Transocean Ltd (RIG) 2013 Q2 法說會逐字稿

Good day, everyone, and welcome to the Transocean second-quarter 2013 earnings conference call. Today's call is being recorded. At this time, I would like to turn the conference over to Mr. Thad Vayda. Please go ahead.

Thank you, Dana. Good day, and welcome to Transocean's second-quarter 2013 earnings conference call. The copy of the press release covering our financial results, along with supporting statements and schedules, are posted on the Company's website at deepwater.com. We've also posted supplemental materials that you may find helpful as you update your financial models. These materials can be found on the Company's website by selecting Quarterly Toolkit under the Investor Relations tab.

Please note that we will no longer be posting three charts as part of our quarterly toolkit. These charts are entitled Average Contracted Day Rate by Rig Type, Out of Service Rig Months, and O&M Cost Trends. The information presented on these charts is still provided as part of our quarterly full-fleet status report, or, in the case of O&M cost trends, as part of the daily operating and maintenance cost schedule that is included in the toolkit. Joining me on this morning's call are Steven Newman, Chief Executive Officer; Esa Ikaheimonen, Executive Vice President and Chief Financial Officer; and Terry Bonno, Senior Vice President, Marketing.

Before I turn the call over to Steven, I would like to point out that during the course of this call, participants may make certain forward-looking statements regarding various matters related to our business and Company that are not historical facts. Among others, these include future financial performance, operating results, estimated contingencies associated with the Macondo well incident, anticipated results of our cost savings initiative, and the prospects for the contract drilling business generally. Such statements are based on the current expectations and certain assumptions of Management, and therefore subject to certain risks and uncertainties. As you know, it is inherently difficult to make projections or other forward-looking statements in a cyclical industry since the risks, assumptions, and uncertainties involved in these forward-looking statements include the level of crude oil and natural gas prices; rig demand; the effects and results of litigation, assessments, and contingencies; and operational and other risks which are described in the Company's most recent form 10K and other filings with the US Securities and Exchange Commission. Should one or more of these risks or uncertainties materialize or underlying assumptions prove incorrect, our actual results may vary materially from those indicated. Transocean neither intends to, nor assumes any obligation to, update or revise these forward-looking statements in light of developments which differ from those anticipated.

Also note that we may use various numerical measures on the call today that are or may be considered non-GAAP financial measures under Regulation G. You'll 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 Toolkit, and Non-GAAP Financial Measures and Reconciliations. Finally, to give more people an opportunity to participate in the call, please limit your questions to one initial question and one follow-up. Thank you. I will now turn the call over to Steven Newman. Steven?

Thanks, Thad, and welcome to all of our employees, customers, investors, and analysts. I appreciate your participation on the call today. At this is our first quarterly call since the May annual general meeting, I want to thank all of you who participated in that process. As always, the opportunity to spend time with our shareholders is extremely valuable for us, and I look forward to continuing dialogue on the key topics we discussed during those meetings. I would also like to reiterate that I am in complete agreement with our shareholders that Transocean's market valuation is too low. I assure you that we are urgently working to address issues that are within our control that are weighing on our valuation, including operating performance, profitability, and fleet composition, and we are committed to keeping you updated as we make progress on our various plans.

As you saw from the press release, we reported adjusted earnings from continuing operations of $392 million, or $1.08 per diluted share. Including $85 million in net unfavorable items, we reported net income attributable to controlling interest of $307 million or $0.84 per diluted share. While we made very good progress in our operating performance during the second quarter compared to the first quarter, and I appreciate and commend the diligent efforts of the Team that delivered this improvement, we are not where we need to be, either in absolute terms or in consistency. Our second quarter fleet-wide revenue efficiency, at 93.1%, was a significant improvement over the 88% delivered during the prior quarter. In fact, performance improved steadily during the second quarter, with June's fleet-wide revenue efficiency at 95.6% and Ultra-Deepwater revenue efficiency at 95%. June's results were in line with what we achieved during the second half of 2012, and preliminary July revenue efficiency results are consistent with June's level of performance.

Slightly offsetting this improved revenue performance during the quarter were higher O&M costs, generally due to increases in planned maintenance and shipyard projects. As I have said before, I am confident that the initiatives we have undertaken will continue to yield improved operating results and financial performance. However, our challenge continues to be demonstrating the sustainability and consistency of the revenue efficiency improvements we have accomplished. Esa will take you through the numbers shortly.

As I said before, we are diligently taking action on the issues most clearly within our control, including improving revenue efficiency, reducing shore-based costs, project execution, and more efficient offshore spending. These are the most important components for margin improvements and the key catalysts for improving our market valuation. I am confident we can achieve our objectives through our continued efforts. We are committed to improving our shore-based cost structure by reducing annualized costs by $300 million as compared with the cost structure in place before the Shelf Drilling transaction. As part of this initiative, we are rationalizing our global workforce and consolidating facilities to reflect the changes resulting from the Shelf Drilling transaction and the continuing divestiture of non-core assets, consistent with our asset strategy.

The process of reducing our global shore-based headcount is ongoing. As you are aware, this is a complicated and sensitive process, and we are committed to ensuring that these workforce reductions take place in a responsible and respectful manner. This will take some time, but we have targeted completion by the end of 2014. In this regard, we have incurred separation costs of approximately $20 million as of June 30. We will continue to keep you informed regarding our progress in this effort.

Rig operating costs are another key component of our profitability. These are driven mainly by headcount and maintenance expenditures, including major overhauls and periodic inspections. We're taking a thorough look at our offshore rig-based headcount, focusing on reduction of labor pools, the careful rationalization of training and developing spending, and the optimization of off-shore personnel deployment. Our objective is to enhance the overall operating efficiency of our rigs and the services we provide to our customers by even better leveraging the extremely talented operations teams and rig crews we have around the world. As with our shore-based initiative, we are taking a very diligent and conscientious approach to the offshore aspects of our cost structure to ensure that we do not in any way compromise safety, operational integrity, or the Company's long-term competitiveness. We will provide more specific information in the near future as our analysis progresses and implementation plans are further refined.

Another key driver of our valuation is our rig portfolio, and we made further progress in executing on our asset strategy during the second quarter. Year to date, we have sold three standard Jackups, and three of the four remaining standard Jackups are already under contract to buyers. In connection with our efforts to dispose of certain Low-Spec Commodity Floaters, since the last earnings call, we sold one stacked fourth-generation Deepwater Floater and entered into agreements to sell an additional Deepwater and two Midwater Floaters, which were also stacked. Also during the quarter, we sold the preference shares in Shelf Drilling, which we received as consideration in the transaction. The sale of the shares further reduces our exposure to this non-core asset class.

The new-build Jackup Transocean Andaman commenced operations on its three-year contract for Chevron in Thailand during the quarter. With about 100% revenue efficiency, both the Andaman and the Siam Driller are providing excellent service to Chevron, reflecting the close partnership we enjoy with them and the quality of Transocean's projects and operations personnel. The successful performance of these rigs underpins Transocean's ability to achieve attractive returns on these investments. I expect the same level of performance from the Ao Thai when she commences her five-year contract with Chevron in Thailand later this year. The Ultra-Deepwater new-build program reminds on track, with the Asgard and Invictus scheduled to go to work in the first and third quarters of 2014, respectively. The four new builds contracted the Shell, though very early in the construction process, also remain on track.

In June, we paid the first installment of our $2.24-per-share dividend, which represents one of the industry's largest yields and highest implied payout ratios. As we discussed during the proxy campaign, the $2.24-per-share dividend approved by our shareholders is a solid starting point. We understand the importance of a sustainable and growing distribution of capital to our shareholders, and I reiterate that it is our intent to increase the level of cash we distribute in the future in the context of our balanced capital allocation strategy.

Finally, I want to touch briefly on the Macondo litigation. During the second quarter, Phase I of the trial concluded, and all parties have submitted their post-trial briefs and proposed findings. I was encouraged that no new facts regarding Transocean emerged during this important phase of litigation. I think this reflects the quality of the investigation work our Team did and the level of cooperation demonstrated with the authorities. I remain confident in our position and the merits of our case, though I would remind you that litigation can be unpredictable. Phase II of the trial, focusing on source control and quantification, is currently scheduled to start at the end of September. With that, I will hand it over to Esa to take you through the numbers. Esa?

Thank you, Steven. I add my thanks to all of you for joining us today. I will now add some more detail and color to Steven's comments. We reported net income attributable to controlling interest of $307 million, or $0.84 per diluted share, for the second quarter 2013. Our results for the quarter included $85 million, or $0.24 per diluted share, in after-tax net unfavorable items as follows. $37 million associated with impairments of three rigs classified as held-for-sale; $20 million of losses on the termination of interest rate swaps and the sale of preference shares associated with the Shelf Drilling transaction; $11 million of unfavorable discrete tax items; $10 million in losses associated with discontinued operations; and $7 million of costs associated with severance plans specifically established for our shore-based cost reduction program.

Excluding these items, our adjusted earnings from continuing operations were $392 million, or $1.08 per diluted share. This compares with similarly adjusted earnings from continuing operations of $0.93 of diluted share in the first quarter 2013. Additionally, related to severances, certain existing benefit plans were accelerated into the second quarter, resulting in an out-of-period expense of about $9 million after tax, or $0.03 per diluted share. With consideration of this item, adjusted earnings from continuing operations would be about $1.11 per diluted share.

For the second quarter of 2013, our consolidated revenues increased by $200 million to $2.4 billion, compared with $2.2 billion in the prior quarter. The increase was mainly due to improved revenue efficiency, with a further positive contribution from our two new-build High Specification Jackups placed into service during the first half of 2013. Total fleet revenue efficiency was 93.1% in the second quarter, compared with 88% in the first quarter 2013. Ultra-Deepwater revenue efficiency improved to 91.1% for the second quarter, from 83.8% in the prior quarter, and June's revenue efficiency results were in line with what we achieved during the second half of 2012. As Steven mentioned, we exited the second quarter with fleet revenue efficiency at about 95%, and a similar level of performance continued in July. Fleet utilization was 80% for the second quarter, unchanged from the previous one.

Other revenues increased by $24 million as a result of increased activity levels in our international drilling management services business. As a reminder, revenues can be volatile in this relatively low-margin business. The volatility has a limited impact on our earnings, but the low margin contribution from this segment has the effect of reducing our consolidated margins when measured in percentage terms. Excluding Macondo crew claim charges of $74 million incurred in the first quarter of 2013, our second quarter operating and maintenance expenses increased by $92 million to $1.39 billion. The increase was primarily due to planned maintenance and shipyard projects, including expenses related to Sedco 712 reactivation, the GSF Explorer contract preparation, and the Transocean Searcher [shipyard]. Also, drilling management services costs increases by $20 million, in line with the higher activity levels previously discussed. The higher O&M cost in the second quarter are fully in line with the O&M guidance provided on our last earnings call.

General and administrative expenses were $77 million for the second quarter, compared with $67 million in the previous quarter. This increase was attributable to restructuring expenses and professional fees associated with preparations for the 2013 annual general meeting. Due to the implementation of the shore-based organizational efficiency initiative, second-quarter 2013 results included about one $20 million in costs before tax, or $16 million after tax, associated with severance and the accelerated recognition of existing compensation plans. Approximately $15 million of this cost was included in operating and maintenance expense, and $5 million was included in G&A.

Depreciation expense for the quarter was $286 million, compared with $275 million in the prior quarter. This increase was due to the start-up operations of the two new-build Jackups and other smaller capsule additions. Interest expense, net of amounts capitalized and interest income, was $135 million, compared to $140 million in the first quarter of 2013. The sequential decrease in net interest expense reflects the continued focus on reducing our long-term debt. We are well on track to deliver on our debt reduction targets through the next couple years.

The second-quarter annual effective tax rate from continuing operations was 23.5%, compared with 19.2% in the prior quarter. The increase was primarily due to changes in the blend of income that is taxed based on gross revenues versus pretax income, rig movements between jurisdictions, and foreign currency impact. Second-quarter 2013 also included an additional tax expense of $10 million, or about $0.03 per diluted share, reflecting the increase in the annual effective tax rate to 21.6% for the six months ended June 30, 2013, from 19.2% for the first three months of the year. Net cash flow generated from operations increased to $416 million in the second quarter, compared with $106 million in the first quarter of 2013. This increase was primarily due to the timing of payments related to the Macondo settlement, [agreed] with the US Department of Justice in January 2013, which were higher in the first quarter than the second quarter, and due to working capital settlements received from Shelf Drilling during the second quarter of 2013.

Capital expenditures were at $352 million in the quarter, down from $488 million in the prior quarter, primarily due to the timing of process payments associated with our seven-rig new-build program. During the quarter, we repaid a total of $406 million of debt, including scheduled maturities and accelerated debt payments. We also distributed the first installment of dividend payments to our shareholders, totaling $204 million. Finally, during the quarter, we sold the preference shares associated with the Shelf Drilling transaction, further reducing our exposure is to this non-core standard Jackup asset class. This net use of cast resulted in $3.36 billion in cash and cash equivalents at the end of the second quarter, representing a reduction of $332 million from the end of the first quarter.

Turning now to our guidance, our full-year 2013 guidance is largely unchanged. Although our second-quarter revenue efficiency improved as compared to the prior quarter, it was still below our expectations with a year-to-date revenue efficiency of about 91%, mostly due to a disappointing first quarter. However, the gradual improvement during the second quarter, which continued into July, demonstrated our ability to achieve revenue efficiency performance similar to the second half of 2012, which average at about 95%. We are confident in our ability to execute, and as such, continue to believe that our previous guidance for revenue efficiency of 93% for the full year remains achievable. This assumes that we perform in the second half of the year at the same levels as we did in June and July.

Our annual operating and maintenance expense guidance range is slightly narrowed to between $5.8 billion and $5.9 billion, primarily due to better visibility and forecast accuracy. We expect higher operating and maintenance expenses in the second half of 2013 as compared with the first half, primarily due to the increase in shipyard activities and expense projects, which are largely reflected in our last fleet status report. As a reminder, our O&M guidance excludes unusual items, including the $74 million Macondo crew claim charges and certain cost associated with our shore-based efficiency initiative. As we previous we communicated, we expect annualized savings associated with the shore-based organizational efficiency initiative of approximately $300 million, as compared with our cost structure prior to the Shelf Drilling transaction. The expected decrease in onshore costs includes workforce reductions, consolidation of offices, and other benefits resulting from the standardization, simplification, and centralization of our support processes. We do not anticipate realization of a material benefit from this initiative in 2013, but we do expect that about 60% to 70% of the annualized savings will be realized during 2014, with the full effect of this program achieved in 2015.

We continue to review our entire cost structure, with the objective of achieving additional improvements in our operating margins. In this regard, Steven has already discussed other steps we are taking to improve our operating margins. We continue to review our entire cost base with an intense focus on offshore activities and continued improvement in our project execution. These steps are expected to improve our profitability and cash flow considerably in 2014, and increasingly thereafter. Our annual effective tax rate from continuing operations is still expected to be between 18% and 22%.

Our 2013 capital expenditures guidance is unchanged at approximately $2.4 billion. As a reminder, a schedule of expected annual payments for our new-build program is included on our website. The increment above our new-build obligations reflects expenditures from sustaining CapEx of about $450 million this year, major upgrades and refurbishment expenditures of approximately $400 million, and investments in capital spare equipment for our ongoing efforts to improve operational performance of about $250 million. After 2013, CapEx related to these capital spare equipments should decrease.

Finally, a few updates on the balance sheet. In line with our balanced capital allocation strategy, we are progressing well with our plan to reduce our gross long-term debt, reflecting a solid investment-grade financial profile, which is (inaudible) by expected earnings growth. Our goal of retiring approximately $1 billion in excess of existing repayment obligations by the end of 2014 also remains on track. During 2013, we have paid approximately $630 million towards the $1 billion goal, by calling our senior unsecured callable bonds due February 2016 and by repaying the [TPBI] credit facilities which were used to finance our joint venture with Pacific Drilling that were secured by the KG1 and KG2. Accelerated debt payments in the future are not expected to result in any material prepayment penalties or any other costs. Schedule maturities for the remainder of 2013 and 2014 are expected to be modest, about $80 million and $290 million, respectively. These figures exclude the payment obligations associated with the partial DOJ settlement on Macondo.

There is no change to our short-term liquidity target, which remains between $3.5 billion and $4.5 billion. This is a prudent and responsible targeted short-term level of liquidity until the uncertainties the Company currently faces are reduced. The liquidity target includes consolidated cash, the undrawn $2 billion revolver, and the secured credit facility of $900 million issued in October 2012. Our liquidity target excludes the $661 million cash collateral that is on deposit to pay the (inaudible) debt. Considering the debt retirements, capital expenditures, and the dividend distribution, we expect to maintain our liquidity well within the target range throughout 2013.

In the context of our balanced capital allocation strategy, our commitment to return excess cash to shareholders remains the same. During the second quarter, we distributed the first of four installments of the $800-million dividend approved by the shareholders at the May AGM. Given our margin improvement plans and the strong long-term market outlook, and in the context of our liquidity target and remaining uncertainties, we believe that the $2.24 per-share dividend provides a solid basis for future increases. Consistent with historical practice, our Board will continue to evaluate these and other factors in considering whether to propose to shareholders that they approve an increase the level of cash contributions going forward.

As to 2014 expectations, we will provide preliminary guidance on our third-quarter conference call. We will be in a position to provide greater details about our roadmap and targets to improve our cost performance and our operating margin since the third quarter call occurs during the latter stages of our 2014 budget process. With that, I will hand it over to Terry to update you on the markets.

Thanks, Esa, and hello to everyone. Before we cover specific markets, I would like to make a few general comments. The second quarter tendering activity was quite a busy one for the independents. The group contacted the majority of the work across the global Floater fleet. In the second quarter, 20 new contracts on the global fleet of Ultra-Deepwater rigs were announced, leaving a total of 14 of Deepwater new-build Floaters and 28 existing Ultra-Deepwater rigs uncommitted through 2014.

Year to date, we added $5.2 billion of contract backlog, and we expect to report more positive news shortly. While the pace of tendering for Ultra-Deepwater and Deepwater rigs accelerated greatly in the second quarter, contract awards continue to take a long time to reach closure, mainly due to regulatory requirements, and in some cases, delays of projects due to economic viability. Additionally, during the second quarter, the market experienced a decrease in contract duration and lead times. While the near-term may be a little challenging with the large number of rollovers of existing fleet and the influx of new builds in the early 2015, we remain confident in the long-term fundamentals and our customers' willingness to continue to increase their activity levels.

Now, to specific markets. Our commentary on day rates for Ultra-Deepwater rigs remains the same as detailed in our last earnings call. We see rates leveling off between $550,000 per day to $600,000 per day, depending upon the area of operation, rig capability, availability, and contract duration. The Lower-Specification Ultra-Deepwater rigs offered around $520,000 day to $570,000 per day, Ultra-Deepwater demand being driven by the US Gulf of Mexico, sub-Saharan Africa, and in certain emerging markets. We expect demand in Brazil to increase over the medium term with the recent success of the licensing round and interest in the October Pre-salt Round for Libra.

As a reflection of the strength of Transocean's position in the marketplace, the quality of our customer relationships, and the competitiveness of our asset base, we are very pleased to announce the extension of the Discoverer Clear Leader at $590,000 per day for four years and the Discover Inspiration at $585,000 per day for five years, plus performance incentives for both rigs, adding contract backlog of almost $2 billion. Additionally, we finalized a one-year contract for the Transocean Barents at $615,000 per day for one year in Norway. We're also in final negotiations on several other existing Ultra-Deepwater rigs. Our confidence in the long-term future of the Ultra-Deepwater market continues to be confirmed by the customer interest in the remaining fleet available in 2013 and into 2014.

The tendering pace picked up in the Deepwater market after a quiet first quarter, and we're currently in discussions with several customers for the available fleet. We were able to extend the Henry Goodrich in Eastern Canada for nine months at $476,000 per day. Midwater and harsh environment activity, especially in the Norwegian North Sea and UK, remained steady compared to the previous quarter. The first quarter -- I'm sorry, the first availability in Norway is the Polar Pioneer in early 2014, and our first available existing rig in the UK North Sea is in 2015. Although apparent demand may provide an opportunity to reactivate one of our stacked North Sea capable, rigs the Arctic I, earlier than this. This demonstrates the strengths of both markets and may provide opportunity for additional supply to be absorbed by the market.

Outside of the UK and Norway, the market for midwater rigs is relatively quiet. However, we observed a slight increase in contracting in Asia. The Transocean Amirante is currently idle, awaiting an opportunity return to work. We are pursuing opportunities for all of the rigs we have available in 2013 and '14. Utilization and day rates for premium Jackups remain strong due to improving demand in almost all Jackup provinces. We expect all new builds to be absorbed by the market, and demand will continue to outstrip supply in 2013. This is reflected in the conversion-to-drilling mode of the Galaxy I in the UK for three years at $215,000 per day at a leading-edge day rate. The increased utilization has resulted in rates for High-Specification Jackups increasing to over $180,000 per day in West Africa and well over $210,000 per day in the UK.

In summary, the Ultra-Deepwater market remains healthy. While the pace of fixtures has moderated, we see ample market opportunities to absorb all of the available capacity over the next several years. While the Deepwater market utilization remains over 90% today, we are seeing some potential for incremental idle capacity in the near term. Midwater activity in the UK and Norway and the premium Jackup market remains robust. Longer term, we expect increased strength of the offshore markets due to the many exploration successes that continue to drive demand, providing ample opportunity for the existing fleet and for future growth. This concludes my overview of the market, so I will turn it back to you, Steven.

Thanks, Terry. With that, Dana, we're ready to open it up for Q&A.

(Operator instructions)

And we'll take our first question from Collin Gerry with Raymond James.

Good morning. Steven, I've heard you mention recently as part of the operational execution strategy, maintain a fleet of spare BOPs, and I wonder if you could just give us a little bit more color in terms of how, in practicality, that could affect the ongoing operations? The way I understand it is that if you have downtime on a BOP, you can send a new one out there, and while the other one is getting fix, you can improve the revenue efficiency of the rig. Is that the way to think about that? And how progressive -- I've never really heard of that program in the industry, so how progressive is that?

Collin, the focus on having an adequate inventory of spare capital equipment around the world is really designed to improve the utilization of the fleet, not necessarily the revenue efficiency. So if you think about a shipyard project, typically, what happens is we will bring a rig into the yard, take the BOP off of that rig and subject it to a process of inspection and identifying all of the necessary repair work and then carrying out that repair work so that we can recertify the BOP and return that BOP to the rig so that the rig can go back to work. Typically, historically, that process of BOP recertification has defined the critical path for returning the rig to service. What we're trying to do with establishing an inventory of spare capital equipment around the world is taking that process of inspection and repair and recertification off the critical path. So when a rig comes into the yard, we take its BOP off, and then we can go through a process of overhauling and recertify that BOP according to the capability of the manufacturer and the OEM facility, but that doesn't drive the critical path for returning the rig to service because we have an existing inventory of ready-to-go BOP equipment that we can ship back to that rig in the yard, get the rig ready to go back to work more quickly and more efficiently. So the inventory of capital spares is really designed to improve our ability to execute shipyard projects in a timely fashion, which is a key driver of utilization.

Okay, very interesting. And so where are we in that program? Does that -- is that being implemented currently? Is it still in the testing phase? You want to think about it that way, or is that something we should see in the results maybe a year or two out?

Yes, we're well into the implementation of this, Collin. We started placing orders in the latter part of 2010 and on into 2011, and we are -- as Esa mention, a significant component of our 2013 capital program reflects the delivery of a large number of those components that we placed orders for two of years ago. As Esa indicated in his comments, our capital expended as a result of building up this inventory of capital equipment should go down after 2013 because we are well into the implementation and taking deliveries of this.

And last one just to follow-up, sorry to hit this harder, but does that imply that -- should we see continued improvements in the shipyard-related time? The capital program is well into the implementation side of things, but on the shipyard downtime, is that still progressively getting better as we implement the program once the equipment is delivered?

Yes, that's where you will see the actual effect of this inventory of capital spares is improved execution of the shipyard projects, improved utilization of the fleet, reduced out-of-service time.

Okay. I've asked enough. Thank you very much.

We'll take our next question from Angie Sedita with UBS.

Thanks, good morning. Steven, you obviously sold four Floaters in the quarter in Midwater and both Deepwater. Could the list of floaters grow that you have up for sale? And also, have you considered selling the Midwater's Floaters in a package so much as you did with the Shelf Jackup rigs?

Angie, our approach to the Floater aspect of our asset strategy is similar to the approach we have taken on the Jackup side. We have a list of rigs that we consider to be divestiture candidates. They are not part of our core long-term strategic fleet. And so we are looking for divestiture opportunities, and in the meantime, Terry and her Team do an excellent job of keeping those rigs working. So we will look at single asset transactions. We'll look at packages We'll consider either private party transactions. We'll consider public market transactions. We'll -- I'm sure, over the course of the execution of the strategy, we'll actually undertake of a wide variety of those different components to ensure we execute the strategy.

Okay. So could something become more formalized as you did with the Jackups?

Well, I would say that over the last two years, 2011 and '12, our focus was on dealing with the Jackup component of the asset strategy. Now that we're largely through the Jackup component, we shift our focus and start ramping up our efforts to deal with the Floater component of the asset strategy as well.

Okay, that's helpful. And then, Terry, you mentioned on the last call some potential concern about short-term over capacity and Ultra-Deepwater market. Can -- in the context of what you said today, has that view changed for the better or to the worse or stable, and then also, in conjunction with that, with the Ultra-Deepwater rigs coming into the market in 2013, 2014, do you think there is near-term risks for the standard Midwater and Deepwater rigs as you see with the Amirante still being idle?

Hi, Angie. Those are really good questions. The last two quarters, we have stated some concern about the sheer numbers. Now, if you look at 2014 in particular, you end up with a number that we haven't seen in the industry ever, so there's 42 rigs. I think there's about 12 new builds that need to be placed, and the rest is a rollover fleet. As we go back to 2008, I think we've of average about 20 to 25 that have been absorbed by our customers. So I think the number is just a little bit concerning. However, with all the successes, we feel comfortable that there is plenty of opportunity for these rigs to go to work. As we look forward, it could be a timing issue, and I think that's the concern. And that's why we say, near term, can our customers absorb just the sheer numbers? There's plenty of capacity to drill, plenty of opportunities out there, and we see an increasing pool of that as these discoveries continue to mound up for 2013, but I think we have to be cautious about it, and be prepared for it, and get our rigs to work as quickly as we can.

So do you think that with the Ultra-Deepwater new builds coming in, that there actually could be -- obviously, they're good rigs. People are going to want the rigs. Maybe there's a little bit of a timing issue in putting those in contracts, but do you think the greater risk could be for the standard Midwater and Deepwater rigs in other places in the world outside of the North Sea?

This has happened in the other type of loose markets that we have experienced. The more capable assets are always going to compete down to the less capable assets, so we've seen it before with the standard Midwaters actually take a pause, and then when the market tightens up again, every rig goes back to its natural water-depth capacity to execute in, and things -- repair itself over time. So there is a possibility of it. Again, we've said that we believe we will see some idle capacity in the near term. You've already seen some. We've seen some. Our competitors have also experienced a bit of it. But again, as soon as we can work this capacity in '14 and see how it plays out, we're just going to have to, again, work very hard to place our rigs.

Thanks. I'll turn it over.

We'll take our next question from Robin Shoemaker with Citi.

Thank you. Good morning. I wanted to ask you about potential for further new builds in the sense that you have these four new builds with Shell, and are there other opportunities to build rigs against contracts now? I'm trying to infer whether your comments about the equilibrium in the market would argue against that kind of opportunity, or whether you see some of your major customers thinking about building rigs to their specification on multi-year contracts, which you might take advantage of.

Hi, Robin. This is Terry. We have some great opportunities to continue those discussions with our customers. And right now, we are in discussions to do just what you suggested, of building to some specific specifications, and we do like that opportunity because it gives us the ability to create something that doesn't exist in the marketplace today. And I think that that is one of our strengths, and certainly, the customers that we deal with agree with, too. So we have the depth to sit down with a truly talented engineering and a new built Team and create something that's really great that the customer can apply to their business going forward.

Okay, thank you. Then I wanted to ask Esa if he could, as you've done in the past, update us on your thoughts about a limited partnership. You recently -- you just told us about the contracts on the Clear Leader and Inspiration, so you are clearly signing some long-term deals. Just wondered if you could update us on your thoughts there.

Yes, thanks, Robin. Thanks for the opportunity to update. We do have some great assets and some great contracts that would actually fit really nicely into the MLP world. We have continued our evaluation evaluating the pros and cons and different structural alternatives, different ways to execute an MLP. I think our overriding conclusion is that an MLP would fit into our capital structure really well. It would provide us with additional source of capital. It would increase our financial flexibility and authorize a new currency as well, and potentially, also, attractive economics. We also believe that we would be able to structure it in such a way that it would overall be credit neutral and allow us to continue as an investment-grade rated Company, which is obviously very important to us, as you know.

But we have also, on the downside, stated several times that it would come at a cost and complexity that should not be underestimated, that the tax complexity is significant, and so is the complexity of actually operating a separate entity side-by-side with the C corp. Also, the cyclical nature of our business, the long-term valuation risks associated with the asset class combined with the drilling volatilities, is a key concern. So all in all, we are positive but cautious about the MLP as a source of capital for Transocean. As I said, it would fit into our capital structure and provide us support for our capital allocation strategy as well, funds for potential growth and fleet, high grading, as well as cash needed to distribute to our shareholders. So we are still continuing our process and continuing to have our internal discussions about the applicability and potential timing for such things. So not the right time to conclude as yet, but, clearly, making a lot of progress in the area.

Okay. Thanks for that.

And we'll go next to Ian MacPherson with Simmons.

Thank you. Terry, I wanted to ask you about your -- the extensions, I assume, when you mentioned the Inspiration, the Clear Leader, those are extensions from Chevron in the Gulf of Mexico. And can you --

Yes.

Can you provide some background on why we're seeing very good rates, but also longer duration on the renewal, the first renewals of these sixth-generation assets and how they compare with the very prototypical two or three are [termed], and new rigs are coming -- or getting as soon as they come out of the yard. Is there a premium that's placed on these broken-in sixth-generation rigs that gives them better marketing leverage? Is that the explanation, or is there something more situation here?

Hi, Ian. Well, I think that this is a good example of what I was trying to allude to, is the building a rig to customers' specifications and working really, really hard in developing these long-term relationships and delivering operational excellence, that you get these opportunities to renew your fleet a little bit longer term because the customer wants to keep the rig. They are very happy with what they've accomplished together, and they feel comfortable and are very excited to be able to give more long term, to continue the programs. And they've got a lot of work to do in the Gulf of Mexico, and it certainly made sense for both of us. So -- Chevron has been a fantastic relationship for Transocean, and we're just very proud to be able to work with them in the Gulf of Mexico with these two rigs.

Okay. That make sense. You mentioned you see the rates for the lower-end Ultra-Deepwater class between $520,000 and $570,000. Is that how we would -- how we should think about the market rates for most of your fifth-generation rigs? Obviously, the GSF Explorer going to ONGC or more of a down-market contract seemed like it was an outlier, and we would just -- it would be informative for us to know whether there are other outliers who are at the bulk of your fifth-generation fleet delete pertains to that $520,000 to $570,000 market range that you alluded to.

Well, Ian, that's a tough question. I think that your assessment of the Explorer is accurate as an outlier. This is a -- was a less capable rig and certainly wasn't capable of drilling these tougher, deeper wells in Pre-salt, so that was one of the things. And we also found ourselves at moment where there was not a lot of opportunity out there, and this rig is perfectly capable to deliver these ONGC wells. So again, she's a lot older than the current fifth and sixth-generation rigs that are doing these tough wells, so that was one of the outliers as you described. I would tell you that we -- I can't really give you a clear answer on the second question because we're in final negotiations on our available 2013 fleet, so I wouldn't want to give our competitors any an opportunity to step in and steal these from us because I don't like that happening. So we better just to try to say -- tell you that we're very positive on where we are on the negotiations, and I think you'll see some positive results here shortly.

Okay, good. Thank you.

We'll go next to Kurt Hallead with RBC Capital Markets.

Good morning. Just a follow-up, Esa, in your commentary about the MLP, at least the way that I would interpret them, came away as leaning more positive than negative. Within that context, not putting any particular words in your mouth, but just trying to get a sense as to whether or not, at this juncture, when you think about that MLP, is it something that could be more likely? And if so, is it something that you think could transpire within the next 12 months or so?

Yes, Kurt, very smart question, and puts me to an interesting place, of course. But the reality is that we haven't taken a decision on MLP yet, and that's the only right way to answer your question. We just haven't taken a decision on that. We continue our discussions, as always, continue engaging with our Board, and over the next two months, I would believe that we will have clarity on this issue as well as some other issues that we are currently in discussions on. So you just have to bear with us a little bit and be patient with us, but currently, no decisions and no reason to read between the lines based on what I just said. We haven't taken a decision, and everything else would be a bit speculative at this moment in time. Theoretically, I think I've said earlier, that if one would decide to do an MLP, it's probably a 9 to 12-month journey, recognizing the carve-out requirements and reporting the financials and other things that would be required to do the IPO. So that sort of time frame you would be looking at, but again, that's speculative in the absence of a Board decision.

Great, thanks, Esa. Terry, maybe for you on the market, I think most people on this call and most investors are probably uncomfortable with the prospect of a flat day-rate environment. At least that is the feedback that I get back in the context of either rates are going up or they're going down, and if they are not going up or down, then they are about to go up or down. So in the context of what you've already indicated, vis-a-vis the market dynamics, it seemed like a little bit more of a situation of maybe -- I don't want to -- not putting words in your mouth, is it -- in your mind, is it excess, or is it just that finally balance that we could see a flat Ultra-Deepwater day-rate environment extend out into -- well into 2014? What is your best guess on that right now?

I like the word that you use, Kurt. You said balance, and I think that that's where we find ourselves today is there's a balance. And the recent tendering activity was certainly up over the first quarter, and it was very encouraging to see these rigs obtain contracts, so that was a positive. But what it shows you is that they were all about in the range. So I think we are balanced, and I think if we were able to continue to be able to continue on that same mode, then it's where it's headed. I don't see it modulating until we hit a place in time where our customers can't simply move forward and contract the rigs. So that's about -- but I think balance is the right answer.

Okay, that's fair enough. I appreciate that. Thanks.

We'll go next to Scott Gruber with Bernstein.

Yes, thanks. I want to come back to the MLP issue just for a second. Esa, it perplexes me a bit when I think about the MLP in the context of Transocean. Can you just provide some more color and thoughts around why you would need another source of equity financing if you're going to maintain a more conservative investment approach and only build rigs against firm contracts?

Well, I'm not sure I said we needed one. I said it would fit in and provide additional flexibility and an additional source of capital. A lot of that depends on the asset strategy execution, the direction it takes. Obviously, a lot of that depends on the pace with which we will aim to increase the dividend distribution and so on. All I was saying is it would fit into our capital structure. It would provide an additional source, an additional currency, and provide us with additional flexibility. So I wouldn't suggest that that's a must have for us. It's something that looks attractive and provides us with something that we might benefit from. But it comes at a cost and complexity, and that's really important part of it. So if I gave you the impression that we would, in any shape or form, be in a spot where we would actually need one, I don't think that is right.

Got it.

Scott, if I could just supplement what Esa is saying, reinforce what Esa is saying. We've done a tremendous amount of analytical work. Esa has led a Team that's been focused on this for the last several months. So we've gotten to the point where, as Esa has said, it could be -- could be a component of our capital strategy, but you've got to put that capital strategy alongside our operating strategy and our asset strategy, and these are all ongoing discussions with our Board. We are not going to do an MLP for the sake of doing an MLP. If we find that as an element of our capital strategy, it supports our asset strategy, our operating strategy, then it's a possibility, but that's where the discussions are right now.

Okay, I appreciate the color. And if I could follow up on the cost savings initiative, if memory serves, you guys were originally talking about realizing the $300 million in early '14. Now it seems like it's going to take a little bit longer than that. Can you just talk about the timing around realizing the $300 million and any delays that you see today?

No. It's Esa. I'm on here again. No, I think you've misunderstood some of our communication. Actually, our story hasn't change at all, if anything, we have accelerated it a little bit. So from the moment we announced the $300-million program, we said that we will be able to deliver the full impact in 2015. And we said our best estimate at the early stages was the two-thirds of those benefits equaling about $200 million would be achievable already in 2014. You have to keep in mind that it takes a little while to actually, first, do the definition, reorganize the Company, redesign processes that is important because what you want to do is you want to do this well, and you want to make sure that your benefits are sustainable, and as a result, you don't actually generate any unintended consequences. So consistently, we have said $300 million in 2015, and I repeat what I said earlier about 2014, two-thirds of the benefits achievable already next year, and that is exactly what I just said also during my commentary.

Good to hear. Steven, if I could sneak in one additional one, when you were at our conference this past spring, you mentioned your belief that you would be able to close the EBITDA margin gap with peers in another two planning cycles, which would mean by late 2015. Do you still hold that view?

Yes. Based on the work we have done already, Scott, I think the timeline we've laid out for ourselves meshes nicely with the expectations I've set publicly.

Very good. Thanks.

And we'll take our next question from David Smith with Johnson Rice.

Good morning. Thank you. Just a housekeeping question. Going back to the sale of assets to Shelf Drilling for $1.05 billion, if I'm reading the 10-Q correctly, in addition to the $195 million in preference shares you sold, you also received $568 million in cash. And since the original press release described $855 million of cash, how should we think about modeling the timing for Transocean to receive the remaining $287 million? Is that something that happens just as the management of the gap is fully transitioned?

Yes, it's Esa here. You are right. It actually grows over time, so in addition to the initial cash that we received, I think we have consistently also said that it will take up to 15, 16 months to generate the rest through a transition that will see us collecting working capital and inventory-related payments from Shelf Drilling. And the current estimate is that during the first half of next year, all that would be completed. It would take a few million dollars, but it will be the vast majority of the cash expected to come in to Transocean generated within that timeframe.

That's helpful. Thank you. And the follow-up question that's for Terry, when you mentioned some potential for incremental idle capacity in the near term on the Deepwater fleet, do you mean temporary gaps between contacts? Is this something you're thinking for one or two rigs? Just wondering if you could give a little more color around the comment.

Yes, I think you're seeing that not only in our fleet, but you're seeing it also in several instances in the global fleet. But I think there will be, if we have loosening or near-term softness just because of the sheer numbers, I think you will see some idle time between being able to move to the next contract. I can't predict what that looks like right now, but I just think that we will see some of that because we're going to be rolling these rigs over now in a little bit of shorter-term projects. So it is a natural phenomenon that is happened historically in the past, and when work these on shorter-term contracts, it's just the (inaudible) to the next location and these type of things.

Thank you very much.

And we'll take our final question from J.B. Lowe with Cowen and Company.

Good morning, everybody. Just a quick follow-up on that last question, Terry, about the delays between contacts. So you do see some of the rigs that are rolling over are going to be moving between regions? And which regions do you think we can see rigs leave from and go to?

Well, we are bidding -- if you look at the open opportunities for us, specifically talking about the Deepwater fleet, we're bidding several opportunities in Africa. We're bidding several opportunities in Asia and in Australia, so it just depends on where the fleet is located. We happen to have the luxury of having fleet in all of these areas, so it's not like we are relocating from one continent to another. So we just see that -- we will be rolling over and over some of these vessels, and it just may be sometime between contracts, but we're trying to ensure that we are in direct continuation at all times, but I just see that there may be some instances where that won't occur.

Okay, that makes sense. And my next question is, could you see some of these rigs leave the Gulf? And if that's so, then when you talk about the $520,000 to $570,000 the range, are you talking about the $520,000 would be more of a Gulf of Mexico day rate, and the $570,000 would be if you moved these rigs elsewhere to higher-cost areas?

When we say dependent upon area location, dependent upon duration, those certainly play a factor in the pricing. But again, we're just going to have to wait and see how this plays out. But for the -- if you're specifically talking to the Deepwater fleet, then those ranges were given for the Ultra-Deepwater fleet.

Okay. Thanks very much.

Thank you all very much for your participation in today's call. Look forward to speaking with you when we report our third-quarter results. To the extent that there are any additional questions that you have, feel free to give me or Diane a call this afternoon and tomorrow. Have a good day.

Again, that does conclude today's presentation. We thank you for your participation.