Transocean Ltd (RIG) 2012 Q1 法說會逐字稿

Good day, everyone, welcome to the Transocean Q1 2012 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 Mr. Thad Vayda, Vice President of Investor Relations. Please go ahead, sir.

Thank you, Priscilla. Good day, and welcome to Transocean's first-quarter 2012 earnings conference call. The copy of the press release providing 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 three charts that may be referenced during today's call. The file can be found on the Company's website by selecting Investor Relations, Quarterly Tool Kit and then PowerPoint Charts.

The charts include average contracted day rates by rig type, out of service rig months and operating and maintenance cost trends. The quarterly tool kit includes four additional financial tables for your convenience covering revenue efficiency, other revenue detail, daily operating and maintenance cost by rig type and contract intangible revenues.

Joining me on this morning's call are Steven Newman, Chief Executive Officer; Greg Cauthen, 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 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 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 10K and other filings with the US Securities and Exchange Commission.

Should one or more of the 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 the 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 Reg G.

As I indicated earlier, you will find the required supplemental financial disclosure for these measures, including the most directly comparable GAAP measure and an associated reconciliation on our website at deepwater.com under Investor Relations, quarterly tool 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 one initial question and one follow-up. Thank you. I will now turn the call over to Steven Newman. Steven?

Thanks, Thad, and thank you all for joining us today. Before I comment on the quarter, I would like to make some introductory comments on the market. The outlook for offshore drillers is positive based upon strong market fundamentals with crude oil consistently trading in a range of between $100 a barrel for WTI and $120 a barrel for Brent, what will commodity prices remain in a range that we believe is supportive of our customer's project economics.

Dwindling available capacity in most rig categories should support increasing day rate trends in our business. There is very little remaining ultra-deepwater availability in 2012 and operators are already urgently focused on securing 2013 capacity. This should have a further beneficial impact on the conventional deepwater and mid-water markets as any supply overhang which might have existed as a result of rigs competing down the water depth spectrum should be a thing of the past.

New discoveries such as Maersk's Azul 1 well and Cobalt's Cameia 1 well in the Angolan pre-salt have added to the excitement regarding West Africa. ENI's commitment to invest $50 billion in Anadarko's recent success with the Barquentine-4 appraisal well in Mozambique are contributing to East Africa's emergence as a fast growing petroleum province.

Further success by Petrobras, OGX and others in Brazil and Anadarko, Shell, Exxon, Mobil, Chevron and others in the Gulf of Mexico suggest significant growth opportunities in these well established markets. Recent conversations with customers in India and the Far East show continuing interest in those markets as well. In short, we are seeing a global increase in demand for all classes of drilling rigs.

Transocean is extremely well positioned to benefit from this positive market environment. First and foremost, our people are among the best in the industry and continue to set us apart from our competitors, and I thank the Transocean personnel around the world for continuing efforts to achieve our vision.

Our rigs and equipment reflect our focus on quality and technology, our demanding expectations and our objectives to continue to lead our industry. Our size and geographic diversity give us critical mass in every key market around the world. Our customer relationships are strong due to our ability to meet their drilling needs in all water depths and environments.

Our ability to perform in challenging environments is evidenced by the multiple instances of Transocean rigs involved in relief well operations following problems encountered on non-Transocean operations. We have three such relief well operations ongoing right now. All of these factors taken together set Transocean apart in an industry with very favorable fundamental market tailwinds.

Since our last call, we have had a couple of key successes. First we secured a contract at an industry-leading day rate for the Deepwater Expedition. Many of you will remember that this rig's prior contract was terminated at the end of 2011 following extended downtime related to the BOP control system. We have continued to focus on identifying the root causes of the downtime and ensuring that the rig is ready to go back to work.

Secondly, the Transocean Honor, the first of four premium jack-ups to be delivered from the shipyard, is in the final stages of customer acceptance on location for Chevron in Angola. These two events are noteworthy because they highlight the value of our existing fleet and demonstrate our commitment to execute our asset strategy. Now, on to the numbers.

For the first quarter, we reported net income of $0.12 per diluted share. These results include net unfavorable items totaling $184 million, or $0.52 per diluted share, including the finalization of our goodwill impairment which had been estimated as part of our fourth-quarter 2011 results. Considering these items, adjusted earnings were $0.64 per diluted share.

Our strong earnings results this quarter were mainly driven by lower operating and maintenance costs resulting from two key drivers. The timing of major maintenance and project spending and lower activity in our low margin drilling management services segment. Greg will discuss each of these items in more detail shortly.

Additionally, we continue to focus on cost control and the management of our cost structure. At 90.4%, our revenue efficiency was below the fourth quarter's 91.9% with the drop being driven mainly by our deepwater and mid-water rigs. We were pleased to see our ultra-deepwater fleet which reported inconsistent revenue efficiency results in 2011 remained roughly in line with the fourth quarter's performance.

It is still our expectation that we reach historical levels of revenue efficiency through a combination of technical improvements and, over time, improved contract terms. Although as I have said, our progress will not necessarily be linear.

Our focus on operational and project excellence continues to be critical to our success. Improved performance in operations measured most readily by revenue efficiency will only come through continued emphasis on thorough equipment inspections, enhanced maintenance and rigorous predeployment testing. Our success in project excellence measured by utilization and our ability to manage out of service time is a direct result of closer cooperation with our vendors to improve capacity planning, quality control and more timely delivery.

As I mentioned on our last call, we have also taken steps to remove the BOP recertification process from the critical path to redelivery of rigs from the shipyard. Initial results on projects executed using our improved process show very promising progress in our ability to manage out of service time.

While improving our operating performance is our first priority, we have not lost sight of the importance of executing our asset strategy. So far this year, we have succeeded in closing sales transactions on four of our standard jack-ups, resulting in $130 million in proceeds.

With additional transactions in the works, I am confident in our ability to meet our 2012 objective of $500 million to $1 billion in asset sales proceeds and reduce our exposure to commodity class assets. To this end, we have begun the process of restructuring our remaining standard jack-up fleet into an independent operating unit that will allow us to better serve our customers as well as provide us with a flexibility to more efficiently take advantage of any opportunity to reduce our exposure to this non-core segment of our fleet.

The third key element of our corporate strategy after improving our operating results and executing our asset strategy is a resolution of Macondo. While the civil trial has been adjourned indefinitely pending review and approval of the BP/PSE settlement, we continue to prepare to defend the Company's position in court. This includes the possibility that we will face criminal charges by the Department of Justice.

We are still interested in finding an acceptable resolution that allows us to put all of the remaining uncertainty behind us, and we have had conversations with various Macondo-related parties in pursuit of this objective. However, in the absence of an acceptable resolution, we are well prepared to argue the merits of our case in court, whether in a civil or criminal context.

In summary, we are very encouraged by the strong market fundamentals and are positioned in the market and the progress we have made to improve our operational performance globally. As we move forward in this improving marketplace, we remain focused on following through on our key commitments to you.

We will continue to execute on our initiatives with the objective of improving the Company's operating results. We will execute the Company's asset strategy to ensure that Transocean remains an industry leader, and we will vigorously defend the Company's interests. 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 mentioned, we reported net income attributable to controlling interests of approximately $42 million, or $0.12 per diluted share for the first quarter 2012. Excluding approximately $184 million in certain net unfavorable items, our diluted earnings were $0.64 per share. This compares with similarly adjusted earnings of $0.18 per diluted share in the fourth quarter 2011.

Net unfavorable items included an additional non cash charge of $118 million for completing the goodwill impairment related to our contract drilling reporting unit for which we recognize an estimated impairment of $5.2 billion in the fourth quarter of 2011. Net unfavorable items also included a non cash charge of $62 million after taxes for an intangible asset impairment associated with our drilling management sources reporting unit.

This impairment was due to the declining market outlook for these services in the shallow water of the US Gulf of Mexico as well as the increased regulatory environment for obtaining drilling permits and the diminishing demand for the services. As a result of these conditions, we have decided to exit the US Gulf of Mexico in order to focus our drilling management efforts primarily on the North Sea and emerging markets in Asia and West Africa where we see greater opportunity.

The remaining net unfavorable items are as follows. $17 million of impairment of the GSS rig 136 which was sold during the quarter, $16 million of other losses, primarily from the loss on sale of Challenger Minerals North Sea Limited, and an impairment of our US oil and gas properties and $29 million of favorable discrete tax items.

Revenue for the quarter decreased by $91 million to approximately $2.3 billion. $48 million of the decrease was due to lower revenue efficiency which declined to 90.4% from 91.9% in the fourth quarter. Additionally, reduced activity in our drilling management services reporting unit resulted in a decline of an additional $49 million of revenues from the fourth quarter.

First-quarter operating maintenance expenses of $1.41 billion decreased by $155 million compared to the fourth quarter, excluding the $1 billion loss contingency. Approximately $70 million of the decrease in operating maintenance costs was due to net lower costs recognized on rigs ongoing shipyard maintenance repair and equipment certification projects during the quarter which were predominantly timing related, either due to delayed shipyards or deferred costs.

The remainder of the decline in operating maintenance costs were due to the non recurrence of approximately $35 million related to the fourth-quarter 2011 termination of the deepwater expedition contract and approximately $40 million related to the decreased activity in the Company's low margin drilling management services reporting unit.

Excluding the net unfavorable items I've described, first-quarter operating income of $498 million increased by 25% compared to the fourth quarter as reduced operating and maintenance cost more than offset the revenue shortfall from revenue efficiency. Interest expense net of the amounts capitalized was $180 million compared to $178 million in the fourth quarter.

The effective tax rate of 24.7% in the first quarter increased from negative 2.2% of the fourth quarter, primarily due to the significant reduction in the goodwill and other intangible asset impairments recognized in the first quarter as compared to the fourth quarter. Depreciation and amortization expenses was $351 million in the first quarter compared to $374 million in the prior quarter. The $23 million decrease was due mainly to assets that are now fully depreciated and the impact of standard jack-ups classified the held for sale or sold.

General and administrative expenses were $69 million for the first quarter compared to $88 million in the previous quarter, including $1 million and $17 million respectively associated with the Aker drilling acquisition. Net cash flow generated from operations declined to $540 million in the quarter compared to $563 million in the fourth quarter due primarily to an increase in cash used by working capital, partially offset by better operating results.

Capital expenditures total $260 million in the first quarter, down from $350 million in the fourth quarter due to the timing of shipyard milestone payments associated with our new build construction program. Additionally, we paid the fourth and final installment of our dividend in the amount of $278 million to our shareholders. Net cash on hand was about $4 billion in the first quarter, generally consistent with the fourth quarter.

I would like to now update our full-year 2012 guidance which remains on hold consistent with our previous call. As reported on our last status report, we continued to expect a large concentration of our 2012 out of service days to occur in the second quarter. Although our first-quarter revenues were partially impacted by some 2011 shipyard overruns, all of these older shipyards are now complete and the rigs are back to work.

We continue to be cautiously optimistic on our remaining 2012 out of service time forecast due to better execution of the shipyard projects we commenced following the implementation of our improved shipyard planning and execution processes. That said, we advise caution as it is not uncommon for unplanned or exceptional major shipyards to significantly increase our out of service time.

We are not able to predict such exceptional shipyards and they consequently are not included on our fleet status reports. Our expectations that shipyard activity will decline in the second half of the year is unchanged. However, the lower level of shipyard activity expected in the second half of the year is not representative of what we expect in the future years. Our future shipyard activity will more closely resemble or long-term average shipyard activity.

Despite the lower first-quarter revenue efficiency compared to the fourth quarter, we still project that our average revenue efficiency during 2012 will be similar to that experienced in the fourth quarter of around 92% with the actual amount varying by quarter. We expect a gradual improvement over time, but it is possible it may take several years to achieve our historical levels of performance as we continue efforts both technical and contractual to accomplish this goal.

We now expect our other revenues to be between $470 million and $500 million for the full year 2012 which represents a decrease from our prior guidance of $625 million to $650 million as a result of our recent decision to exit drilling management services in the Gulf of Mexico. Please remember that our other revenues generate fairly low margin generally in the mid- to high-single-digit range.

Our operating maintenance cost guidance for 2012 remains between $6.15 billion and $6.35 billion. An expected decrease in cost associated with our reduced drilling management services activity is completely offset by an increase in other costs, the majority of which relate to rig reactivations.

During the year, we now expect to incur an additional $90 million of cost related to reactivating and operating the High Island 9, the Galaxy 1 and one additional jack-up and for long lead time expenses in relation to the potentially reactivating the Transocean Richardson and the Discover 534.

Although we expect the total number of our out of service days the lower in the second quarter as compared to the first quarter as reported in the status report. We expect an increase in the number of planned out of service projects in the second quarter. And expected 35 rigs with out of service projects versus 26 in the first quarter, as well as increase in the cost of these out of service projects, primarily due to the type of project and the work scope.

We also expect to incur approximately $50 million more in the second quarter than the first quarter related to the previously discussed reactivation. Furthermore, we anticipate a increase in maintenance on our operating rigs in the second quarter compared to the first-quarter levels. Overall, we expect second-quarter operating maintenance costs to be significantly higher in the first quarter, primarily due to the expected increase in cost related to shipyards, reactivations and maintenance on our operating rigs.

We expect operating maintenance costs in the third and fourth quarter to be higher than the first quarter, but significantly lower than the second quarter as our expected level of shipyard activity decreases in the second half of the year. We continue to focus on cost control and management of our cost structure.

Our guidance for the other items for 2012 is still the same as on our previous call. To reiterate, we expect depreciation expense for 2012 to be between $1.4 billion and $1.5 billion. General administrative costs expected to range between $270 million and $300 million. Interest expense net of interest income is expected to be between $610 million and $630 million, including roughly $50 million of interest income and roughly $40 million of capitalized interest.

We expect that our annual effective tax rate for 2012 to be between 25% and 30%. Our capital expenditures for 2012 are expected to be between $1.2 billion and $1.3 billion with allocation consistent with our previous guidance.

Our target to reduce long-term debt to an amount between $7 billion and $9 billion and increase our cash balance to be between $3 billion and $4 billion also remains unchanged. Both targets exclude the accurate export finance debt of approximately $850 million, which is supported by a similar amount of restricted cash.

To support these targets, we plan to continue to focus our 2012 available cash and cash flow on retiring debt as it matures with the expectation that our Series C convertible notes will be put to us in December. In April, we retired early $375 million of other debt, in line with our guidance provided in the prior call. With that, I will hand it over to Terry 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, 2012 started as positively as 2011 ended. Robust commodity pricing continues to drive improving levels of contracting opportunities for all asset classes within our drilling slate for the remainder of this year and well into 2013. We have executed $1.6 billion in contracts thus far for 2012 and have over $2.5 billion more in the pipeline.

Since the last earnings call, we have executed $1.1 billion of contract backlog. Utilization and day rates are continuing to improve and have reached levels not seen since the last cycle.

In this extremely tight market, we secured our last available ultra-deepwater drill ship, the Deepwater Expedition, for two-year firm term at a leading-edge day rate of $650,000 a day with three eight-month options at $695,000 a day plus a substantial mobilization fee. Additionally, we've extended our harsh environment ultra-deepwater semi, the Transocean Spitsbergen, for two years at $543 per day in Norway.

Tendering and contracting activity in a deepwater market is also increasing. The several fixtures recently announced by our competitors with rates over the mid-400s. We expect to report more positive news in the near future regarding our own fleet with outstanding opportunities in Australia, West Africa and Southeast Asia.

Mid-water activities continue to improve, especially in the UK and Norway. Multiple tenders for longer term exploration and development programs have further improved an already tight market. We expect this improving demand for harsh environment semis for the UK and Norway will further improve pricing in these markets.

Demand for premium and standard jack-ups continues to increase, resulting in higher global utilization and day rates and has led to further reactivation of some of the world's isle standard jack-ups. Key areas of demand are Southeast Asia, India, West Africa, Saudi Arabia and Mexico, and we expect the new builds arriving in the market in 2012 to be fully be absorbed.

Now let's take a little deeper look at the various market segments, beginning with the ultra-deepwater market. The tight ultra-deepwater market has resulted in pricing opportunities well above $600,000 a day for near term markets, as evidenced by our recent fixture. The ultra-deepwater demand is further enhanced by continuing exploration successes in the Angolan pre-salt, Northern Brazil and East Africa.

Additionally, we believe that Petrobras will soon return to the market for their ultra-deepwater needs. Their re-entry will have a significant impact on the already tight near-term market conditions. We are already in advanced discussions on our existing ultra-deepwater units available in late 2012 and beyond at very attractive rates. Our confidence in the long-term future in the ultra-deepwater market has also been confirmed by the strong interest being shown by our customers in our two DSME design ultra-deepwater drill ships under construction.

Turning to the deepwater market. Tendering and contracting activity is showing improvement with a few impressive contracts being executed at day rates of $460,000 to $490,000. We expect to see more contracting opportunities, Australia and West Africa in the near term, and we are confident our fleet will benefit from these opportunities. Additionally, with the tightening of the ultra-deepwater market, demand for the deepwater will continue to improve.

We also expect Petrobras to issue a tender in the near future for up to two rigs to satisfy its deepwater requirements. In the mid-water floater market, we see increasing demand in Norway and the UK North Sea. Based on inquiries received from our customers, we believe that the market will continue to be under supplied through 2014 and possibly well into 2014 -- '13 and '14, sorry about that.

Since our last call in late February, we have been able to secure a new leading-edge contract at $315,000 per day in the UK. We are confident in our ability to secure favorable rates for available mid-water capacity not only in the harsh environment markets, but also in India and Southeast Asia, where demand has also been increasing.

Moving to the jack- up market, demand for premium jack-ups continues to grow. Increased utilization has resulted in higher day rates moving to $150,000 per day and beyond in West Africa and Southeast Asia. The North Sea has also proven to be a hot spot for jack-up activity which provided an opportunity for us to reactivate our last stack HD, HE jack-up unit, the GSF Galaxy 1 at $133,000 per day plus a lump sum reactivation fee. This unit will be used as an accommodation unit.

Since our last earnings call we have been able to secure multiple contracts across our entire jack-up fleet, totalling around five rig years with day rates ranging from $131,000 per day for the lower spec jack-ups, up to $153,000 a day for our premium units. We are especially pleased to announce the fixture of one of our premium units, GSF Monitor for one year at $153,000 a day in Nigeria. Based on the strong market and requests from our customers, we anticipate that we will be able to continue to reactivate our idle equipment.

In conclusion, strong demand continues across all market segments in the major oil and gas provinces and emerging markets, which reinforces our view that day rates and utilization will continue to improve. With the versatility and global footprint of our fleet, we can provide our customers with the optimal asset solutions to execute their global programs. That concludes my overview on the markets. I will turn it back to you, Steven.

With that, Priscilla, we are ready to open up the Q&A.

Certainly. (Operator Instructions) We will take our first question from Angie Sedita with UBS. Your line is open.

Greg, on your operating cost guidance, you mentioned that Q2 will be obviously higher than Q1. Is it fair to assume that it would be closer to Q4 level of $1.56 billion?

I think a rough rule of thumb -- a lot of the operating costs that were favorable in the first quarter were really timing related. And a lot of those just flip into the second quarter because of shipyard delays and other items. But then in addition, as I talked about, we've got another $50 million of reactivation costs that we had not -- were not in our plans on our last earnings call. Really, you are going to see that kind of increase, we expect, in the second quarter. Now, we will caution you, that's assuming all the shipyards we have planned for the second quarter stay on plan for the second quarter because a lot of times weather well in progress will delay shipyards, and that's what we saw happening in the first quarter. But right now our best guess is we do all those shipyards in that drive, that significant increase in the second quarter. And then it falls back for the rest of the year, both as we do less shipyards and as our drilling management service activity declines during the year as we phase out the Gulf of Mexico operation.

Okay. And then the follow-up to that, on the BOP recertification process, is it still your assumption that it will be completed late in 2013 or mid-2013, and are you seeing any improvements in the length of time to complete these BOP recertifications or the cost?

I think in general, Angie, we are starting to see the benefits of the significant efforts that our OEM, the pressure control OEMs have gone to over the year or 18 months. Over the course of the rest of the year, we will continue to see those benefits come into play. It will take us beyond 2012 into 2013, and then we get back into a routine of executing recertification as part of our normal five yearly SPS work.

Okay, and finally one for Terry real quick. On the deepwater Nautilus, I saw that it is up for renewal here in August. It's in the Gulf of Mexico with Shell at a nice rate of 550. Giving the dynamics that we're seeing in the market today, I would assume it's fair that we should see a modest bump in that rate, and will that rig still stay with Shell or move elsewhere?

Well, what I can say today, Angie, is that we were in advanced discussions with Shell on the unit. But since we haven't concluded a firm contract, I'm really unable to give you a whole lot of specifics on it. But I think in the very short term we are going to have some positive news.

Okay. Good to hear. Thanks, guys.

Thank you, we will take our next question from Scott Gruber with Bernstein. Your line is open.

Yes, thanks. I wanted to inquire about revenue efficiency in the nonlinear improvement trajectory as you described, Steven. Are rig reactivations out of shipyard holding back improvement in that revenue efficiency number?

By holding back, do you mean are they -- is a reactivation project a distraction from the operational efficiency efforts we are making? I would say categorically no. There is enough technical talent focused on the efforts and the initiatives aimed at improving our revenue efficiency that a standard reactivation project doesn't really distract from that. Did I get the essence of your question, Scott?

I was actually focused on the fact that putting these rigs back to service out of the yard may result in more interruptions during the first well versus continuing operations such that we're just -- because of the number of shipyard reactivations that you are undertaking today, maybe holding back that revenue efficiency number some?

Just purely as a result of the calculus, when you undertake a reactivation project, there is always a focus on initial teething problems and break-in problems when the rig gets on location and goes to work. But I will tell you, we have made dramatic improvements in what we call our ready to operate procedures, that are designed to address exactly that. That's all part of the predeployment testing that is key component of our operational improvement efforts.

Got it. And then turning to the market outlook, clearly strength across all segments. But how would you describe the relative strength across the floating rig market? Are you seeing -- is your ability to push rates greatest still at the high end? Is it now transferring down into the fourth gen or in the mid-water?

Scott, I think that with the tremendous tightness in the near term you are going to see the ability to leverage on the deepwater and the mid-water. And we are very confident that we will be able to push those rates up a bit. And again, it's because of the tightness we are seeing in the ultra-deepwater arena.

How come --

I'm sorry?

Go ahead.

So, the answer is yes, we will be able to leverage this tightness in the market to improve the rates in the other segments.

And how confident are you in your ability to push mid-water rates outside of the North Sea? Going through the projects in the queue, quite a lot of growth to come in the North Sea, but we don't see a lot of growth outside of the North Sea. I was wondering if you could give a little bit of color on non North Sea and mid-water?

We are starting to see some smaller players come into the non-North Sea markets that are showing some interest in moving into some activity in West Africa and also in southeast Asia. We do believe that we will be able to increase the rates for that fleet outside the North Sea and I think that in a couple of -- in a very short term you are going to see some of our opportunities come to fruition where we will be able to prove that up.

Okay, great. I'll turn it back.

Thank you. We will go next to Kurt Hallead from RBC Markets. Your line is open.

Hi, how is everybody today?

Good morning, Kurt.

I am -- obviously the market dynamics are improving and have been improving for the better part of six to nine months, you've given than indication, Terry, on your comments with respect to the marketplace. I am curious now, it appears to me that the cycle here is evolving in a very similar way, as it always has. In that context, can you do some comparison and contrasts and suggest -- is it -- can you confirm that, that this is evolving in the same way it always has? Are there elements that you think are different and better? Are there some things that we should not expect to see that we have seen in prior market cycles? Just to clarify this one last point, you just mentioned that you expect to leverage what's going on with the ultra-deepwater with the deepwater the mid-water, so is this going to be the classic cycle where the proverbial rising tide will sell boats, or are some assets going to be left behind in this process?

Kurt, interesting question. As we look back over the last cycle, it feels a lot like that. The one thing that I am seeing currently though, the increase in the tendering activity feels a lot stronger. And with that, I can say that we are in serious discussions on quite a few of our ultra-deepwater units that didn't even go to tender. These are direct negotiations situations, and then you see the significant open demand. And I think that if you do the count and run through the list, you can see that the open demand is about 34 rigs in the ultra-deepwater segment alone and if we add those years up, it's over 100 years a term. With the open demand, that doesn't account the demand that we are talking about privately, and I know our competitors are also out there talking privately with their preferred customer base. So, that's why it feels a little bit different.

And then also, we have to keep -- be aware of the tremendous amount of influx of new builds that are going to come to the market in '14, so we can't ignore that dynamic either. We are going to have to see how this plays out. But the market has been absorbing up to 20 ultra-deepwater units since 2007, so it's been tremendous growth with this steady commodity price that has given the customers a lot of confidence. With depletion of production and with all of the new territories that are opening up, we see that the outlook looks very supportive of continued absorption of this fleet. So, we are very optimistic in the discussions that we are having with the customers. It is even going outside the boundaries of east Africa and the Angolan pre-salt. We are now talking to our customers about opportunities in Mauritania, in the Kara Sea, in Uruguay. So, everyone is moving into a new dynamic based on the high oil prices that have continued to stimulate exploration in other territories that we have just begun to think about.

Now, there had been a perception in the marketplace last year that the moored rigs were going to be essentially worthless and beached and so on and so forth. So once again, predicated on your commentary, it looks like the operators are trying to get their hands on whatever rigs they can get their hands on irrespective of say the asset's age and the capabilities. Is that a fair comment?

Yes, I think that's a fair comment., Kurt This is my 30th year in the industry, and I was on some of those rigs when they first came out, and those girls can still drill. We are very optimistic about some opportunities that we are going to see quickly. I'm excited about getting this. I made that comment about the $2.5 billion pipeline, we got to work very hard. Our marketing teams are out there working hard to get these things out of the pipeline and on the books. We are very optimistic, and I think you are going to see a pretty positive story that will prove up how these ol' girls can find some work.

Thank you. We will take our next question from Ian Macpherson with Simmons. Your line is open.

At the risk of flogging the dead horse on some material we have already covered, the Expedition seemed like a good rate for what was I think your worst ultra-deepwater asset six months ago. Is that an anomaly with the scarcity in the market for Q4? Or is that the benchmark for rigs like the Nautilus and the DD1 and the Explorer that have open windows at the end of this year?

I think you got to look at availability in the market and match it with the program and urgency of a customer. I don't think that we could paint that every opportunity out there right now is going to get $650,000 a day. Let's look at what the competitors are announcing right now. Of course, we announce a little bit different than the competitors. We announce a clean rate and our competitors sometimes co-mingle modes and bonuses in their numbers. But I think if you look at a clean rate right now, I think you're going to hover around $600,000 a day, dependent upon the market that you are in. So, we all know that West Africa is a bit more expensive, Brazil is a bit more expensive, Gulf of Mexico is not as expensive, so I think it is going to be dependent upon when we are going to be putting these rigs to work. Into '13, '14, the prices are going to modulate accordingly with where we are in the market. I think it's not a hard standard, but certainly with 2012 availability, it looks like the number for the ultra-deepwater, DP rigs are going to be around the $600,000 range.

All right. And then, Terry or Steven or whomever, could you help us with our expectations for the Richardson and the 534 with respect to timing and handicapping, whether those rigs come out at a market day rate or a discounted day rate, et cetera?

Okay, well, I will take that one. We are currently in the few tendering opportunities for the Richardson, so we are just waiting to see. We believe that we will have some opportunities to bring the Richardson out. And again, it has to be the right opportunity because she is going to require significant upgrade to get her out. But we're optimistic that in this incredibly tight market that we will be able to do that. The 534, we are still looking for an opportunity, haven't found that yet, but again, we are going to scan the markets and look to see what we can do.

We will take our next question from Robin Shoemaker with Citigroup. Your line is open.

Thank you. Steven, I just wanted to go back on the creation of a jack-up, standard jack-up fleet. I think I understand which rigs are going into that, can you confirm which jack-ups are not going to be part of that entity?

The starting point for that, Robin, is our asset strategy. And so our desire to reduce our exposure to low-spec commodity class assets. The jack-ups that are characterized as low-spec commodity class jack-ups will be essentially all of the standard jack-ups.

Okay. That you classify, all right.

The way we report them on our fleet status report.

Yes, okay. And so in terms of your desire to reactivate rigs within that class and spend money in doing so, how does that work if you are looking to potentially divest that asset?

It's a bit of a delicate balancing act. We are trying to respond to the needs in the marketplace and meet the needs of our customers. We are trying to create as much of a robust entity as possible so that when it comes time to divest ourselves of that entity, there's working rigs in there with prompt cash flow that can sustain the ongoing business and there will, even at that time, likely be some remaining idle capacity that will provide some long-term growth opportunities for the entity.

Thank you, and we will take our next question from Waqar Syed with Goldman Sachs. Your line is open.

Thank you. My question first relates to the operating cost. We noticed in the detail, that very good detail that you provided about the daily operating cost for the working rigs, that number did not change much from the fourth quarter levels. Maybe expecting some wage cost inflation and other materials inflation, so we didn't see that. Is that still to come? Do you have a different cycle in terms of wage increases or this is going forward daily operating costs for the working rigs?

A couple of drivers. You are exactly right, a lot of our wage increases occur in the second quarter. Not all of them. They vary around the world, from country to country. But a lot of them occur in the second quarter later in the year. And also that it's very hard to compare one quarter to the preceding quarter because a lot of our daily operating costs are influenced by our maintenance, our extraordinary maintenance projects. So, in the first quarter we tend to do fewer extraordinary maintenance projects because of budget cycles and weather in the North Sea and things like that. It's better to look at a rolling average. We still -- we talked about on the last call, we still expect average year-over-year average of daily operating costs to increase between 5% and 10% between wage inflation as well as maintenance inflation.

Okay, great. Another question on your second and third gen fleet. Do you have a number of rigs that may be due for five year service in that class in 2013?

Just on average, there would be about a fifth of that fleet that would be due for its SPS in any one year. That's just the way special periodic survey cycles work.

Thank you. And we will take our next question from Joe Hill with Tudor Pickering. Your line is open.

Good morning, guys

Good morning, Joe.

Steven, just to tack on to the last question. Should we generally expect an SPS on the fifth year anniversary from delivery date of a rig?

That's probably a starting point to our rule of thumb, Joe, but there are windows within which the classification societies allow you to carry out that work. And I don't remember exactly how large the window is, but if you are in your fourth or fifth cycle, you would have probably taken advantage of that window a couple of times during the life of the rigs, so you may be off the -- you may be off of a simple multiple of five.

Okay. And my next question has to do with what operators are trying to do to free up some rig time. Can you give me an idea as to how much of the rig time is actually in nondrilling mode, doing stuff like intervention, completion or construction? And are you seeing any efforts by operators to use a CAD-A vessel to do that sort of work now that's greater than it has been historically or maybe efforts to do top hole drilling with a cheaper rig?

That's a really interesting question, Joe. I can give you a couple of perspectives on that. Over time, I think we have seen the relative allocation of a rig's activity having gone from 70% of the time it was drilling and 30% of the time it was doing completions work, to now it's -- with the complexity of the completions our customers are running, now it's as much as 50% drilling, 50% completions. I'm not aware of a significant effort on the part of the customer community to address that. I think we have seen it in a couple of instances where a customer has hired a specific rig to carry out the drilling operations and another rig to carry out the completion operations that we have been involved in a project like that in West Africa with Akpo for Total. But other than those limited instances that I'm directly familiar with, I'm not sure there is a trend.

I think that what we are starting to see is Norway, Statoil's going to go out for an intervention vessel opportunity, and then we also understand that Petrobras will soon be coming to the market for some intervention opportunities. It's just starting, so I don't have a way to handicap it or quantify it at this point, but we do -- we've just hear of these two opportunities.

Thank you. We will go next to Matt Conlan with Wells Fargo. Your line is open.

Thanks. I've got a couple of cleanup timing questions for you. First on the Richardson Discoverer 534, what's the length of the shipyard requirements that those rigs need to get back on the payroll?

Well, it depends on if we are going to -- if we would reactivate a rig and we would add some time to meet upgrade requirements that the customer would like. So, I think getting on one particular program, we are looking at a six month reactivation, but again, it would depend on if we won the opportunity and the customer wants to do further upgrading, so that could extend out the time horizon. It's going to be dependant on what we are going to do for a specific project that we would win.

Okay. That's very helpful. And switching to the jack-ups, you are moving those standard jack-ups into an independent company, I assume that's so it could either be sold or perhaps even spun off. Spinning it off would probably take a little bit more time. What is the soonest you think it can be in position to be ready for a spinoff with audited financials and stuff like that.

The critical path time line for that, Matt, would be the audited financials, and that's not a 2012 event. It's probably second half of 2013.

Thank you. We will take our next question from Robert MacKenzie with FBR Capital Markets. Your line is open.

Hi, Rob MacKenzie here, guys. I wanted to go back to the cost question a little bit. Not the daily operating cost, but the downtime cost. That tends to vary on a per-day basis obviously quite a bit, and I understand you have given us full year guidance. But what really are the moving parts there? Is it really just timing of when you pay the shipyard when a rig is down? Or what is it? Can you help us understand that better?

Sure, there is really a couple of big drivers. Some of -- a lot of our shipyards are what we refer to as contract preparation shipyards. So, they are shipyards that are being done to meet various customer requirements prior to starting a new contract. And a lot of times, under our accounting method, costs that relate to that contract preparation get deferred and amortized over the life of the contract. Now any up front revenue related to that also gets deferred and amortized. When we have a lot of contract prep shipyards in the quarter like we did in the first quarter, that shows a lower shipyard out of service daily operating cost number because costs are being deferred. Now, if it's a survey shipyard or a shipyard that is within a contract and if it's an older rig that takes a lot of work, then those costs can tend to be higher. It really varies based upon the mix of shipyards, and that's one of the things that we see happening in the first and second quarter. First quarter, 60% of our shipyard projects were contract prep project. In the second quarter about 30% of our projects are contract prep projects, so that drives up the average cost of those profits.

Great. That's really helpful. And then my follow-up would be on the Macondo situation, understandably you can't say much, but is there anything you guys could tell us about what the bid/ask spread might look like for a potential settlement and what your view of timing might be?

No comment, Rob.

Okay. Fair enough. Thanks.

We will go next to Andreas Stubsrud with Pareto. Your line is open.

Thank you, thanks for taking my question. I have a very quick question for you, Terry. You talked about Transocean Richardson and tenders you are bidding on, are some of them in Norway?

Andreas, I can't tell you all my secrets. (laughter) We've looked at opportunities before in Norway for the Richardson and to get her in Norway, it is a pretty extensive upgrade. It's not that we can't do it and not willing to do it, it's just, again, we got to have the right economic return to take a look at that. So, we are open to looking at everything. That's how we have been charging, trying to put her back to work.

Okay. Very good. That was my only question. Thank you.

Thanks, Andreas.

And we will go next to David Smith with Johnson Rice. Your line is open.

Sorry, my questions have been answered. Thank you.

Okay operator, if there's no additional questions?

Apologize, we have no further questions at this time.

Thank you very much. This concludes our first quarter 2012 results conference call. Thank you very much for your participation today, and we look forward to speaking with you again when we report the second quarter. Have a good day.

This concludes today's conference. You may disconnect at any time.