Transocean Ltd (RIG) 2012 Q3 法說會逐字稿

Good day, and welcome to the Transocean third-quarter 2012 earnings conference call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Mr. Thad Vayda. Please go ahead, sir.

Thank you, Shannon. Good day, and welcome to Transocean's third-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 four 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. 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 Toolkit includes four additional financial tables for your convenience covering revenue efficiency, other revenue details, daily operating and maintenance costs by rig type, and contract intangible revenues.

Joining me on this morning's call are Steven Newman, Chief Executive Officer; Greg 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'd like to point out that during the course of the 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, estimated loss contingencies associated with the Macondo well incident, matters associated with the pending divestiture of our shallow water drilling assets, and in general, 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 Form 10-K, and other filings with the US Securities and Exchange Commission.

Should one or more of these risks and uncertainties materialize, or underlying assumptions prove incorrect, actual results may vary materially from those indicated. Transocean neither intends to, nor assumes any obligation to, update or revise these forward-looking statements, in light of developments which differ from those anticipated.

Also note that we may use various numerical measures on the call today that are, or may be, considered non-GAAP financial measures under Reg G. As I indicated earlier, you will find the required supplemental financial disclosure for these measures, including the most recently comparable GAAP measure and an associated reconciliation on our website at deepwater.com under Investor Relations, Quarterly Toolkit, and non-GAAP Financial Measures and Reconciliations.

Finally, to give more people an opportunity to participate on this call, please limit your questions to one initial question and one follow-up. Thanks for your attention, and I will now turn the call over to Steven Newman. Steven?

Thanks, Thad, and welcome to all of our employees, customers, investors, and analysts. Thank you for joining us on the call today. We had a very eventful quarter, during which we made notable progress against a number of key initiatives. As you saw from the press release, we reported adjusted earnings from continuing operations of $499 million, or $1.37 per diluted share, including $880 million in net unfavorable non-cash items, mostly related to the impairment of assets and goodwill associated with our pending divestiture of the Standard Jackup fleet, we reported a net loss attributable to controlling interest of $381 million, or $1.06 per diluted share.

Our adjusted results clearly demonstrate the considerable progress we have made in improving our execution in the field. At 94.3%, third-quarter revenue efficiency from continuing operations was the best in three years, and an increase from about 92% in the second quarter of 2012. I am particularly pleased with the performance of our High-Specification Floater fleet, which achieved revenue efficiency of 95.4%.

Ihab Toma, Alan Quintero, and the entire operations team around the world deserve a ton of credit for their tireless efforts in delivering these results. While I am by no means satisfied with where we are, and there is still work to be done to achieve even better operating performance, as well as to ensure its sustainability at these improved levels, I am happy with our progress and optimistic about the future.

Another noteworthy item -- since our July 18 Fleet Status Report, we've added an incremental $10.2 billion in backlog, bringing year-to-date contract additions associated with continuing operations to $15.4 billion. This is a direct result of the strength of our marketing team, the deep customer relationships that they have nurtured over the years, and, I believe, also reflects the confidence and trust that our customers place in Transocean. I want to thank them for allowing us to be a part of their business, and to contribute to their success.

As you have likely noted, over the past quarter we have announced a number of changes in the senior management team. On October 1, John Stobart joined us as Chief Operating Officer. John brings with him a demonstrated passion for operational excellence, and a career of delivering exceptional results. I have known John a long time, and I'm confident he is the right person to build on Ihab Toma's notable success over the last several quarters, and take our operational execution to the next level.

Concurrent with John's arrival, Ihab agreed to become our Chief of Staff, where he continues to oversee our marketing efforts, and has assumed responsibility for our human resources, information technology, supply chain, and asset divestiture functions. I am certain Ihab will provide exceptional leadership and strategic direction to these key functional areas, and continued support for the implementation of our vision and strategy across the Organization.

On November 15, Esa Ikaheimonen will take over from Greg Cauthen as Chief Financial Officer. Like John, Esa brings a passion for excellence, and has a career track record of delivering shareholder value. I am very pleased to have John and Esa join our team.

Finally, Nick Deeming, our former General Counsel, recently resigned from Transocean. I want to thank Nick for his service during his tenure at the Company. We have a considerable depth of knowledge and experience on our legal bench, and as such, Mike Munro, Vice President, Deputy General Counsel, and Chief Compliance Officer, and David Schwab, Senior Associate General Counsel, Global Head of Dispute Resolution, have stepped up to seamlessly assume management of our internal and external legal affairs.

Over the past several quarters, I have focused my comments on three critical issues -- our operating results, our asset strategy, and Macondo. During the third quarter, we demonstrated meaningful progress on two of these critical issues.

First, regarding our objective to achieve operational excellence, our quarterly results illustrate what can be accomplished through the consistent application of a simple formula to improve the performance of all critical systems on our drilling rigs, particularly the reliability of complex subsea well-control equipment. Through thorough inspections, standardized maintenance, and rigorous pre-deployment testing, we have improved our revenue efficiency to 94.3% from 88.5% one year ago. And importantly, our Ultra-Deepwater fleet improved to 95.8% from 86.4%.

Additionally, we have been successful in partnering with many of our customers to implement enhanced contract terms and conditions that more appropriately reflect the financial impact of new regulations and customer requirements for subsea-related maintenance and repair. These contract terms will benefit our revenue efficiency performance in the future. Our project management results also show substantial improvement, with reduced volatility and more predictability in rig out-of-service time, the result of increased rigor in project planning and work-scope development.

Second, our asset strategy is straightforward. We have a clear objective to gradually reduce our exposure to lower-specification, less-differentiated assets, and increase our exposure to High-Specification assets, both Jackups and Floaters. With respect to the former, our agreement to sell 38 shallow-water rigs to Shelf Drilling remains on track for closing in the fourth quarter. We also anticipate continued progress in the sale of individual non-core assets, both Floaters and our remaining Standard Jackups. Through the end of October, we have divested eight non-core assets in single-asset transactions.

Representing the most recent growth component of our asset strategy, in September we announced that we would build four industry-leading, state-of-the-art High-Specification Ultra-Deepwater drillships for Shell. These fully contracted assets represent 40 rig years of work and an unprecedented $7.6 billion of long-dated backlog for the Company, and reflect our objective to achieve profitable growth. When I visited the DSME yard in South Korea to sign the construction contract for the four Shell newbuilds, I also reviewed the construction progress on the Deepwater Asgard and the Deepwater Invictus, which will join Transocean's industry-leading Ultra-Deepwater fleet in early 2014.

As you know, we recently contracted the Deepwater Invictus in the Gulf of Mexico at $595,000 per day for three years, and we are in conversations with several operators regarding the Deepwater Asgard. These two newbuilds, along with the Harsh Environment semi-submersibles, the Transocean Barents and the Transocean Spitsbergen, acquired through the purchase of Aker Drilling, have strengthened our High-Specification leadership position in the industry. I note that the year-to-date revenue efficiency of the Barents and the Spitsbergen, at 99.2% and 97.5%, respectively, has been among the best in our fleet.

The third key area of focus is the resolution of Macondo. We are well-prepared for trial, scheduled to commence on February 25. While we remain open to the possibility of a settlement with the DOJ and others, the favorable rulings we have received from the trial court on our insurance, our contractual indemnity from BP, and our standing under the Clean Water Act and Oil Pollution Act, emphasize the strengths of our case.

We are similarly focused on our continued defense of the Company's business and employees in Brazil. We were pleased with the partial lifting of the preliminary injunction by the Superior Court of Justice, and we continue to pursue all available alternatives to resolve the outstanding litigation related to the Frade incident.

Finally, sustained high levels of global activity, and the influx of approximately 53 new Ultra-Deepwater drillships and 90 premium Jackups over the next several years, is likely to result in accelerating cost inflation. We expect to see evidence of this in our operating and maintenance costs, which include increased labor expenses reflecting competition for, and retention of, talent, the cost of training and deploying crews to man the new equipment, and in the cost of drilling equipment spares and consumables, among others.

We are focused on minimizing the impact of inflation on our bottom line through disciplined cost control and the negotiation of appropriate commercial terms that account for the economic environment. As is our practice, we will provide you with more detailed guidance for 2013 when we report our fourth-quarter 2012 results.

Lastly, I should mention that this is Greg Cauthen's last earnings call with us as interim CFO. I want to thank him personally, and on behalf of the Company, for his significant contribution over the past year. His perspective, professionalism, and dedication are reflected in the progress we have made against the objectives I just discussed.

With that, Greg, let's go through the numbers.

Thank you, Steven; and good morning, everyone. As Steven mentioned, we reported a net loss attributable to controlling interest of $381 million, or $1.06 per diluted share, for the third-quarter 2012. Excluding $880 million in certain net unfavorable items, mainly related to the impairment of the assets associated with our pending divestiture of the standard Jackup fleet, our adjusted earnings from continuing operations were $499 million, or $1.37 per diluted share. This compares with similarly adjusted restated earnings of $0.88 per diluted share in the second-quarter 2012.

In September 2012, the Company committed to exit the Standard Jackup and swamp barge markets. As a result of this decision, we have classified these rigs as held-for-sale, discontinued the depreciation expense, and reclassified the operations in related gains or losses and impairments as discontinued operations. For consistency and comparison, the Standard Jackup operations for all prior periods presented have also been reclassified as discontinued operations. Consequently, as I make my comments, I will specify whether they relate to the whole Company, continuing operations, or discontinued operations.

In our third-quarter results, net unfavorable items included an $878 million loss on impairment of assets included in discontinued operations, associated primarily with exiting the Standard Jackup market. This impairment includes fixed assets, goodwill, and other assets related to our Standard Jackups and swamp barge, and reflects the excess of the carrying value of such assets over their fair market value. Fair market value is net of approximately $80 million in taxes, advisor fees, legal fees, employee-related, and other costs associated with the sale of these assets. We have recorded the loss on impairments in the third quarter, and anticipate no additional significant valuation adjustments when the transaction closes, currently expected in the fourth quarter.

The remaining net unfavorable items are as follows -- a $30 million loss in discontinued operations, with $24 million related to operations of the Standard Jackups, which includes revenues, operating costs, depreciation and income taxes, and $6 million primarily associated with Challenger Minerals; $48 million of net gain on the sale of two Floaters, the Discoverer 534 and the Jim Cunningham; and a $20 million loss related to discrete tax items and other items, primarily related to changes in estimates of prior-year taxes.

After adjusting for these net unfavorable items, adjusted earnings from continuing operations were $499 million, or $1.37 per diluted share. Inclusive of discontinued operations, adjusted earnings were $469 million, or $1.29 per share.

Consolidated revenue from continuing operations increased $88 million to approximately $2.44 billion from $2.35 billion in the second quarter of 2012. Contract drilling revenue increased by $136 million, with about $60 million of the increase due to higher revenue efficiency, which for continuing operations improved to 94.3% in the third quarter from 92.1% in the second quarter.

Overall fleet utilization from continuing operations increased to 77% for the third quarter, up from 72% in the second quarter, accounting for much of the remainder of the improvement. Partially offsetting the increase in contract drilling revenues was a $48 million decrease in other revenues, primarily due to reduced activity, mostly related to timing of well completions in our drilling management services reporting unit.

Third-quarter operating and maintenance expenses from continuing operations of $1.3 billion decreased by $43 million, compared with the second quarter, adjusted to exclude the $750 million Macondo loss contingency recorded in the second quarter. Operating maintenance costs decreased by $60 million, due to the previously mentioned reduced activity in our drilling management services reporting unit. This decrease was partially offset by a $17 million increase in contract drilling operating and maintenance costs, due to activity increases, pay raises, and other factors, partially offset by lower costs in the third quarter associated with rigs undergoing shipyard maintenance and repair projects.

Excluding the net unfavorable items I have discussed earlier, third-quarter operating income from continuing operations of $761 million increased by 26%, compared to the second-quarter operating income of $605 million, as revenues increased and costs decreased.

Interest expense, net of amounts capitalized in interest income, was $165 million compared to $170 million in the second quarter. Increases in interest income, and the reduction in interest related to interest rate swap terminations and bank debt retirements, more than offset the increase in interest expense from our $1.5 billion bond offering in September.

Depreciation and amortization expense from continuing operations of $280 million in the third quarter was the same as the prior quarter. General and administrative expenses decreased to $69 million for the third quarter, compared with $79 million in the previous quarter, primarily due to second-quarter transaction costs related to the exercise of the put option by Quantum.

The annual effective tax rate from continuing operations, after adjusting for unusual items, was 20.5% for the nine months ended September 30, decrease from an adjusted 24.6% for the six months ended June 30, primarily due to improved profitability and changes in estimates. The actual effective tax rate of 16.5% for the quarter reflects a $31 million favorable adjustment required to decrease our annual effective tax rate, offset by changes in estimates for discrete tax items.

The loss in discontinued operations of $909 million includes the previously mentioned Standard Jackup impairment loss of $878 million, Standard Jackup normal operations loss of $24 million, and the remainder relating to Challenger Minerals. For more details, please see note 9 in the third-quarter Form 10-Q.

Net cash flow generated from total operations increased to $786 million in the third quarter, compared to $459 million in the second quarter. The increase was primarily due to better operating results in the third quarter, enhanced by the lack of the annual pension funding contribution of about $100 million, which impacted the second quarter.

Capital expenditures totaled $225 million in the third quarter, down slightly from the $236 million in the second quarter, due to the timing of shipyard milestone payments associated with our newbuild construction program. Additionally, disposal of our non-core assets generated proceeds of $183 million in the third quarter, compared to $161 million in the second quarter of 2012. Excluding the Shelf Drilling transactions, we remain on track to achieve at least the low end of our $500 million to $1 billion divestiture target.

Finally, cash flow from financing activities was $1.29 billion, representing proceeds from our $1.5 billion bond offering, partially offset by debt retirements. Net cash on hand was $6 billion at the end of the third quarter, up by more than $2 billion from the second quarter, primarily due to the bond offering and cash generated by operations.

I will now update our full-year 2012 guidance. As reported on our latest Fleet Status Report, we expect a higher level of out-of-service days in the fourth quarter than the third quarter, due to a shift of commencement of the shipyard from the third quarter to the fourth quarter in several contract preparation shipyards, now expected to occur in the fourth quarter. Consequently, we expect a lower level of revenue in the fourth quarter as compared to the third quarter of 2012.

While we have experienced several quarters of stable to improving revenue efficiency, and are becoming more confident in the sustainability of these improvements, we remind you that our revenue efficiency can be volatile, and particularly so in a zero-tolerance environment. For the fourth quarter of 2012, we currently anticipate that revenue efficiency for continued operations will average about 93%. Other revenues are expected to be between $560 million and $590 million for the full-year 2012, consistent with our previous guidance.

Operating maintenance costs from continuing operations for the full-year 2012 are expected to be between $5.4 billion and $5.5 billion. Consequently, we expect our fourth-quarter operating maintenance costs from continuing operations to be significantly higher sequentially, due to the previously mentioned increase in days in shipyard, as well as an expected increase in maintenance activity. Inclusive of discontinued operations, total 2012 operating maintenance costs are expected to be between $6.2 billion and $6.3 billion, consistent with our previous guidance.

We expect that depreciation expense from continuing operations will be between $1.1 billion and [$1.15 billion] for 2012, which, after adjusting for discontinued operations, is also consistent with our prior guidance. We continue to expect that interest expense, net of interest income, will be between $660 million and $680 million, including $55 million of interest income and roughly $55 million of capitalized interest. This remains consistent with our previous guidance, as the higher interest expense from our $1.5 billion bond offering is offset by higher-than-anticipated bank debt retirements, higher interest income, and more capitalized interest.

We now expect the annual effective tax rate from continuing operations for 2012 to be between 19% and 23%. Even after adjusting for discontinued operations, this is lower than previously guided. The reduction in the annual effective tax rate highlights the effects of our tax structure -- when we generate higher profitability, our tax rate is generally lower.

General and administrative costs are expected to range between $280 million and $300 million, consistent with our previous guidance. Our capital expenditures for 2012 are now expected to be between $1.6 billion and $1.65 billion, with the increase from previous guidance related to initial payments in October on the four Shell newbuilds. Relative to the third quarter, we expect improved results from discontinued operations in the fourth quarter, due to higher field operating income and the discontinuation of depreciation expense, partially offset by higher income tax expense.

Now, I will update our preliminary guidance for 2013. Keep in mind that we are still working through our budget process, and we'll provide more refined guidance for 2013 when we report our fourth-quarter 2012 results. The shipyard activity in 2013, provided in our most recent Fleet Status Report, continues to represent our current best estimate of out-of-service time.

Additionally, and as we have said before, 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 consequently, they are not included in our Fleet Status Report. For 2013, we currently expect revenue efficiency from continuing operations to average approximately 93%. However, this will vary quarter to quarter, as we have mentioned before.

Operating maintenance costs from continuing operations for 2013 are expected to be between 5% and 7% higher than 2012, as restated for continuing operations. About half of this increase relates to the removal of the shallow-water rigs from the numerator and the denominator. We are also seeing inflation in the daily cost of operating our rigs, training and development of crews to man our newbuilds, and higher-than-expected shipyard-related costs. We expect our Macondo legal costs to be between $15 million and $20 million per quarter through all of 2013.

Although we expect the Shelf Drilling transactions to close in 2012, we will still be obligated to provide transition and operating services to Shelf Drilling through much of 2013, and some of these services are likely to continue into 2014.

Consistent with the guidance provided when we announced the transaction, we will receive fees from Shelf for providing the operating and transition services, and we expect that our ongoing overhead costs related to Shelf will exceed those fees by approximately $15 million to $20 million per quarter. The total loss that we recognize related to providing these services will depend on how long we have to provide them, and how quickly we can reduce the related overhead costs. The losses will be classified as discontinued operations.

We expect our capital expenditures to be approximately $3 billion in 2013, with most of the increases from 2012 related to the newbuild installments on the two Aker drillships and the four Shell drillships. The expected future payments for our entire newbuild programs are included in our third-quarter 10-Q. As our 2013 budgets are still not complete, our estimates could change materially, and will also be affected by changes in timing of shipyards, decisions to reactivate more rigs, and changes in industry inflation, among other factors.

Finally, I will focus on our balance sheet. We remain committed to an improving investment-grade credit rating. Our objective to reduce gross long-term debt to be between $7 billion and $9 billion, and maintain a cash balance of between $3 billion and $4 billion is 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 other current assets and other assets.

Our liquidity target of between $5 billion to $6 billion is also unchanged. The liquidity target includes consolidated cash, our undrawn $2 billion revolver, and a new secured credit facility of $900 million issued in October. The $900 million secured credit facility replaces a similar Aker facility, but with considerably better terms. The secured credit facility is not contemplated as being a permanent part of our capital structure, and we intend to eliminate the facility after significant uncertainties, such as Macondo, are resolved.

To support these balance-sheet objectives, we plan to deploy available cash flow to retire debt as it matures in 2012 and 2013. We currently anticipate that our Series C Convertible Notes will be put to us in December 2012, after which we expect to have more than $4 billion in cash at December 31, which is near the high end of our targeted range.

Our 2013 scheduled debt maturities are expected to be about $1 billion, with the majority maturing in the first quarter of 2013. Even with these debt retirements and the capital expenditures I have already described, we expect to maintain our cash and liquidity targets throughout 2013.

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

Thanks, Greg, and we will miss you.

Hello, everyone. Before we cover specific markets, I would like to make a few general comments. As Steven mentioned, we had a stellar quarter from many perspectives. We added $10.2 billion of contract backlog since our last earnings call, totaling $15.4 billion from continuing operations year to date. We collaborated with an important customer, Shell, to design an industry-leading drillship that will be capable of meeting the highest standards of safety, environmental and operating efficiency. The newbuilds are also provisioned to accommodate technical capabilities that are not available today. The commercial terms associated with the rigs are also industry leading, $7.6 billion of contract backlog for four rigs, totaling 40 rig years of term.

Year to date, industry ultra-deepwater contract executions totaled 46 fixtures, or 160 rig years, which is the highest level of fixtures executed since 2008. This demonstrates the urgent needs of our customer, and highlights the positive demand outlook for our available fleet as we move into 2013. Reflecting this demand, we contracted the Deepwater Invictus for three years with another long-term customer, BHP, leaving only one newbuild, the Deepwater Asgard, available at the end of 2013.

Some additional market highlights include -- utilization and day rates for the Ultra-Deepwater fleet remain at historic highs, and our customers continue to secure rig capacity at near-record levels over the past three quarters. We continue to see positive momentum for the available units in 2013, and strong interest in the rigs that are available in 2014.

With the high utilization of the ultra-deepwater market, we are seeing increasing opportunities for our deepwater fleet. Tendering and contracting activity in the deepwater market continue to improve, and we are in discussions with several customers to contract the fleet for their 2013 programs. We expect to report more positive news for the rest of our deepwater fleet with prompt availability.

Midwater activity, especially in the UK and the Norwegian North Sea, is approaching an all-time high, pushing rates over $400,000 per day, as evidenced by a multi-well program at $408,000 per day for the Transocean Prospect in the UK. Multiple tenders in the UK, Norway, and Eastern Canada for long-term exploration and development programs are providing opportunities to extend the existing fleet and bring additional Harsh Environment capacity into the market.

Utilization and day rates for Premium and Standard Jackups remain strong due to steady demand. This is reflected by solid contracts announced in the key demand areas of the UK, Southeast Asia, West Africa, and the Middle East. We, therefore, currently expect the newbuilds arriving to market in 2012 and 2013 to be absorbed without significant impact on the market dynamics.

Beginning with Ultra-Deepwater, let's take a closer look at the various markets. The tight Ultra-Deepwater market has resulted in favorable pricing opportunities from the high $500,000 per day, to well over $600,000 per day for rigs with prompt availability. Ultra-Deepwater demand is primarily being driven by exploration programs in the US Gulf of Mexico, West Africa, East Africa, and in other emerging markets; asset-intensive development programs resulting from exploration successes; and a need to combat declining production for mature fields has compounded the demand for these Ultra-Deepwater assets.

We think that operators' recent exploration successes will result in incremental demand for Ultra-Deepwater rigs over the next several years, as field development is more rig intensive than exploration drilling. As a result, we expect existing and incremental Ultra-Deepwater capacity to be fully absorbed.

Since our last earnings call, we have been able to secure multiple Ultra-Deepwater contracts, totaling approximately 46 rig years worth over $9 billion. The Deepwater Invictus is one of our most recently contracted fixtures, at a clean rate of $595,000 per day exclusive of mobilization for three years in the US Gulf of Mexico. As previously mentioned, and demonstrating our engineering and operational depth of expertise to deliver rigs that will meet Shell's high expectations, we were awarded contracts to build four drillships with industry-leading capacities, which will commence work in late 2015. And the others will follow on in 2016.

Highlighting the strength of the market and our customers' urgency to continue to contract rigs in this tight market, we recently announced a fixture for $600,000 per day for a fifth-generation rig, the Sedco Express, built in 2001. Additionally, we recently received a letter of award for the Discoverer Americas, also at $600,000 per day, for two years, which is not included in the announced contract backlog.

We are also in advanced discussions on our existing Ultra-Deepwater units, available in late 2013 and beyond, at very attractive rates. Our confidence in the long-term future of the Ultra-Deepwater market continues to be confirmed by the strong customer interest in the Deepwater Asgard and the remaining fleet available in '13.

Turning to deepwater, due to the previously mentioned tightness in the ultra-deepwater market, we expect the tendering and contracting activity to continue to improve over the next several quarters. Recent deepwater fixtures of over $500,000 per day by our competitors and the open demand particularly in West Africa and Asia, we remain confident that we will benefit from these opportunities.

In the Midwater and Harsh Environment Floater market, we continue to see strong demand in Norway and the UK, where we are close to being sold out for 2013, and are evaluating opportunities to selectively reactivate some of our idle capacity. Based on inquiries received from our customers, we believe that the market will continue to be undersupplied through 2013, possibly well into 2014, providing ample growth opportunity with a few customers requiring Harsh Environment newbuilds for their programs.

Since our last earnings call, we executed several Midwater contracts, totaling over $750 million of contract backlog with approximately six years of term. We secured a leading-edge contract at $365,000 per day for a two-year term on the GSF Rig 135 in the Congo, and $408,000 per day in the UK for a two-well program on the Transocean Prospect. We just signed a contract for $410,000 per day plus bonus for a 32-month term on the GSF Grand Banks in Eastern Canada that is also not included in the announced contract backlog. Outside of the North Sea, the trajectory of demand for Midwater rigs is somewhat less certain, and we are actively looking for opportunities for our rigs becoming available in late 2012 and 2013.

Moving to the Jackup market, demand for Premium and Standard Jackup remains strong. Since our last earnings call, we have been able to secure multiple contracts across our entire Jackup fleet, totaling approximately 9.5 rig years. Increased utilization has resulted in rates for High-Specification Jackups, moving over $150,000 per day, as evidenced by long-term fixtures in West Africa, and over $200,000 per day in the UK. Non-Harsh Environment Premium units are commanding rates in the $160,000 per day. Day rates on Standard Jackups range from $97,000 per day for lower capacity rigs to about $130,000 per day for Higher-Specification Standard Jackups.

In summary, the tight market in all asset categories, coupled with the continuing exploration successes, maturation of some large development programs and emerging plays, continue to support our view of ample opportunity to contract the existing fleet and for future growth of our customers.

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

Thank you. Shannon, with that, we are ready to open up the line for questions.

Yes, sir.

(Operator Instructions)

Angie Sedita, UBS.

First, congratulations on a very solid quarter, nice to see.

Thank you. The team's been working really hard.

Good job. The first question for you, Steven, is -- congratulations on signing the four newbuilds for the construction. Do you see, today, additional opportunities over the near term to build additional Ultra-Deepwater rigs? Or, do you believe that four is manageable, and you're not actually seeking additional opportunities at this time?

I think there's a question on the marketplace and I'll let Terry comment on that in a minute. We remain focused on achieving some well-articulated balance-sheet objectives that we think are fundamental to allow us to continue to execute our business plan going forward, Greg talked about those in his comments, our gross debt target of $7 billion to $9 billion and a liquidity target. So, we would want to make sure that any opportunities we pursue are seen in that context. We've got to continue to focus on ensuring that our balance sheet is supportive of the strong investment-grade credit rating we're looking for.

I'll let Terry talk about what opportunities might be out there in the marketplace.

We are in solid discussions with quite a few of the customer base. And, we are encouraged that looking beyond certainly 2014 and '15, that they are still talking about future development programs, where they're going to need -- simply need more rigs. We find that to be very encouraging and certainly supports all the comments that we've made about how we believe in the strength and long-term view of the ultra-deepwater market.

So yes, I think there's more to come. If you look at open demand today, and that's not -- just what's public, that's not open demand that us and our competitors are in private conversations with our customers, but today you see 70 to 20 opportunities that are on the books. So, I think that it is still strong, and the conversations are still very fruitful.

Okay, great. Thanks, that's very helpful. Then, as a unrelated follow-up, answer as you can, are you today, Steven, in active conversations with the Department of Justice, today? And, have you had any conversations at all with the Plaintiff's Steering Committee recently?

On those two specific points, Angie, I'm probably not going to say anything more than what's already in our disclosures regarding the investigations with the DOJ, the PSC, and BP, and all the other parties that are involved in the Macondo litigation.

All right, thanks. I thought it was worth a shot. Thanks, I'll turn it over.

Gregory Lewis, Credit Suisse.

I have a couple more fleet questions. So, when we think about the Sedco 706 in Brazil, what's the outlook for that rig over the next two months?

The Sedco 706 doesn't come available in 2013. She's under contract, still, with Chevron at this time.

But, isn't that the rig --

Yes. It's the rig that was involved in Frade, but we're -- Chevron is in discussions, at the moment, trying to assign the rig to Petrobras so that it can remain active in Brazil.

Okay, great. Then, switching gears to the Midwater rigs that you have coming off. Are you able to provide any outlook guidance on the Grand Banks and the Arctic 1?

On the Grand Banks, I just mentioned in the commentary that we just signed a 32-month contract, so that will certainly keep her occupied for the next 3 years, so we are excited about that. We just signed that this last week.

The Arctic 1, we are looking for opportunities. There are some short-term opportunities in Brazil with other customers. So, we are in discussions, but we don't have anything flanged up right now.

Okay, great --

Let's keep in mind that this is a UK-capable rig -- that there is also that opportunity, should that present itself to be able to relocate it to another market.

Would there be any upgrade maintenance required to get it back into the UK?

Yes, there would be.

Can you give us any guidance on how the timing of that and the costs --?

We haven't really looked at that because what we try to do is we try to match those opportunities with some long-term programs to make it economically feasible to do so. And, we just haven't looked into that type of upgrade as of this time.

Okay. Thank you very much.

Ian Macpherson, Simmons.

Indeed, what a difference a year makes, so congratulations on the quarter. Steven, it's become perfunctory this quarter for everyone to ask the MLP question to management teams in the offshore drillers. But, you are in the unique position of having an incoming CFO who was -- who did all the heavy lifting on that for Seadrill over the past year, so I wonder if you have any different comments to provide on the applicability of that structure to a part of your business; particularly, part of your business it looks like your Shell contracts with that 10-year term tenor, et cetera. Is it something that's being kicked around or not?

I'll tell you, Ian, I'm going to let our outgoing balance sheet and capital structure expert, Greg, give you our perspective on that.

Ian, we've actually looked at this, talked to the various banks, watched as Seadrill did their transaction. And, we're going to continue to look at it and continue to monitor how an MLP in the contract-drilling space actually performs over time. Does it make sense long term for drilling contractors, such as Transocean? So, it's certainly interesting. It's something we have and will continue to look at, but we've not come to any conclusions at this time.

All right, pretty political. Thanks. Follow-up question (laughter) Greg, did you quantify or describe the amount of shipyard deferrals that benefited the third quarter, from revenue and/or the cost perspective?

I didn't quantify them. There was one shipyard that was deferred that benefited cost and revenue. So, that's now expected to occur in the fourth quarter. There was also several very significant extraordinary maintenance projects where the parts came in a little late, so they didn't get performed in the third quarter and have been or will be performed in the fourth quarter. So, both those timing differences have shifted some costs to the fourth quarter.

In addition, we have some contract prep shipyards, some shipyards that we reported in the October Fleet Status Report that -- so, the overall level of shipyard activity is increasing significantly in the fourth quarter versus the third quarter. So, that's going to hurt revenues relative to the third quarter and increase costs relative to the third quarter.

Okay, got it. Well, thanks very much.

Ole Slorer, Morgan Stanley.

Again, congratulations on getting the revenue efficiency up on the fleet. That's certainly a very good job. On the 93% guidance for next year, could you talk a little bit to what you have left to deal with as far as operator of legacy systems with rate control systems, or BOPs versus what is just a regular scheduled maintenance?

In terms of the upgrades, Ole, we have been including in our Fleet Status Report the number of systems that have been recertified and the outlook for continuing projects in the future that have an element of recertification to them, so that information's pretty readily available in the Fleet Status Report.

When we talk about the guidance for next year, because that is a measure of the rig's performance on location, what we're talking about is just the continued implementation of this simple recipe we've been focusing on for the last year, year and a half now, that's rigorous inspections, standardized maintenance, and thorough pre-deployment testing; and including that, and implementing that, across the entirety of the fleet.

When we talk about that, there's a lot of underlying material that has to be put in place, particularly in the context of these standardized maintenance tasks and the pre-deployment testing, significant element of focus internally with respect to putting in place the checklists and the standard preventive maintenance tasks. That's what our corporate group is focused on, and then those are rolled out across the fleet and implemented across the fleet.

So it's just the continued focus on the implementation of that recipe that's going to -- that has allowed us so far to demonstrate improvement and that's going to continue to allow us to demonstrate improvement going forward.

So, where you stand at the moment is this improvement to where you had your performance here in the last quarter, but just say that this is a function now of a company-wide system that's up and running, and that's working? Or, was there something that helped to really boost it this quarter?

Well, I wouldn't say there was anything unique and different this quarter, other than you're starting to see the meaningful and material results of what we have been focused on for the past year or 18 months now. So, I give our corporate team a lot of credit for talking relentlessly about the model, about the recipe, and for putting in place all of the underlying documentation and the infrastructure that needs to be in place for our rig teams around the world. And, I give the guys offshore a lot of credit for embracing the model, and utilizing the tools and systems, and applying those rigorously to deliver these kind of results.

Okay, good to see the results of this coming through now. Greg, one question for you. I might have misheard you, but I think there was reference to a $3 billion CapEx number for 2013. Did you mean 2013, or did you refer to the remaining newbuilding CapEx from 2013 onwards?

No. The $3 billion was for -- just for 2013. So, we've got the final installments on the two Aker newbuilds, so those are very significant right before they get delivered in late '13, early '14. Then, we have the installments on the four Shell newbuilds that kick in at various milestone payments during the year, as well as we got final installments on our newbuild Jackups coming out.

Then, capital expenditures on our ongoing shipyard rework programs and everything, as well as some increase in capital expenditures related to as we continue to build up our capital spares, related to all the various subsea efforts Steven's described. So, all that together aggregates to roughly $3 billion. I would caution, though, we're still finalizing our budget, so that's still a rough estimate.

Sure. You might have mentioned it, but of that $3 billion, what will be maintenance CapEx?

We'll defer until February, once we've completed our budgets, and then Esa can give you all the details of the final budgeted CapEx for 2013.

Okay, thank you very much.

Collin Gerry, Raymond James.

I'll throw the congratulations in as well, great quarter. Seems that the revenue efficiency was a big driver here. And, from the prepared comments, I take it that there's almost two components to that. There's the game plan, or the recipe as you call it, but also the new -- the enhanced terms on the contracts. I'm wondering if you could break that apart and maybe describe the relative impact. What was more impactful this quarter, and what do you see more -- a bigger driver to the 93% guidance for next year?

In terms of where we have been, Collin, and the results we've been able to report so far, I would say that the vast majority of that is due to this simple recipe of the guys offshore executing the systems and tools and processes to improve the performance of the equipment.

We haven't really seen, in a meaningful way, any of the new contract terms and conditions that Terry and her team around the world have been able to negotiate with our customers, we haven't really seen any of those kick in yet. So, the vast majority of what we've been able to accomplish has been due to the operating folks across the fleet. Going forward, as the contracts start to come into play, as rigs start to roll to these improved terms and conditions, you'll see an impact due to those improved terms and conditions, but we haven't seen that yet.

Okay, that's interesting. Essentially, it's fair to say that, by and large, even if we hadn't had new contract terms coming forth in the marketplace, the revenue efficiency would have been what you actually reported this quarter?

Yes.

Okay.

Yes, I think that's the right way to characterize it.

Excellent. And then, just to follow-up on the cost guidance, a lot of moving parts with discontinued and continued -- the 5% to 7% for 2013, just so we're all doing the same math, what is the denominator we should be using for that?

Probably use the midpoint of our 2012 continuing operating and maintenance cost guidance, so use that midpoint, and that 5% to 7% then produces a range for next year.

And just in case I missed it, but that range for 2012, was that the 5.4% to 5.5%?

That's exactly correct.

All right, perfect. Thank you.

(Operator Instructions)

Joe Hill, Tudor Pickering.

Guys, I'm trying to understand a couple things. And, to tag on Colin's question there at the end, Greg, I think the guidance you gave implies a very slight uptick in the cost guidance for 2013?

Yes, that's correct. Part of that is a function of the Shelf transaction because when we strip out Shelf, we have a smaller base that we're working with. And, we had actually expected our Shelf operating and maintenance costs to decline a little bit next year because they had lower shipyard activities that we expected for the Standard Jackup.

So, you pull that up out, and just mathematically, it would cause that percentage increase to be higher. So, that probably accounts for half of the increase over our previous guidance. The rest is, as we work through our detailed budget, we're seeing all the cost pressures that Steven talked about in his opening comments. So, they're starting to impact our labor costs, our maintenance costs, and so that accounts for the rest of that uptick in the guidance.

Okay. Then, I hate to pin anybody down on politics, Greg, but are you writing contracts today to be MLP-able? And, are those Shell contracts for the newbuilds MLP-able?

We've studied and we've worked on various MLP-type transactions, but we're not necessarily writing anything to be MLP-able, but that doesn't mean it's not MLP-able. We have a lot of flexibility in our contracts, but I can't say we've specifically focused on that.

So in your estimation, you wouldn't have to go back to the customer in order to drop some of these into a structure?

We've not done that analysis, so I'll pass. But, I wouldn't see that as a big issue.

Okay, fair enough. Thanks a lot.

Doug Becker, Bank of America Merrill Lynch.

Given some of the debt parameters, the cash balance parameters, and just the liquidity, is it fair to say that a dividend proposal to the shareholders is unlikely in 2013?

Doug, we will continue to dialogue with the Board about the deployment of capital. But I'll tell you, if you just do the simple math on what we expect our operating results to be next year and what that might translate into in terms of available cash flow and our ability to use that available cash flow to make progress towards the balance-sheet objectives, I wouldn't completely rule it out. But I'll tell you, we're really focused on the balance-sheet objectives right now. We want to enhance the Company's investment-grade rating.

Okay, that makes sense. Then, one just on Brazil. Do you think Transocean is sized appropriately for Brazil? I guess in -- it was kind of scary just how close halting up operations actually took place. Is that a market that you're looking to maybe have less exposure to going forward? And, just the latest thoughts on a potential tender to bridge the gap to the newbuilds that Petrobras is ordering?

I'll tell you, Doug, we like our position in Brazil. We've been in Brazil for 40 years, and over the course of that 40 years, we've seen really good times and we've seen some not so good times. We've got an excellent relationship with Petrobras, and I -- particularly in the context of the recent situation we've just gone through, you mentioned how close we came to that injunction taking effect.

I want to tell you how pleased I am with the support we got from Petrobras in that situation. They continue to be a very supportive customer in helping us work through the litigation and the Frade situation. We're focused on helping Petrobras, just like we are with any other customer, to execute their plans. And, if that means we get an opportunity to add to our position down there, under the right circumstances, we would embrace that opportunity.

And, any potential tenders? It sounds like they've been pushed off for a little bit, but just potential tenders down there?

Hi Doug, this is Terry. I've just returned from Brazil. And, what we're seeing now is we're seeing that they're trying to focus their efforts now on the pre-salt. I think you're going to see a lot of the rigs switching over to, certainly, development drilling so that they can improve their balance sheet. I think they may take a pause, here for a little while, so they can reorganize and get focused on their pre-salt drilling.

Okay. Thank you very much.

Jud Bailey, ISI Group.

First question, and I apologize if I missed this, but did you guys give any payment terms on the Shell drillships on how that breaks up over the next couple years?

We haven't talked specifically about the contracts themselves and the payment terms associated with those contracts; but if you look in our 10-Q, you can see the remaining commitments that are associated, not only with the Shell newbuilds but the Aker newbuilds and the three remaining Keppel FELS Jackups as well, so that's all detailed in the 10-Q.

Okay. I'll take a look, thanks. My second question is regarding operating costs going forward. You gave pretty decent guidance, but my question is, if you guys sell some of your older assets, if you sell some more Floating rigs or the remaining Jackups, there's obviously going to be an impact on direct operating costs.

But can you help us think about where costs could be reduced further in terms of, these older rigs had a lot of maintenance, maybe marketing was more cost intensive, things of that nature? How should we think about -- as your older lower-spec portion of your fleet gets smaller, how can we think about from a big-picture standpoint you lowering your operating costs maybe more so than what we're all modeling?

I think the real question there, Jud, is as the fleet size adjusts over time in response to the execution of our asset strategy, we've got to continue to focus on the cost structure of the Company, and by that I mean primarily the overhead. The elimination of a rig here or a rig there, and in the case of the Shelf Drilling transaction 38 drilling rigs, those obviously take away the direct operating costs of the Company. But, we've got to focus on ensuring that the overhead structure responds the same way the fleet does to the execution of the asset strategy.

Where would you say you are in that process in terms of evaluating your overhead? Are you far along in that, or is that something that's going to be more a process for 2013?

That's just really taking on a little bit of momentum now. The focus up until now, and really for the next couple of months, is on closing the Shelf Drilling transaction. Then, we will shift all of that energy and passion within the Company from getting the Shelf Drilling transaction done to reevaluating our overhead and making sure that the overhead responds to the reduction in the fleet size.

Okay, great. That's great color, thank you.

[Robert Jensen], [Plateau Markets].

Following the disposal of the Standard Jackups, you're left with a relatively low presence in the Jackup market. I'm just thinking, do you see appetite for increasing the Jackup fleet? And, how should we think of that in second-hand transactions versus newbuilds?

The answer to the first part of your question, Robert, is absolutely. When I talk about the asset strategy and increasing our focus on High-Spec assets, I am conscientious when I talk about it being High-Spec Jackups and High-Spec Floaters.

So, we will look for opportunities to build on the Company's presence in the High-Spec Jackup market. Whether that's through second-hand transactions or the opportunity to build to contracts like we were successful in securing with Chevron, I'm a little bit less specific about that right now.

I want to increase our presence in the Jackup market because that's an important component of the business for us. But, it's at the high end of that Jackup market. I want to add to the Company's High-Spec position in Jackups.

Sure. But, is there any specific number of Jackups that we should think of as a decent size of the fleet?

No. I wouldn't attach a specific number to it at this point.

Okay. Secondly, on the Floaters side, you mentioned, again, reactivation of Floaters. Can you handicap a bit for us which rigs you're looking to reactivate, and which ones we could look at as disposal candidates?

Well, we've looked at over last several months reactivating some units in the North Sea because there is significant demand there. And again, when we do this, we look at the amount of program needed to reactivate and also to provide the right economic return for us.

So, we've looked at -- lately, we have looked at two units. One is in the North Sea, which was the Sedco 712, and also the other was the Transocean Richardson. So, we're still in evaluation process. I can't handicap that for you right now, but other than we will continue to have those discussions and see if it makes sense.

Okay, thanks. And, if I might squeeze in one more, what's happening with the GSF Explorer? Can you update how long that will be in the yard, and where you would likely put that to work?

Right now, she's having her BOP recertified in the shipyard. We are in an active tender right now, which is very promising, and we hope to have some good results here in the next three weeks.

All right, thanks.

Matt Conlan, Wells Fargo.

Just wanted to follow-up on Brazil a little bit, quickly. With the rapid cost inflation there and the government issues, are you able to change your contract terms, specifically with Petrobras, to give you some more protection against those issues?

Matt, when we were negotiating some of the Higher-Spec Jackups earlier in the cycle, we were able to use a modified contract with Petrobras, and that was the Cajun Express. All of our other contracts have been under the standard Petrobras contract, which there's not a lot of negotiation in that because in the standard tender if you take exceptions you're disqualified.

So you're pretty much there -- if you're going to participate there, you're going to use their contract. Having said that, they do have some indices that do protect against some costs but not all of the costs. So, it's the way that we do business in Brazil.

Okay. So, your protection will have to come from some premium rates? Is that a fair assessment --?

That's a fair statement. Also, you would be -- not just the premium rates, you have to look at it as a strategic market. You're getting a lot of long-term opportunities there, so it would be a portfolio effect, right? So, we've been there for 40 years. And over those years, it's been a protected market for us when we go into these cycles, the ups and down cycles, it's been very good to us. And, we've been able to work there for a very long time.

Okay, great. Again, congratulations on the operational performance this quarter.

Thanks, Matt. We've been working hard, and we're going to continue to work hard.

Good to hear.

That does conclude today's question-and-answer session. I will turn the conference over to Mr. Thad Vayda for closing remarks.

Thanks very much for your participation today. Diane and I will be available over the course of the day to respond to any additional questions you have.

We will talk to you again when we report the fourth quarter in early 2013. Thank you.

That does conclude today's conference. We do thank you for your participation.