overruns. We are encouraged that the Millennium and the Grand Bank shipyards, the first two shipyard projects executed with our new processes, have been completed to plan. With that, we remain cautious. We note even prior to Macondo it was not uncommon for unplanned or exceptional major shipyards to increase our annual loss revenue due to out-of-service periods by 15% in excess of plan. For 2012 we estimate this would be about $75 million in additional loss revenue. We are not able to predict exceptional shipyards and they are not included in our Fleet Status Report and update.

As Steven discussed, we expect our revenue efficiency to gradually improve over time; however, this improvement will not be linear. Based upon recent experience, we currently expect average revenue efficiency during 2012 to be similar to that experience in the fourth quarter of 2011. We expect a gradual improvement but it is possible it may take several years to achieve our historical level of performance as we continue efforts, both technical and contractual, to accomplish this goal. The actual revenue efficiency will vary from quarter to quarter as was the case even prior to Macondo.

We expect other revenues to be between $625 million and $650 million for the full-year 2012. Recall that other revenues generate fairly low margins, generally in the mid to high single-digit range. We estimate operating maintenance costs for 2012 to be between $6.15 billion and $6.35 billion, reflecting higher utilization of full year's activity for Aker Drilling, continued well equipment certification costs, and estimated $50 million of the Macondo expenses net of estimated insurance recovery, and general inflationary pressures. The mid point and upper end of this cost estimate range is lower than previously guided as we have now completed our 2012 budget and implemented a variety of cost reduction efforts.

Our well controlled equipment certification costs are expected to be lower in 2012. We had completed certification of well control equipment on 29 of our 63 active floaters, including 18 of 27 ultra-deepwater rigs, and have 8 planned in 2012. As reported in our Fleet Status Report and subsequent update, our planned shipyards are more heavily weighted to the first half of 2012. Consequently, we expect operating and maintenance costs to be approximately $100 million higher in each of the first and second quarters, than in the third and fourth quarters of 2012. Finally, our operating maintenance cost estimates assume the reactivation of the High Island IX.

We expect depreciation expense for 2012 to be between $1.4 billion and $1.5 billion, reflecting the full-year effect of the acquisition of Aker Drilling. General and administrative costs for 2012 are expected to range between $270 million and $300 million. Interest expense net of interest income of roughly $50 million and capitalized interest of roughly $40 million is estimated to be between $610 million and $630 million with the increase versus 2011 primarily related to the debt assumed in the acquisition of Aker Drilling as well as the refinancing of the Series B Convertibles with higher cost senior notes. We currently expect the annual effective tax rate for 2012 to be between 25% and 30%, but this will depend on our overall level of profitability among various other factors.

Absent additional new build commitments, capital expenditures are expected to be between $1.2 billion and $1.3 billion in 2012. Of this, roughly $350 million is due to our existing new build programs, $250 million relates to our well control equipment to support our operational and project excellence initiatives, and the remainder relates to our planned shipyards and normal ongoing capital expenditures for our operating rig and our shore bases.

As Steven indicated, our philosophy regarding capital deployment is unchanged, which is to maintain a strong flexible balance sheet and an investment grade rating on our debt, reinvestment in the business through value-enhancing opportunities, and return excess cash to shareholders. In support of maintaining a strong flexible balance sheet, the Company has previously stated its long-term commit to reduce debt to an amount between $7 billion and $9 billion, and we reaffirm that commitment. For purposes of this target, debt does not include the Aker export finance debt which is supported by a similar amount of restricted cash, currently approximately $900 million. The improved flexibility in order to better handle the various uncertainties the Company faces, we have also decided to increase our target cash balance to between $3 billion and $4 billion excluding the Aker restricted cash included in other assets. Even in the event uncertainties, such as Macondo resolved, we do not believe it is prudent to reduce our available cash to below $1.5 billion.

To support these targets, the Board has decided to focus our 2012 available cash and cash flow on retiring debt as it matures and on building cash liquidity. In addition to maturing debt we plan to also retire early $300 [billion] to $500 billion of other debt. Absent any asset sales, we expect our cash by the end of the year to be between $2.7 billion and $3 billion. Proceeds from the asset sale initiatives that Steven has discussed will allow us to build additional liquidity beyond this level. And, with that, I will hand it over to Terry to update you on the markets.

Thanks, Greg, and hello to everyone. Before we cover specific markets, I would like to make a few general comments. From a marketing standpoint, 2011 was a very positive year for Transocean from many perspectives. We began the year with 35 stack jackups, successfully returned 7 to active service, and sold 6 units. Consistent with our asset strategy, we added 4 premium jackups with combined day rates and terms that are still leading edge for new builds even in today's improving market. We acquired two harsh-environment semis from Aker Drilling that delivering operational excellence to our customers and we added two ultra-deepwater drill ships under construction in Korea that are being considered for several long-term opportunities.

We also executed a total of $6.7 billion of contract backlog during 2011. Since the last earnings call, we have executed $1.1 billion of contract backlog during a relatively quiet holiday season. Over 60% of the total contract backlog awarded since the last earnings call is related to our jackup fleet. While the global economic uncertainty still lingers, our major customers' capital spending budget for 2012 portends a year-on-year increase averaging around 12% to 15%. The availability of ultra-deepwater rigs for 2012 is very constrained and our customers are now shifting their focus to fulfilling their longer-term requirements for 2013 and beyond.

Tendering and contracting activity in the deepwater market was light for the fourth quarter. However, we expect some long-term fixtures to be announced shortly in Australia and in Brazil where Petrobras' current 1200 and 1500 meter tenders are ready to absorb additional units. Midwater activity is holding firm and demand improved over the period, especially in the UK and India. Apparent demand for harsh-environment semis in the UK and Norway exceeds available supply and we expect upward pressure on pricing in these markets. Premium and standard jackups continue to enjoy an increase in utilization in day rates 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, India, West Africa, Saudi Arabia, and Mexico, and we expect the new builds arriving in the market in '12 to be fully absorbed.

Let's now look at the various market segments beginning with ultra-deepwater. Limited availability in 2012 is pushing rates up quickly as evidenced by a few fixtures for short-term programs above the $600,000 a day level. With the increase in demand and the golden triangle which includes expected near-term demand resulting from significant discoveries in the Angolan pre-salt, Northern Brazil and East Africa. In addition to the current outstanding tenders that remain unfulfilled, we are very optimistic that we will be able to extend contracts on our available fleet through 2012 and '13. We are in advanced discussions on our units available in '12 and expect to conclude these discussions at attractive rates. Interest continues to build for the two DSME design ultra-deepwater drill ships under construction with our customers in the US Gulf of Mexico, West Africa and Brazil. We remain confident about the future of the ultra-deepwater market and our ability to capitalize on the many opportunities available in the marketplace.

Turning to the deepwater market, tendering and contracting activity was a bit lighter compared to the previous quarter with most activity occurring in Australia and Brazil. However, we see demand improving in this segment due to the continuing tightness in the ultra-deepwater market and we are offering our available units for multiple opportunity. Petrobras is also expected to issue another tender for its deepwater needs in the near future. This opportunity, coupled with open demand, should tighten the deepwater market over the next few months. Indicative of this positive market sentiment, we have been able to execute an estimated eight-month contract for the Discoverer Seven Seas, a 1,000 foot drill ship at $445,000 a day with E&I in Indonesia.

In the midwater floater market contracting activity in the Norwegian and UK sectors of the North Sea continues to reduce available capacity through 2012 and '13 and exert upward pressure on pricing. Little supply remains in the UK North Sea for a 2012 commencement and with the influx of development programs we expect to see increasing terms that will further tighten supply in the UK. With multiple operators trying to secure the same units, we believe that stacked units will return to the active fleet during the upcoming year. Since our last call, we've been able to secure an additional 3.5 rig years in the midwater class with day rates ranging from $260,000 to $280,000 a day. Based on our current discussions with multiple operators in Norway, the UK, West Africa and Southeast Asia, we will be able to secure further contracting opportunities through 2012 and 2013 at improving day rates.

Moving to the jackup market, the tendering and contracting pace for premium and standard jackups continues to strengthen. Utilization in day rates are on the rise as evidenced by the lower specification jackups receiving rates around $130,000 a day in west Africa. In this improved market environment and since our last earnings call we have been able to secure multiple contracts across our jackup fleet of approximately 16 rig years with day rates ranging from $83,000 a day for lower spec jackups to $143,000 a day for premium units. Most notably, we were able to execute a contract with Chevron in Angola for the delivery of a fourth new build jackup for a three-year term at $149,100 a day. We are confident that the additional demand from our customers for premium and standard jackups will lead to further contract extensions for our active fleet and provide opportunities to reactivate more of our stacked assets.

In conclusion, we are experiencing strong demand across all market segments in all major oil and gas provinces and emerging markets which reinforces our view that utilization in day rates will continue to improve. The versatility and global footprint of our fleet position as to enhance our customer relationships by providing them with the optimal asset solutions to their future programs. That concludes my overview on the market. So, I will turn it back to you, Steven.

Okay. Tim, with that we're ready to open is up for Q&A.

(Operator Instructions)

We will take our first question from Ian Macpherson with Simmons & Company.

Hi, thank you very much. It sounds like the demand fundamentals are certainly progressing very nicely, but circling back to the cost guidance and I think you indicated, Greg, that we had costs assumed for the reactivation of the High Island IX, should we infer that there are not other re-activation costs in that guidance for floaters? And how is the outlook progressing for re-activation prospects in the conventional deepwater fleet?

Yes, all we have in the numbers are the re-activation costs for the High Island IX. As other re-activations are planned during the year, if they are planned, we will include those in any future updated cost guidance, but right now it just includes the one jack-up.

Ian, just had -- (multiple speakers)

And Terry is going to comment on prospects for re-activations.

Yes. Ian, just to add a little bit more color, we are getting a lot of interest in the stack fleet, as you would guess, so while they're not in the cost guidance we do believe we will have several opportunities over the next few quarters to be able to re-activate some of our deepwater and also our continuing jack-up fleet and that would also include the midwaters. We have opportunity possibly for one in the near future.

Okay. How would you characterize the lead times for your floater re-activations from -- if you were to get a contract from one today? Would this be something you could roll out in one or two months, or four or five months?

It is going to be closer to the latter, Ian, rather than the former. The -- generally, the re-activation projects on the stacked floaters that we have are going to be relatively longer term in nature compared to some of the re-activation opportunities we have on some of our jack-ups. So think four to six months as the minimum.

Okay. Got it. And then, Steven, if you don't mind, just one more quick question. Any reassessment with yourself and the Board with regards to the asset strategy and the aversion to building spec rigs? Seadrill has ordered two more this morning, and it seems plausible that we're going to have something of a replay of last year with your competitors going down that path and I wonder if you are still comfortable with the strategy that has been in place of not doing that?

I tend to revert back to the same things we have always talked about, Ian. We recognize fundamentally we're in a supply/demand business in a cyclical industry and I think we're going to continue to hold to the principles and the philosophies that have stood this Company very well over the course of the cycles we've been through.

That sounds like no change, full stop.

We remain averse to the idea of building on spec.

Okay. Congratulations on the encouraging results. Thanks.

And we will take our next question from Doug Becker with Bank of America Merrill Lynch.

Thanks. I just want to touch base on the Macondo loss contingencies. What are the assumptions associated with insurance there and could more -- or what could be applied to that potentially?

As you can see more fully described in our 10-K, there are no additional insurance accruals that have been applied to the $1 billion. We do have recorded about $274 million of asset related to insurance, but those relate to previous losses that we've recorded related to Macondo. There is a little more than $600 million remaining in our insurance power, but under the US GAAP rules it is very complex to determine how much of that could be recorded against the contingent loss like we've recorded in the quarter and so we're not able to determine the amount of any additional asset that we could record under US GAAP, but we would expect over time there to be some insurance recoveries.

Understood. And then, taking a look at the cost side, I notice that the average out-of-service costs for the ultra-deepwater fleet jumped up pretty substantially in the quarter to almost $640,000 a day from $490,000 a day in the third quarter. The out-of-service days were relatively similar. I understand that you're expecting less of the ultra-deepwater fleet to be out of service in 2012, but maybe -- is this indicative of the out-of-service time and costs I guess really that we should be expecting going forward, or is there anything specific in the fourth quarter that might have accounted for that jump?

The in-service daily operating costs is always a fairly volatile number because it can be heavily impacted by some major maintenance projects that occur during the quarter. So, we like to look at the trailing average, so the average of the last four quarters, and looking at the average of the last four quarters to what we expect the average to be next year for the fleet as a whole, we expect to see about a 6% increase in that average daily operating cost. Now, that's not 6% from the fourth quarter to the first quarter, that is 6% average over average, year over year, so that will trend in during the quarters; but, again, it is very volatile and so can be impacted by major maintenance projects, other activities like that.

And just to clarify, that was for the in-service costs, correct?

That's right.

Okay. Any commentary on the out-of-service costs which seemed to jump up in the fourth quarter?

Sure. We expect our total out-of-service costs next year to drop by about $500 million versus this year with significant decrease in out-of-service time as well as the decrease in the higher risk BOP recertification efforts. So, in our cost guidance we would expect at the low end of the range to see that $500 million cost reduction. Now, that is the most volatile, so at the higher end of the range we wouldn't necessarily see as much of a decrease.

Thanks, Greg.

We will take our next question from Scott Gruber with Bernstein Asset Management.

Thanks. Could you --

Hi, Scott.

Hi, how are you? Could you provide some color on what compelled the goodwill impairment? Does it reflect a change in assumption regarding re-activation potential or the return to peak jack-up pricing? I just think it's in contrast to the strengthening market fundamentals here.

Unfortunately, the goodwill impairment under US GAAP is very mechanical and we elected, probably 12 years ago when the new rules came into effect, to evaluate our goodwill on October 1, and so on October 1 is when we have to evaluate all the various market conditions and all of the uncertainties, including the Macondo Well uncertainties, the operational uncertainties that we were experiencing in the fourth quarter. So, all of those went into our valuation of the contract drilling business and, really, all the same factors that impacted our stock price and our market capitalization in the fourth quarter end up reflected in our valuation of the contract drilling business.

So, when we compare that we go through an allocation process and come up with the implied value of goodwill that is really a point in time. I always view it as, if you look back at our market cap at the time and you compare it to our net book value, you would see our market cap is way below our net book value. Now, it is a much more complicated process than that simple calculation, but essentially it is the same. It has nothing to do with our view of the future of our fleet. It is really a very mechanical valuation exercise.

Got it. And then an unrelated follow-up. Is the new BOP unit exchange strategy, is that going to require having some backup systems in place and ready for deployment?

Yes. I'm not sure whether you would call them backup systems, Scott, or just an inventory of capital spares spread across our fleet. So, really the exercise is one of identifying how many of this particular make and model we have, what the outlook is for the five yearly recertification process for those rigs carrying that particular make and model and ensuring that the Company has enough capital spares in inventory to be able to have a rotational program across that particular make and model.

Okay. So it is going to be more parts and inventory rather than full systems.

Correct.

Got it. Okay. Thanks.

Thanks, Scott.

And we will take our next question from Matt Conlan with Wells Fargo.

Hi, guys. I was hoping to get --

Hello, Matt.

-- a little more clarity on the $1 billion contingent liability that you recorded. Can you help us separate the Company's total liabilities into a couple of buckets? One, what are the probable exposures that are attempted to be estimated by the $1 billion, and then what are the reasonably probable exposures that are above and beyond? What is left after the $1 billion that you've estimated so far?

If you look at our balance sheet and you look into our 10-K, we actually have $1.2 billion of liability recorded related to the Macondo Well incident. The $200 million has built up really since the incident, primarily related to crew claims and other similar liabilities. So, the additional $1 billion we evaluated under FAS-5; and so FAS-5 requires us to evaluate all of the facts and the developments that occur during a period, and if we believe we can determine a reasonably possible range of losses, then we are required to accrue the low end of the range of those losses. So, that range of losses that make up the $1 billion again isn't related to crew claims. It is related to all the other losses from litigation that could come out of the Macondo Well incident. And because those are active, that is active litigation, we really can't go into the details of the various components of those losses, but it is really everything else, all of the litigation losses, all of the things that are going to be covered by the trial that starts a week from today, so all of those losses are included in setting that low end of the range. Now, we will continuously evaluate the developments as they occur and it is possible future developments could cause us to adjust that evaluation at the low end of the range.

Okay, that's very helpful. Thank you for the clarity. And in addition to you not being able to record any insurance benefit against that billion, it also appears there has been no tax deduction. And I'm unsure, given your Swiss status, would you be able to, if it were $1 billion expenditure, would you be able to deduct that for tax purposes from US operations?

We're currently assuming, due to the possible nature of the various components of that, that there would be little to no tax deduction for that provision.

Okay. Also very helpful. Thank you very much, guys.

Let's take our next question from Kurt Hallead with RBC Capital Markets.

Hi, good morning.

Good morning, Kurt.

So, I guess my initial question for you guys is, Steven, you guys talked about having three different buckets of assets and determining your disposition strategy, and I was wondering if you might be able to give us an update on, first, those buckets, secondly, whether or not the cost estimates related to the buckets that may have shifted, and then the -- just the other component of that question as it relates to the buckets is, given the market dynamics here, have some of the assets kind of shifted around a little bit and are there as many assets for sale as you thought there may have been?

Are you talking about our asset strategy or the re-activation candidates?

I think I'm talking, I'm thinking about it in an all-inclusive manner and I know you've referenced that you had assets that you put in different buckets in the past, I think there are three different buckets you put them into. I think there are some cost estimates related to that, but I'm just wondering if you can give us an update on if anything has changed, is the market dynamic causing you to pull some of those assets off the market, what -- just give us an update on that if you can? That would be great.

So, as we think about the opportunities for re-activation, Kurt, I generally think about the stacked fleet in three different buckets. There's a group of assets that are -- that I think make relatively straightforward reactivation candidates whether they're jack-ups or floaters. It is about a third of the fleet that I think can be re-activated in a relatively straightforward manner. So, if you're talking about jack-ups, these are projects that probably are 60 to 90 to 120 days and maybe $20 million for re-activation expenditure.

On the floater side, as I mentioned earlier, it is going to be a little bit longer than that, maybe four to six months in terms of re-activations and the re-activation expenditure is going to be in the range of $50 million. There is another third at the other end of the spectrum that are not likely to work for us again but still make attractive divestiture candidates. We sold a couple of those in 2011. We will continue to focus on divestiture opportunities in 2012. And then there is a third in the middle. They are re-activation candidates and, as Terry has explained, the market is getting better out there -- activity is increasing, demand is increasing, term and day rate is increasing, and all of that provides the economics that are more supportive of further re-activation possibilities.

Okay. And in the context of the market improving, Terry, where would you characterize the current market dynamic when you think about it in pre-Macondo terms? Would you equate it to 2006, 2007, 2005? What's your best approximation?

Well, Kurt, it feels a whole lot like 2006 and 2007. If we -- just looking at the ultra-deepwater activity, if you look at what is available in the market and then what we know that is being considered and close to being contracted, we look at 2012 and '13 and we kind of get a number that looks around six to eight rigs left in the ultra-deepwater space. And then if we look at the deepwater segment we put the same pencil there and that's assuming that some of these rigs get rolled over with their existing customer, so we kind of get the same numbers, six to eight rigs in the deepwater space, that is active fleet. And we all know that there is a heck of a lot of demand out there. If we look at West Africa alone, I think that there was a recent study done that said that they need 20 more rigs in 2012 and that doesn't include the recent discovery for the Angolan pre-salt. So, we're very optimistic about 2012 and 2013. And, like I said, it does feel a whole lot like the scenario that we saw in 2006 and '07.

You mentioned on the jack-up side you think all of the new builds will be absorbed by 2013?

Well, with the rigs that are coming to the market, we can see that there is a lot of demand there that we believe they will be absorbed and especially when you have Saudi out there trying to actively fulfill their needs, and then you have Pemex saying they're going to get back up to 40 rigs and O&GC has been very, very active. We see that the demand is very tight. We're seeing an opportunity for our -- we call them our class 3 bucket low commodity spec jack-ups, one in particular the High Island IX, has just received a three-year contract with Saudi.

So, the demand is certainly picking up and if you look at over the last 12 months, the most -- the biggest increase in day rate has been the old standard jack-up. So, as ultra-deepwater increased over the same time period from day rate pricing to about 23% and the old jack-ups have increased around 30%. So, it is very interesting and we believe that this is going to continue.

Okay. And one more, if I may, Steven. I believe it was last fall there were some questions about the new Brazilian rigs and I think there was some discussion as well that some of those new rigs may actually wind up in the hands of the traditional rig operators. Can you give us an update on what may be transpiring in Brazil and, though you may not want to go out and build a rig on spec, isn't buying one of these Brazilian rigs or getting an interest in one of these Brazilian rigs essentially a way to get a contracted rig in hand and not take it on the upfront risk? Could you give us an update on that?

Kurt, we remain interested in growing our business in Brazil and further developing our relationship with Petrobras and so we continue to have conversations with our colleagues at Petrobras about exactly how to do that. We would be interested in having discussions about helping them in terms of taking over the operatorship and buying into the equity ownership of some of the rigs they've already contracted that they're looking to place in the hands of experienced operators.

And have those discussions been happening or are they yet to happen?

I would say it is more of a continuous dialogue with Petrobras than an episodic or discrete dialogue.

Okay, thanks. Thanks, Steven.

Thanks, Kurt.

And we will take our next question from Angie Sedita with UBS.

Thanks. Good morning, good afternoon. First, Steven, congratulations on the encouraging rulings from the court so far. That is certainly good to see.

Yes, I will tell you, I think we have an excellent legal team and they've done a superb job of arguing the merits of our case.

Well, it is nice to see the contract honored. The first question I have is you spoke briefly on the dividend. Could you give us some thoughts there as far as the importance to -- of the dividend to Transocean going forward? And what is the possibility or probability that could be reinstated in 2013?

I will tell you, Angie, I think the Company has a long history of being really disciplined about how we think about reinvestment. We already -- always set really high criteria for ourselves and there are times when we take some criticism in the marketplace for holding to those criteria, when we won't build on spec. So, we've been disciplined about our reinvestment criteria and I think we've been similarly disciplined about our historical approach to returning excess cash to our shareholders. So, that capital deployment philosophy hasn't changed. We remain focused on a strong balance sheet and investment grade quality debt, on identifying attractive opportunities to reinvest in our business, and being disciplined about returning excess cash to our shareholders. And we will continue to engage our Board in discussions and evaluations of our business in the context of that capital deployment philosophy.

Okay. Fair enough. That's somewhat helpful. And then on -- you discussed in various forms a potential spin or sale of some of your older jack-ups and I believe a bank may have been hired to run this process. Is this a possibility or an event that could potentially occur in 2013?

Well, as I said in my commentary, Angie, we remain focused on executing our asset strategy. We want to increase our exposure to high-spec assets and reduce our exposure to low-spec commodity class assets. We've done a good job at that in 2011. We generated more than $440 million in asset sales proceeds. We continue to explore a variety of alternatives, including single asset transactions which our asset divestiture folks are getting really good at. We have had discussions over the last several months about packages of assets and we remain interested in a single large-scale transaction if we can make it work.

Okay. And finally, then, I think that's helpful, and then, Terry, given the fact that we're delivering 23 ultra-deepwater rigs in 2013 of which most are still uncontracted, there is certainly some positive data points in West Africa and elsewhere. Your thoughts on the ability to absorb those rigs in 2013 and the day rate outlook at the same time in 2013 for the ultra-deepwater market.

Angie, I think -- let's roll back to 2012 for a second. I think with the availability, and there is not a whole lot left, you're going to see some of these short-term fixtures continue and I think they're going to be over $600,000 a day. Now, we know that 2013 there is an influx but there are -- we see opportunities that are already developing. We are having conversations I think certainly with the new news of the Angolan pre-salt. We're already getting discussions there. So, it looks very promising. And if we're having discussions, I have to think that our competitors out there are also having discussions. And so I think that's why you see a buoyant movement here in that everyone is very optimistic about the 2012 and 2013. So, I think that they're going to be absorbed and I think we are going to have plenty of opportunities, certainly to place the unit and we are certainly hopeful that bleeds down into the deepwater segment also. So, again, we're very optimistic and I'm very confident of our talented marketing teams in the field to get these things done quickly.

Operator, we're going to take one more caller, please.

And we will take our last question from Ole Slorer with Morgan Stanley.

Thanks for getting me on the call here. I want to go back to the midwater again, that's clearly where you have the most open exposure over the next 12 months and with, as far as we can see, there is really only three ultra-deepwater rigs available over that period of which you have one. Assuming that these rigs settle in the $600,000s, where do you see that you have the biggest pricing power on your midwater fleet? Is it in a benign environment because of the very strong demand and very high rates likely to see in the six generation segment there, or is it more in the classic areas like the North Sea, which are coming back again?

Well, just talking about the midwater fleet in the UK, we're seeing strong, strong demand and we have several opportunities to roll our fleet over here shortly and we're very optimistic about those opportunities and we have multiple customers who are asking for the same units. So, we're very optimistic about that. And then also of our other -- we have six available in 2012 in our active fleet and we're in discussions on all of those rigs at the moment and these are very positive advanced discussions, so we like what we see in the midwater opportunities for 2012.

I understand that. You highlighted 2006, 2007 and I think we all remember very well what happened in the midwater segment during that period as probably the most dynamic segment. So, how close do you think we can get to old highs or let's say how close can we get to the percentage of leading edge high spec rig rates?

Well, I think if you look at 2007 as a marker, I think that you would have to say that we're there. So, if 2007 we were approaching $550,000 a day, that's what we accomplished, and today you're already seeing those fixtures $550,000 to $600,000 a day, so I would argue that we're there. Now, where we're lagging, as you pointed out is, as soon as we get a little bit more tightness in the ultra-deepwater segment, then we do believe the optionality exists for the standard deepwaters and the midwaters to improve. They're not there yet, but I think in the next couple of months I think we are going to see significant improvement and, again, I feel the same way about the premium jack-ups and the standard jack-ups.

I would agree with that, but maybe one last question. If I look at your efficiency, conventional wisdom might suggest that older rigs have a longer uptime, but when you look at your fleet, I mean your Harsh Environment which are some of the older rigs in your midwater floaters which are some of the older rigs, both have utilization of 94% to 98% which is very good compared to your ultra-deepwater and deepwater at, say, 88%, 89% utilization. So, can you talk a little bit about how come older rigs have a better uptime than modern rigs?

Oh, it just has to do with the complexity of the control system. The older rigs tend to work in shallower water depths and they tend to utilize simple hydraulic control systems for their BOPs. What that means, Ole, is there is just fewer components in the system that are susceptible to the stress of working in deeper waters, the rigor of repeated testing and the low tolerance for failure rates. It is just a question of the complexity of the control system.

As opposed to it means when the midwater market comes back again, the execution risks for you should be a lot lower than in the deepwater?

Broadly speaking, I think that is true.

Okay. Well, thank you very much.

All right. That concludes today's conference call. Thank you all very much for your participation. We will be available offline if you have any additional questions. Operator?