Transocean Ltd (RIG) 2012 Q2 法說會逐字稿

Good day, everyone, and welcome to today's Transocean second quarter 2012 earnings conference. As a reminder, today's call is being recorded. At this time, I would like to turn the conference over to your host for today, Mr. Thad Vayda. Please go ahead, sir.

Thank you, Sarah. Good day, and welcome to Transocean's second-quarter 2012 earnings conference call. A copy of the press release covering our financial results, along with supporting statements and schedules is posted on the Company's website at deepwater.com.

We have also posted a file containing 4 charts that may be referenced during today's call. This 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, operating and maintenance cost trends, and a new chart illustrating historic and forecasted out of service rig months by asset class for the years 2008 to 2013. 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 today's call are Steven Newman, Chief Executive Officer, Greg Cauthen, Executive Vice President and Chief Financial Officer, and Terry Bonno, Senior Vice President of 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 fact, including future financial performance, operating results, estimated loss contingencies associated with the Macondo well incident, 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, the effects and results of litigation, assessments and contingencies and operational and other risks, which are described in the Company's most recent Form10-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 very materially from those indicated. Transocean neither intends to nor assumes any obligation to update or revise these forward-looking statements in light of developments which differ from those anticipated.

Also note that we may use various numerical measures on the call today that are or may be considered non-GAAP financial measures under 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. Thanks for your time, and I am now turning the call over to Steven Newman. Steven?

Thanks, Adam. Thank you all for joining us today.

In beginning my comments, I would like to focus on two key highlights from yesterday's press release. First, our second-quarter revenue efficiency of 92.5% was the highest we have seen since the second quarter of 2010. While I will remind you that our progress going forward will not necessarily be linear, the 2 percentage point improvement over the first quarter demonstrates that we are making progress in our efforts to improve our operating results.

I am particularly pleased with the performance of the ultra-deepwater fleet which delivered revenue efficiency of 92.2%. These high day rate rigs have the greatest impact on our performance, and our people are doing a great job in focusing on operational excellence.

Second, between April fleet status report and the July fleet status report, we signed $4.7 billion in new contracts. This represents a tremendous accomplishment, and a lot of hard work on the part of Terry and her worldwide marketing team. As significant as the dollar magnitude of this backlog is, more importantly, we have seen an improvement in contract terms, particularly in the area of enhanced subsea related maintenance and repair provisions. Our customers recognize that this is an industry-wide issue, and are partnering with us in addressing it.

For the second quarter, we reported a net loss attributable to controlling interests of $0.86 per diluted share. These results included net unfavorable items totaling $560 million or a $1.58 per diluted share, including an increase to our Macondo well incident estimated loss contingency, discrete tax benefits, gain on the sale of rigs and other items. Considering these items, adjusted earnings were $0.72 per diluted share, a quarter-on-quarter increase of $0.18 versus the first quarter of 2012.

While our operating and maintenance costs in the second quarter were higher than the first quarter, as we had guided in our first-quarter call, increased revenues both in contract drilling driven by improved revenue efficiency and drilling services the result of increased activity outside of the US Gulf of Mexico, more than offset this. Greg will discuss the numbers in more detail in a moment.

As I indicated, I am pleased with the progress reflected in our operating results. We continue to focus on operational improvements, through thorough inspections, standardized maintenance, and rigorous pre-deployment testing, and enhanced contractual terms and conditions. I am also encouraged with our progress in project management, and the reduced volatility and uncertainty in out of service time. Operational excellence and project excellence are key focus areas for our management team.

We also continue to see progress in the execution of our asset strategy. During the second quarter, we sold 4 standard jack-ups for total proceeds of $144 million. Subsequent to the quarter, we classified 2 additional rigs as held for sale, GSF Rig103 and the Discover 534. Regarding the Discover 534, after a more extensive review of the rig's capability in the context of our asset strategy, we decided to sell the rig.

With this continued progress, I am confident we will achieve our 2012 objective of $500 million to $1 billion in asset sales proceeds. We also recently announced the formation of an independent organization to operate our remaining standard jack-ups, which will allow this group to focus exclusively on competing effectively at the commodity end of our business, while we continue to explore divestiture options.

It is worth remembering, that our asset strategy is not just about reducing our exposure to commodity class assets. It also entails increasing our exposure to high-spec assets, both high-spec floaters and the high-spec jack-ups. We now own 100% of the Dhirubhai deepwater KG1 and KG2, which were previously owned through a 50% joint venture. Progress continues on our 5 rig construction program, and customers have shown significant interest in our 2 ultra-deepwater drillships under construction in Korea.

While we remain reluctant to add speculative capacity, we continue to pursue opportunities that meet our disciplined reinvestment criteria, and support our focused high-spec strategy. After improving our operating results and executing our asset strategy, and other key priority is the resolution of Macondo. The civil trial has been rescheduled to start in January 2013, and I assure you we are well-prepared to defend the Company in court if necessary.

The string of successful court rulings on our insurance, our indemnity, and our standing under the Oil Pollution Act and the Clean Water Act all support the merits of our case. At the same time, we continue to explore the possibility of a resolution, which would allow us to put the uncertainty of Macondo behind us. The additional $750 million in estimated loss contingency we recognized in the second quarter reflects our efforts in this regard, and I believe we are making progress.

In closing, I believe our strategy is simple and clear, deliver best-in-class operating results, demonstrating our leadership in contract drilling, rationalize our fleet and strengthen the Company's leadership in high-spec equipment, vigorously defend the Company's business model, contractual indemnity and reputation in the context of the Macondo well incident. Our second-quarter results demonstrate clear progress on the first two items. Resolving Macondo may take time, but I am extremely confident in the Company's position.

With that, I will turn it over to Greg to go through the numbers. Greg?

Thank you, Steven, and good morning, everyone.

As Steven mentioned, we reported a net loss attributable to controlling interests of $304 million or $0.86 per diluted share for the second quarter 2012. Excluding $560 million in certain net unfavorable items, our adjusted earnings were $0.72 per diluted share. This compares to similarly adjusted restated earnings of $0.54 per diluted share in the first quarter 2012. During the second quarter, we identified an error associated with the recognition of $104 million of Macondo-related insurance receivables for legal and other costs, and have made appropriate adjustments to our prior period consolidated financial statements.

Based upon the very favorable District Court ruling with respect to our insurance coverage, we believe that the ultimate reimbursement of our legal costs remains likely. At this point, however, we are just not able to record these particular insurance receivables as an asset under US GAAP. In this regard we have determined that our insurance receivables were overstated by $67 million in 2011, and an additional $37 million in the first quarter of 2012.

These amounts are immaterial to prior-year financial statements. However, the Company has made these adjustments in accordance with SEC guidelines which stipulate that if, when corrected in the current year, a prior period error can be material to the current year, the prior-year financial statements should be corrected.

In addition to the adjustments related to insurance receivables, we are required to record all other adjustments related to the fiscal year 2010 and 2011 in the first quarter of 2012, even though these adjustments were, and continue to be immaterial. These additional immaterial adjustments primarily relate to repair and maintenance costs, income taxes and the allocation of net income or loss attributable to non-controlling interest.

As the adjustments are immaterial to the prior years, we do not have to amend our previously filed financial statements. Details of these corrections, as well as the required reconciliation, are provided in appendix A to the earnings release.

In our second-quarter results, net unfavorable items included an additional estimated loss contingency of the $750 million related to the Macondo well incident. This brings our total Macondo loss contingency up to $1.95 billion. The loss contingency amount is our current estimate under US GAAP of the low end of a range of a reasonably estimable losses. As new developments occur, or new information becomes known, the amount of estimated loss contingency could change, and the change could be significant.

The remaining net unfavorable items are as follows, $145 million of favorable discrete tax items, $64 million of gains made from the sales of 4 standard jack-ups, $14 million loss related to exercise of the put option by Quantum by which we acquired full ownership of the 2 ultra-deepwater drillships KG1 and KG2, $12 million impairment on the GSF Adriatic II, and a $7 million gain from the sale of Challenger Minerals.

Revenue for the second quarter increased $238 million or 10% to approximately $2.6 billion from the first quarter 2012. Overall fleet utilization increased to 66% for the second quarter, versus 61% for the first quarter. Sequentially improved utilization increased revenue by $106 million, related primarily to a reduction in a shipyard time compared to the first quarter.

Another $75 million of the increase was due to higher revenue efficiency, which improved to 92.5% from 90.6% in the first quarter. Additionally, increases in activity in our drilling management services reporting unit resulted in the increase of an additional $69 million of revenues from the first quarter. Second quarter operating and maintenance expenses of $1.61 billion, excluding the $750 million Macondo loss contingency, increased by $144 million compared to the first quarter. Approximately $82 million of the increase in operating maintenance costs was due to rigs undergoing shipyard maintenance and repair projects, as previously anticipated.

Although our shipyard days decreased in the second quarter, maintenance and shipyard costs have increased, due to the type and mix of projects, including reactivation. Additionally, $62 million of the increase in operating maintenance costs was due to increased activity in our low margin drilling management services reporting unit. Excluding the net unfavorable items I have described earlier, second quarter operating income of $535 million increased by 20%, compared to the first quarter as increases in revenue more than offset the increases in costs.

Interest expense, net of amounts capitalized and interest income, was $170 million compared to the $165 million in the first quarter. The effective tax rate adjusted for unusual items of 31.1% in the second quarter increased from an adjusted 27.6% in the first quarter, primarily due to rig moves and other changes in estimates. As a reminder, our estimates change as we file tax returns, resolve disputes with tax authorities, or become aware of other events that include changes in deferred taxes, valuation allowances on deferred taxes and other tax liabilities.

Depreciation and amortization expense was $345 million in the second quarter, compared to $355 million in the prior quarter. General and administrative expenses increased to $79 million for the second quarter, compared to $69 million in the previous quarter primarily due to transaction costs related to the exercise of the put option by Quantum. Net cash flow generated from operations declined to $459 million in the second quarter compared to $540 million in the first quarter, primarily due to an annual pension funding contribution and a seasonal increase in tax payments, partially offset by better operating results.

Capital expenditures totaled $236 million in the second quarter, down from $260 million in the first quarter, due to the timing of shipyard milestone payments associated with our new build construction program. Additionally, the disposal of our non-core assets generated proceeds of $144 million in the second quarter, compared to $41 million in the first quarter of 2012. Net cash on hand was $4 billion at the end of the second quarter, generally consistent with the first quarter.

I will now update our full-year 2012 guidance. As recorded on our latest fleet status report, we expect a lower level of out of service days in the third quarter. We continue to be cautiously optimistic on the forecast of remaining 2012 out of service time, compared -- due to the better execution of shipyard projects we have commenced on the implementation of our improved shipyard planning and execution processes.

However, the lower level of shipyard activity expected in the second half of the year is not necessarily representative of what we expect in future years. The shipyard activity in 2013 provided in our most recent fleet status report represents our current best estimate of out of service time. However, we have not yet completed our 2013 budget process.

As Thad mentioned in his opening remarks, we have provided a new chart in our quarterly toolkit that provides out of service time by asset class. Additionally,, and as we have said before, we advise caution as it 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 consequently, they are not included in our fleet status report.

Revenue efficiency in the second quarter was 92.5%. We expect a gradual improvement over time, but it is possible it may take several years to achieve our historic levels of performance as we continue efforts both technical and contractual that accomplish this goal. Our revenue efficiency guidance for 2012 remains unchanged at this time. We continue to expect it to average about 92%.

We estimate other revenues to be between $560 million and $590 million for the full-year 2012, which represents an increase from our prior guidance of $470 million to $500 million as the result of expected increased activity in our drilling management services market outside the US Gulf of Mexico. We now expect our operating and maintenance costs for 2012 to be between $6.25 billion and $6.4 billion, an increase from our previous guidance of $6.15 billion to $6.35 billion.

This increase in cost guidance is associated with expected higher drilling management services cost of more than $90 million, as well as roughly $70 million from the expected full-year impact of the correction of the error associated with the Macondo related insurance receivables. Based on shipyard timing reflected in the latest fleet status report, we expect operating maintenance costs in the third quarter to be moderately higher than the second quarter, with operating maintenance costs in the fourth quarter falling back to be in line with the second quarter.

However, shipyard schedules can change, and these changes will impact operating and maintenance costs in these periods. Although we expect the total number of out of service days to be lower in the second half of 2012, as compared to the first half as reported in our fleet status report, the relatively higher costs intensity of the shipyard projects in the second half of the year, the start of operations of our premium new build jack-up, the Transocean Honor, and a moderate increase in maintenance and personnel costs in our operating rigs, will result in a level of costs in the third and fourth quarters higher than the first half of 2012.

Interest expense, net of interest income, is estimated to be between $660 million and $680 million, including roughly $50 million of interest income and roughly $50 million of capitalized interest. The increase of approximately $50 million from our prior guidance is mainly due to a forecast change on non-cash amortization of debt issue costs, discounts and premiums. We now expect the annual effective tax rate for 2012 to be between 27% and 32%, up from 25% to 30% previously guided, primarily due to the mix of rigs working in various jurisdictions.

Our guidance for all other items for 2012 is unchanged from our previous call. To reiterate, we expect depreciation expense for 2012 to be about $1.4 billion. General and administrative costs are expected to range between $270 million and $300 million. Our capital expenditures for 2012 are expected to be between $1.2 billion and $1.3 billion, with an allocation consistent with our previous guidance.

For 2013, we expect operating and maintenance costs to be between 2% to 4% higher than 2012, as the increase in costs related to rig starting operations are reactivated, and the impact of inflation on the daily operating costs of our operating rigs more than offset any reduction in costs due to reduction in out of service time. However, as we have not completed our budgets for 2013, our estimates could change materially, and will be affected by changes in timing of shipyards, decisions to reactivate more rigs, and changes in industry inflation among other factors.

Our target to reduce long-term debt to an amount between $7 billion and $9 billion and maintain our cash balances between $3 billion and $4 billion also remains unchanged. Both targets exclude the Aker export finance debt of approximately $800 million, which is supported by a similar amount of restricted cash, included in our other current assets and other assets on our financial statement. 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 B convertible notes will be put to us in December. In April, we retired early $370 million of other debt, in line with our guidance provided in the prior call.

With that, I'll hand 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, the recent weakness and volatility in oil and gas commodity pricing during the quarter have not dampened the demand for any asset classes within our drilling fleets. This is evidenced by the significant number of contracts executed since our last earnings call, totaling $4.4 billion.

Year-to-date, we have secure contracts totaling $6 billion, resulting in an increase in our total contract backlog for the first time since the fourth quarter of 2008. Additionally, we have opportunities worth over $2 billion currently under discussion. More importantly, the pace of contract execution so far this year has already exceeded the level we attained in all of 2011, and we still have five months left to go. We look forward to the many opportunities available in the market for the remainder of 2012, and on into 2013.

Utilization and day rates for the ultra-deepwater fleet are near historic highs, and our customers continue to secure rig capacity at near-record levels over the past two quarters. With multiple customers competing for the same units available in 2013, we believe that the remaining supply will be quickly absorbed, pushing the positive contracting momentum to the units available in 2014.

With a high utilization in the ultra-deepwater market, we are seeing increasing opportunities for our deepwater fleet. Tendering and contracting activity in the deepwater market continuing to improve, as evidenced by the recent fixture for our Transocean Marianas at $530,000 per day, plus performance incentives. This is the first fixture over $500,000 per day for a moored deepwater units since 2008. We expect to report more positive news for the rest of our deepwater fleet with availability in 2012.

Mid-water activity, especially in the UK sector of North Sea is approaching an all-time high, pushing rates even closer to the $400,000 level, as evidenced by the one-year extension for our Sedco 714 at the leading edge day rate of $395,000 per day in the UK. The recent fixture of our GSF Rig 135 at $340,000 per day for a duration of 120 days represents the highest day rate in the standard floater market since Q1 2009.

Multiple tenders in the UK, Norway and Eastern Canada for long-term exploration and development programs are providing opportunities to bring additional harsh environment capacity into the market. Demand for premium and standard jack-up continues to increase, resulting in higher global utilization and day rates, as evidenced by solid contracts being reported in the key demand of arenas of Southeast Asia, West Africa, and the Middle East. We, therefore, expect the new builds arriving in the market in 2012 to be fully absorbed, without significant impact on the market dynamics.

Beginning with the ultra-deepwater market, let's take a closer look at the various markets. The tight ultra deep water market has resulted in pricing opportunities now, from the mid $500,000 per day to well over $600,000 per day, depending on availability, overall term and location. The ultra-deepwater demand is being mainly driven by exploration programs in the US Gulf of Mexico, East and West Africa, compounded by the emerging markets, where recent successes are resulting in incremental demand.

As we move further into the development cycle over the next few years, we believe that increased demand will continue to absorb the available units, and provide further growth opportunities for our fleet. While Petrobras' current five-year plan does not imply a significant increase in demand for ultra-deepwater rigs, we believe there will be opportunities to secure extensions for existing fleets, and expect a need of incremental rigs to bridge the gap to the arrival of the Brazilian-built new build fleet.

Since our last earnings call, we have been able to secure multiple contracts, totaling approximately 9 rig years worth $1.8 billion. The Discover deep-sea was our most recently contracted fixture at $595,000 per day for three years with a new customer in the US Gulf of Mexico. The previous day rate on this rig was $450,000 per day.

We are 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 of the ultra-deepwater market has also been confirmed by the strong interest shown by our customers in our 2 DSME designed ultra-deepwater drillships under construction.

Turning to the deepwater market, due to the above-mentioned tightness in the ultra-deepwater market, we expect the tendering and contracting activity to continue to improve over the next two quarters, as evidenced by the recent deepwater fixtures of over $500,000, and the open demand in West Africa and Asia, we are confident our fleet will benefit from these opportunities. Since our last earnings call, we executed 2 rig contracts for over 3.5 rig years worth $600 million.

In the mid-water and harsh environment floater market, we continue to see increasing demand in Norway and the UK North Sea, where we are close to being sold out for 2013, and are evaluating opportunities to reactivate some of our idle capacity. Based on inquiries received from our customers, we believe that the market will continue to be under-supplied through '13, possibly well into '14, providing ample growth opportunities with a few customers requiring harsh environment new builds for their programs.

Since our last fleet status report, we have been able to secure the leading edge day rate of $395,000 per day for the one-year contract in the UK. We are confident in our ability to secure favorable rates for our remaining available mid-water capacity, not only in the harsh environment market, but also in West Africa, India, and Southeast Asia where demand remains steady.

Moving to the jack-up market, demand for premium and standard jack-ups continues to grow. Increased utilization has resulted in higher day rates moving over $150,000 per day as evidenced by our long-term fixtures in West Africa and Southeast Asia. Since our last earnings call, we were able to secure multiple contracts across our entire jack-up fleet, totaling approximately 9.5 rig years, with day rates ranging from $116,000 per day for lower spec jack-ups to $155,000 per day for our premium units. Based on the strong market and requests from our customers, we expect to have additional opportunity to reactivate more of our idle equipment.

In conclusion, strong demand and tight supply, coupled with the continuing exploration successes, maturation of some large development programs, and new emerging plays as continue to support our view that day rates and utilization will continue to improve, while providing opportunity to grow our fleet with our customers.

This concludes my overview on the markets. So I will turn it back to you, Steven.

Thank you. Sarah, with that, we are ready to open it up for Q&A.

Thank you.

(Operator Instructions).

We will go first to Angie Sedita of UBS.

Good morning, solid quarter.

Thank you, Angie.

Steven, just a theoretical question on the dividend, and potentially or ultimately the reinstatement of the dividend. Do you believe, you and the Board, that you would already need to have settled with the Department of Justice and the plaintiffs before considering the dividend, or reinstating partially the dividend? Or given the large reserve that has been taken, could you consider, you and the Board reinstating the dividend before settling with both parties?

This is delving into the realm of speculation. So let me try to give you at least some guidance on how we think about this. First of all, I would tell you that the reserves we have taken are non-cash reserves. They are booked through our balance sheet, but they would require, once we do reach agreement with the other parties in the Macondo situation, it would require us to actually fund that with cash. So that would be, a use of cash, that if, as we booked reserves on our balance sheet, which would ultimately have to be satisfied.

As we think about it from the perspective of the Board, we are focused on the quality and the strength and integrity of our balance sheet. We're focused on remaining an investment grade quality issuer. We are focused on identifying opportunities to reinvest in our business, and then we're committed to returning excess cash to our shareholders. So that is kind of the framework within which we would think about it. I would not that out, that as an absolute requirement, we would have to have a settlement. But that would be a significant factor in our consideration for sure.

Okay. That is helpful. And then, I know you touched on briefly on the new rig construction, and obviously, you have talked about it in the past. But correctly or incorrectly, I had recently heard that there could be a reevaluation of building ultra-deepwater rigs on speculation. And is the Board reevaluating this policy? Or could they revisit this policy?

As I said in my comments, we remain reluctant to add speculative capacity. That is not an absolute. It is something that the Board regularly evaluates. We are interested in identifying opportunities to reinvest in our business, that meet our reinvestment criteria, and add to our focus on high-spec assets.

Okay. And finally as a follow-up to that, as you mentioned, new management on the jack-up and placing it into a separate entity. Does that imply that a spin could still be a possibility, or is still, as a sale clearly on the table?

Well, we continue to consider all of the divestiture alternatives that are available to us. We have made progress in selling single assets, and we continue to evaluate the possibility of selling a package of assets, or packages of assets. And also the possibility of an IPO or spin type transaction. It is all still on the table.

Okay thanks. I will turn it over.

Thanks, Angie.

We will go next to Robin Shoemaker of Citi.

Thank you. Steven, just as clarification, was --on the $750 million additional charge, was there any event or court ruling or anything specific, that led to that charge taken in the second quarter? How does that process work, if you could describe --?

The way the process works, Rob, and the process itself, is relatively straightforward. It is a result of management evaluating all of the facts and circumstances associated with the Macondo well incident. And we do that evaluation almost on an ongoing basis. So as we approach the end of the quarter, we get together, and we did internal evaluation. Then we obviously review that valuation with our external auditors, and that is what resulted at the end of the quarter in the addition of $750 million for the loss contingency.

Okay. So on -- as you identify rigs for potential sale, you mentioned the Discover 534 and another rig -- how you gauge demand for those rigs, which obviously need considerable capital investment, to put them back into service? And are there -- these last two that you have identified, are we likely to see more within the idle fleet, that would be a good candidates for the divestiture?

Yes. I would tell you the if you think about the Company's strategy to reduce our exposure to low-spec commodity class assets, and you look at some of the idle capacity that we have, certainly some of that idle capacity falls into that category of low-spec commodity class. And so, it is really an ongoing process on the part of our asset divestiture team to evaluate opportunities in the marketplace, to remain in contact with both rig brokers and buyers, to see if we can identify opportunities that make sense for us, that dispose of those assets, to divest ourselves of those assets. That divestiture team is doing a great job, and we are making good progress on it. We will continue to focus on that as one key element of our strategy.

(Operator Instructions).

Up next from ISI Group, we will go to Jud Bailey.

Thanks. Good morning, and congratulations on a good quarter. A quick question on Brazil. We know that, it sounds like Petrobras may be coming out with some tenders here shortly. But I was wondering if you were having any conversations, or were talking to any non-Petrobras customers in Brazil? It sounds like there may be some more opportunities developing for non-Petrobras operators down there. So I was wondering if you could comment on that, please?

Hi, Jud, this is Terry. We are -- we remain in discussions with Petrobras, and we look for them for guidance, certainly on the existing fleet and when they're going to go about doing that. Right now, they are tied up on the [Seti] contract awards. So you just noticed that 6 awards have already been awarded to [Brasfeld] by Petrobras to [Seti]. So they are working on those contracts. They are trying to finalize the other ones. Then, after they do that, they are going to refocus on their extension of fleet and also incremental rigs. So we think that there will be, as I stated in my notes, some incremental rigs to bridge to these new build. Now we are engaged in discussions with independents in Brazil also, and we are drilling for a few independent now. So we do see that there is up at other opportunities there too.

Okay and a follow up on some of the asset sale questions, kind of broke up into two. The disclosed sale price for the 534, was well below what we had expected. Can you say if there was any equipment that was taken off of that rig? Can you say if there was any equipment that was taken off that rig, or wasn't included, or if it was coming up against a survey of any type? And then also, are there other opportunities to sell that class of asset, an upgraded deepwater rig?

Yes, I would tell you, Jud, we don't ever comment on the individual consideration we receive for any particular assets, and each one of those asset transactions is a little bit different, in terms of the equipment that is sold, and the provisions that are included in the sales agreements. So I am not going to comment specifically on the sales of the 534, beyond the fact that we have listed it as an asset held for sale. Outside the 534, beyond the 534 there are, as I said earlier, in response to a question, there are other assets in our fleet that fall into that low spec commodity class, to further of older conventional, older generation deepwater equipment that we think would be better in somebody else's hands. And so, we will continue to execute that asset strategy to position the Company as a clear leader in both deepwater and high-spec jack-ups.

We will move next to Ole Slorer of Morgan Stanley.

Thank you very much, and again, good to see the operations moving in the right direction here. Could you talk a little bit on that point? I mean, you have raised guidance on [O&M] sort of slightly. It is not much at all, so obviously, giving some confidence now that you are hopefully getting through the biggest hurdle in terms of upgrading, your very ambitious upgrade programs. So can you give a little color on what specifically is left for you to do now, in order to get the operating efficiency to the level that you think is appropriate?

As I mentioned in my call, and this has been a consistent theme in our comments for the last several quarters now, we are focused on thorough inspections and standardized maintenance and rigorous pre-deployment testing. And when you say that, you can generally get it out pretty quickly, but when you try and implement it across a global fleet like ours, each particular element of that approach to improving our operations takes a lot of hard work and effort on the part of our worldwide operations team.

I think the results in the second quarter demonstrate that we are making progress. But as Greg indicated in his comments, our guidance for revenue efficiencies for the full year 2012, it remains about 92%. And it could take us some time to get back to our historical levels of where we were prior to, experiencing our troubles where we were delivering revenue efficiencies in the mid-90s. So we have still got some work to do, in terms of implementing that consistent program across the entirety of our fleet, throughout all of the different elements of it. But I am convinced we're making progress.

So do you still have a roadmap in place to get into the mid-90s?

Absolutely. It is a combination of the technical efforts we are making, in terms of improving the performance and reliability of our equipment, and all of the hard work being done by Terry and her marketing team in terms of importing the contract terms and conditions. We will get there.

We will go next to Ian Macpherson of Simmons & Company.

Steven, with the creation of a separate organization for the jack-ups should we consider this to be more of a process, in order to move one step closer to a stand-alone entity? Or in the meantime, we see some sort of appreciable change in the way the jack-up business is running? And other words, are we going to see higher or lower costs in that business than we otherwise would have? And any change in the way the jack-ups are marketed more or less aggressively, et cetera et cetera?

Ian, I think your characterization of this as a process is exactly right. We have just taken the initial steps of starting to create the organization. We have been working on the approach to selling individual assets for some time now. This positions us further along the spectrum, if we were to actually identify a package opportunity in that we could pursue, or ultimately some kind of a large capital markets transaction like an IPO or spin. This is a process that will help us get there.

Okay. My follow-up is again kind of flogging the asset sales topic. Do you see them the opportunity to sell floaters for well intervention conversions as scalable in any way? I know that Helix does not have unlimited balance sheet, but do you see new entrants into that markets, oR existing participants in the eastern hemisphere looking for conversions?

That is a good question, Ian. Over the course of the last year or 18 months we have sold assets into the accommodation market. We have sold assets into the drilling market. We are open to selling assets into the intervention market. I am not sure how much that will actually grow. We have been talking about the intervention market for several years now, with the increasing prevalence of subsea wellheads installed around the world. You think there would be a market there. And so if it does materialize, I guess it wouldn't surprise me.

We will move to Wells Fargo's, Matt Conlan.

Thanks. So just getting back to the stronger revenue efficiency. It seems that not only you, but also the other drilling contractors showed that they kept their deepwater assets operating better this quarter than they had for the last few. What kind of -- how is the relationship between you and your customers? Are they becoming less draconian as to what level of BOP issues are tolerable versus what required the drilling stoppage?

I think what I would say to that, Matt, is everybody is learning as we go on. We started out in the immediate aftermath of the Macondo with a lot of heightened scrutiny and very, very low levels of tolerance. I think we're all learning and improving the way we risk assess, and operate and maintain subsea equipment. And I think that is reflected in the industry's improved performance.

Okay. That's terrific. And as a follow-up, on your forward cost guidance, does that include expenses for reactivating rigs, that haven't already been announced? And if so, how much of that is in those cost estimates?

A generally does not include expenses for reactivating rigs, that haven't been announced. The only exception, and we have talked about this previously, is on the Richardson we are doing some preliminary work on a long lead time items and everything. And so those costs are included in the cost estimates. But other than that, until we make a decision to reactivate a rig, it is not in our cost guidance.

Okay, great. Thank you very much.

Thanks, Matt.

Kurt Hallead of RBC Capital Markets. Your line is open, please go ahead with your question.

Good morning, or good afternoon, where you are.

Good morning.

I just had a question on the overall market dynamics. You indicated, Terry, I think some possibilities to activate rigs, I think both in the mid-water and on the jack-up front. How would you characterize those opportunities today versus maybe three or six months ago? And could you potentially put a number behind that?

We have not been putting actual numbers of what we think that we could reactivate. We are doing is we are going to business case analysis, as you would expect, to see which rigs we could put to work with the continued improvement of the mandate out there. Ant the North sea, we believe there's been perhaps provide an opportunity where we could reactivate a rig, and be happy to do so. The term is certainly there, and the rate is certainly there. So we like what we see there. We are working on that.

And then there are other opportunities that we see also in Australia, where we could potentially reactivate a rig there. So we like those two opportunities. We are working on them very hard. In the jack-up space, we have multiple tenders that are coming in from Qatar, from Saudi, certainly ONGC is about to come out with where we do we think is going to be an 8 rig package. So we think that with the current demand situation in those arenas, we believe that we will be able to reactivate more some jack-ups.

Okay, great. That's it for me. Thank you.

Thanks, Kurt.

From [Platou Markets], we will hear from Robert Jensen. Please go ahead.

You touched a bit upon this earlier, but circling back to the 534. You have previously had said that, that was one of the units you consider to reactivate. And if I remember correctly, you had already ordered some long lead items for that rig. And given that, that has sold, should we read into this, that you have become less interested in reactivating floaters? Or was that just a one-off?

You have to look at those decisions on asset by asset basis, Robert. The evaluation surrounding the 534 was a specific to the 534. So even though we may have ordered some long lead equipment when we do that, we typically focus on the equipment that is transferable across our fleet. So that investment can be recaptured elsewhere. And then we look at specific condition of the 534, and the opportunities that are available in the marketplace that meet the specifications of the 534, and the economics of reactivating the 534 And in the case of the 534, we made a decision that it made more economic sense for us, to sell that asset.

Okay, fair enough. Just one question on the cost side as well. Are you getting some indications on the 2013 cost level. But if you look longer-term, like two or three years down the road, in your opinion, is there any chance of you getting cost back towards that $6 billion mark or even below? Just trying to get some sense of what this long-term -- call it normalized OpEx level is for you?

One, certainly looking long-term like that, is very problematic. Certainly over time the we would expect to see improvements in some of the issues related to the BOP recertification and all of that. But over that same period of time, you have got general industry inflation that is moving the other way, and some of the issues regarding the new regulations have given our OEMs a lot of pricing power. And so net-net, long-term, we would expect to see costs continue to increase. I mean, those two trends, the inflationary trend, is going to offset the improvements in how we are able to do our maintenance.

From Barclays, we will hear from Harry Mateer.

Hi, I guess first question.

Hi, Harry.

As you see it today, do you expect to be able to pay down, the early 2013 maturities, as well as the Series B convert with cash?

That is what we are currently anticipating. Steven talked about, we are targeting $500 million to $1 billion of asset sales. And so with our cash from operations, proceeds from those asset sales, as well as the cash we currently have in the bank, we are considering paying off that debt now. Now as time progresses, we will certainly look at that, and whether it makes sense to refinance or pay that off with cash. But we are certainly, at this point, able to pay that off with cash if that makes sense.

Got it. And then as my follow-up, can you just give us the exact balance on the Aker export debt? On June 30, I know you mentioned it was around $800 million. But if you could give us the exact breakdown of between short-term and long-term, but we will have Thad report back with you later.

I don't have the exact breakdown of between short-term and long-term but we will have to revert back with you later.

We will go next to Joe Hill ofTudor Pickering.

Good morning. Greg, I was just wondering if there's any Macondo legal expenses in the 2013 cost bump?

Yes. So we -- as Steven talked about, we expect the trial to start in 2013. So in our very rough estimate of 2013 expenses are Macondo legal expenses. And because we expect to be in litigation, there is some increase. But frankly, it is a small compared to the overall operating maintenance expenses, relatively small. So that is certainly not a big driver in the increase, but there is a small increase.

Okay. And Greg just thinking about your tax guidance here. We are certainly not seeing the benefits of the tax conversion with the re-domestication. And I am wondering if you could give us some insight as to why that is, and what the prognosis is going forward for that?

Our tax structure is actually working, exactly as anticipated. But the tax structure generates a very low marginal rates, which benefit the Company when it has very high margins. And despite the operational improvements we have seen several quarters, we are clearly not back to the kind of margins that we should have, and expect to have in the future. So as you see, our margins increase with those low marginal tax rates, that will drive the effective tax rate right back down. And if you go back and look at a 15 year cycle, you will see this happen to the Company previously in the downturn in the early 2002, 2003 where our tax rate went way up, and profitability declined. And as soon as profitability came back, tax rate plummeted. And that is what we would expect to happen here.

Scott Gruber, with Bernstein. Your line is open. Please go ahead.

Thanks for taking my question. Appreciate the detail on expected out of service days in '13. Should we assume that about 2,700 days it is broadly a normal run rate, or is that on the low side?

If you look at chart 3, that is the new chart that we have now provided out on the website, we show our five year history of out of service days. And you will see that 2013 looks a little lower than the average pre-Macondo. Now as I have pointed out, we don't, in the fleet status report include unplanned shipyards or whatever. And those pre-Macondo years have unplanned shipyards in them. So it is a little low, but broadly, if you factor in some contingencies for unplanned shipyards, it is broadly in line with what we saw pre-Macondo.

Okay. And then an unrelated follow-up. I believe you are currently not booking any tax benefit associated with the Macondo Chargers? Is that correct, and have you assessed that potential?

We are not booking any tax benefits associated with Macondo charges, because currently we have a reserve into book tax benefits. You really need to know with great specificity what exactly is going to be paid, when it is going to be paid, and what entity it is going to be paid in. And at this point, we have none of that information. And so, it would not give us a lot of comfort to book any tax reserve. But even as we look at hypotheticals, I (inaudible) anticipate a very significant tax offset, when we do get that additional detail.

And we will here next from Darren Gacicia of Guggenheim.

Thanks for taking my question. I wanted to ask, I noticed a very positive update guidance on cost. As you look into what you have in your fleet, in terms of existing contracts for cost escalation clauses, and look at that, versus what you are planning at the margin and how you see that kind of willing through, can you give me a little color on the mix of rigs that have process escalation causes? And maybe what is included in that incrementally? Is that part of the contracting process that is actually getting better?

Well, this is Terry. Most of our high-specification floaters that are on long-term contracts have cost escalation provisions in them. It has been an industry standard for quite some time. And we don't believe that, is particularly going to go away. Because we are seeing a lot of the countries that we are working in, we are seeing the costs certainly, of labor going up quickly. So this is something that we have negotiated for years. We are continuing to negotiate the same provisions and we have not seen pushback. But as far as to give you a specific number, I don't have that information readily with me. But again, if you look for long-term, and you look for the high-specification floaters, it is an industry norm.

And so therefore, some of the concerns across the space, our about labor shortages and cost going up should not really been issue for you. And then kind of secondarily, if you think about subsea stack downtime, as you maybe kind of read through the industry-wide presentations about what is causing downtime, that has been incremental too. Is that something, where not only do you get labor coverage, but you also maybe getting it, for subsea stacked downtime incrementally too? And that is part of why you are looking a little bit better on the cost side, looking forward?

Darren, I would not make that 100% -- what is the word that I am looking for here --

Statement.

Statement, thank you. Yes, it is not universal. I mean, each contract is negotiated on a case-by-case basis, and it is all dependent upon where you are in the market, and what you get. You don't get full coverage on every escalation provision. They are all different. Some are indices, some are based on flat rates. So it's just -- it completely depends on the situation and the country.

And be careful when we have cost escalation protection, that shows up in the revenue line. So when we guided to cost, that includes all our expectations of future cost increases on those contracts that have cost escalation, that will show up in the revenue line. And as Terry mentioned, it is not unusual maintenance costs for those escalation provisions to be based on indices, or other formulas that have not really captured all of the additional maintenance we have had to do post-Macondo. So they work very well on labor and on the general inflation, but not on an increase in actual maintenance activity. So they are not working well.

And also, I would caution you not assume that because we have escalation provisions, that the cost increases don't have an impact on the Company going forward. Because new contracts, our falling, our day rates are set by the general supply demand, and we are still subject to the higher cost level in that area. So be very careful on this topic.

It appears we have no further questions at this time. Mr. Vayda, I would like to turn the conference back over to you for any closing remarks.

Thanks for much, Sarah. Thanks to all our participants today. We look very much forward to speaking with you again on the third-quarter call. If you have any follow-up questions, please don't hesitate to ring us up. Thank you.

Thank you. And again that does conclude today's conference. We thank you all for joining us.