Transocean Ltd (RIG) 2013 Q3 法說會逐字稿

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

Good day, everyone. Thank you, Tim. Welcome to Transocean's third-quarter 2013 earnings conference call.

A 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 some supplemental materials that you may find helpful, as you update your financial models. These materials can be on the Company's website by selecting Quarterly Toolkit under the Investor Relations tab.

Joining me this morning, as usual, on the call, are Steven Newman, Chief Executive Officer; Esa Ikaheimonen, Executive Vice President and Chief Financial Officer; and Terry Bonno, Senior Vice President of Marketing.

Before I turn our call over to Steven, I'd 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 initiatives, capital allocation and strategy, newbuild projects, and the prospects for the contract drilling business generally. Such statements are based on the current expectations and certain assumptions of Management and are therefore subject to certain risks and uncertainties.

As you know, it's inherently difficult to make projections or other forward-looking statements in a cyclical industry since the risks, assumptions, and uncertainties involved in these forward-looking statements include the level of crude oil and natural gas prices; rig demand; and 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 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 disclosures for these measures, including the most directly comparable GAAP measure and an associated reconciliation on our website at deepwater.com, under Investor Relations Quarterly Toolkit and Non-GAAP Financial Measures and Reconciliations.

(Caller Instructions)

Thanks very much. I'll now turn the call over to our CEO, 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. I am very pleased to say that our third-quarter results demonstrated clear progress toward several key objectives.

For the third quarter, we reported adjusted earnings from continuing operations of $499 million or $1.37 per diluted share. Including $47 million in net favorable items, we reported net income attributable to controlling interest of $546 million or $1.50 per diluted share.

Our third-quarter financial performance reflects continued operating improvement. Our revenue efficiency was 94% compared to 93.1% in the second quarter and fleet utilization was 83% compared to 80% in the prior quarter. These improvements translated into an increase of $81 million in contract drilling revenues, about half of the total increase of $161 million in consolidated revenues. The remainder is associated with increased activity in drilling management services. This improvement was partially offset by an increase of $98 million in operating and maintenance costs, mostly due to drilling management services and, to a lesser extent, higher shipyard costs. In a few minutes, Esa will take you through the third-quarter numbers is more detail, as well as provide you with guidance for the remainder of the year and our preliminary outlook for 2014.

During the quarter, we continued with our fleet transformation efforts, with the commencement of operations on the Transocean Ao Thai, a newbuild high-spec jackup, working for Chevron in Thailand under a long-term contract. We also announced a long-term contract with Chevron for a state-of-the-art ultra-deepwater drillship to be delivered in the second quarter of 2016. The five-year contract on the drillship adds about $1.1 billion in backlog. The $725 million in capital costs includes the shipyard contract; project management; owner-furnished equipment, including a second BOP; capital spares; and inventory; and all costs for operational readiness. Our seven-rig ultra-deepwater newbuild program remains on schedule, including the Deepwater Asgard and the Deepwater Invictus, which are scheduled to go to work in 2014, and I appreciate the continued support of our shipyard partner and key suppliers in focusing on the on-time delivery of these important projects.

Yesterday we announced that we awarded contracts to Keppel FELS Limited's shipyard in Singapore for the construction of five Super B 400 Bigfoot Class jackup rigs. The delivery of the first of these high-specification jackups is scheduled for the first quarter of 2016, with the remaining four expected at approximately four month intervals thereafter. We also have negotiated shipyard options for the construction of five additional Super B 400 jackups, the first of which would need to be exercised in approximately one year. The combined capital costs for the five firm rigs is estimated at approximately $1.2 billion, an average slightly under $240 million each. This investment is another important step forward and is consistent with our strategy to continue to invest in premium high-return drilling assets. We expect strong demand for these capable rigs as the renewal of the industry's jackup fleet continues.

Our continued investment in high-spec floaters and jackups reflects our belief in the long-term fundamentals of our Business as our customers continue to focus on reserve replacement to provide the hydrocarbon energy the world needs. While the ultra-deepwater market is experiencing some near-term uncertainty and this is having an adverse impact on the demand for lower-specification assets, we believe this situation is temporary and that the market will fully absorb the uncontracted newbuilds entering the fleet and the existing rigs rolling off contract. Terry will give you some more color on the markets in a moment.

I'm also encouraged by what I see in our organizational efficiency and broader margin improvement project. Our shore-based teams around the world have responded extremely well to our need to ensure the Company's structure evolves, along with the changing profile of our offshore fleet. As we have discussed previously, we anticipate achieving annualized savings through this effort of approximately $300 million, with about $200 million accruing in 2014. This has been a painful process. We've had to say goodbye to colleagues who have contributed significantly to the Company over the years. However, those who remain are extremely enthusiastic about the Company's future and I thank them for their continuing commitment to our success.

Regarding our offshore fleet cost reduction initiatives, our operations teams are focused on optimizing personnel on board the rigs and in labor pools and on the efficient execution of our planned maintenance program. Our project teams continue to reduce out-of-service time and expenditures associated with our major capital projects and our marketing teams are focused on ensuring that the terms and conditions in our contracts optimize the commercial partnerships with our customers. I am fully confident that the combination of these efforts by these talented teams around the world will enable us to bridge the margin gap between us and our comparable peers. These efforts are also essential for us to fulfill our commitment to sustain and grow our dividend, which already represents one of the industry's highest yields and implied payout ratios.

During the third quarter, we continued to reduce some of the uncertainty surrounding the Company. I was pleased with the settlement of the two civil cases associated with the Frade field incident in Brazil. As a reminder, the Company assumed no financial obligation in this settlement and did not accept any fault or liability. Brazil remains an important market for the industry overall and Transocean in particular. This resolution removes significant uncertainty about our ability and commitment to continue working safely and responsibly offshore Brazil.

With respect to ongoing litigation resulting from the Macondo well incident, Phase II of the trial has concluded and the parties are now preparing their post-trial briefs and proposed conclusions and findings of fact. As the second phase was principally focused on source control and quantifying the amount of oil spilled, Transocean had only a minor role and no new facts emerged in this process related to us. Also during the quarter, the Fifth Circuit Court of Appeals vacated its earlier reversal of the district court's findings in the BP additional insured claim against our excess liability insurance policies and certified a number of key insurance law questions to the Texas Supreme Court. As it relates to the Macondo litigation, we remain confident in our overall position and the merits of our case.

Finally, the criminal trial in Norway related to our historical tax positions and filings concluded in September. We believe that our Norway tax returns are materially correct as filed and our tax and legal team did an excellent job defending this position in court. We expect rulings sometime in the first half of 2014.

On a final note, we recently sent out invitations to an Analyst and Investor Day to be held on November 21 in New York. This meeting, which will be webcast, with details to be provided later, will provide us an opportunity to brief you on key elements of our operating, asset, and capital strategies, and the near-term plans in place to progress the execution of these strategies.

With that, I'll turn it over to Esa to take you through the numbers. Esa?

Thank you, Steven. Thanks to all of you for joining us today.

I'll spend a few moments reviewing the key financial elements of our third-quarter results. Then I'll provide some comments on our full-year expectations. And, finally, close with preliminary guidance for 2014.

As Steven said, we recorded net income attributable to controlling interest of $546 million, or $1.50 per diluted share, for the third quarter of 2013. Our results for the quarter included $47 million or $0.13 per diluted share, in after-tax net favorable items detailed already in our press release. Excluding these items, our adjusted earnings from continuing operations were $499 million or $1.37 per diluted share. This compares with similarly adjusted earnings from continuing operations of $1.08 per diluted share in the second quarter of 2013. Additionally, related to severances, certain existing benefit plans were accelerated into the third quarter, as a result of our onshore reorganization, resulting in about $11 million or $0.03 per diluted share.

For the third quarter of 2013, our consolidated revenues increased by $161 million to $2.56 billion compared with $2.4 billion in the prior quarter, reflecting continued improvement in our operational performance. As Steven said, the increase was due to better fleet utilization and improved revenue efficiency, as well as increases in other revenue, reflecting higher activity levels in our drilling management services business. Higher average day rates in the period, particularly the North Sea, provided an additional positive contribution. Third-quarter operating and maintenance expenses increased sequentially by $98 million to $1.49 billion, due primarily to increased drilling management services activity. This was in line with the increase in revenue I mentioned already.

The increase in O&M was also partly due to higher shipyard costs and an unfavorable adjustment in contingencies associated with the Macondo well incident. While the increase in O&M costs in the third quarter is consistent with the guidance I provided on our last earnings call, we are beginning to see underlying reductions in our cost base as a result of the ongoing margin improvement initiatives, mostly in shore-based costs, so far.

General and administrative expenses were $67 million for the third quarter compared with $77 million in the second quarter, which included some 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, third-quarter 2013 results included about $27 million in pre-tax costs associated with severance and accelerated recognition of existing compensation plans. Approximately $22 million of this cost was included in operating and maintenance expenses and about $5 million was included in G&A. Depreciation expense for the quarter was $273 million compared with $286 million in the prior quarter. Interest expense, net of amounts capitalized in interest income, was $131 million compared with $135 million in the second quarter of 2013. This reduction reflects the continued focus on gradually reducing our long-term debt.

The third-quarter annual effective tax rate from continuing operations was 19% compared with 23.5% in the prior quarter. The decrease was primarily due to changes in the annual provision estimates related to favorable tax legislation and court rulings, the blend of incomes that is tax based on gross revenues versus pre-tax income, and rig movements between jurisdictions. Net cash flow generated from operations increased to $623 million in the third quarter compared with $416 million in the second quarter of 2013. This increase was primarily due to higher earnings in the third quarter.

Capital expenditures were at $450 million in the third quarter, increased from $352 million in the prior quarter, primarily due to the timing of progress payments associated with our newbuild program. During the third quarter, we repaid a total of $77 million of debt, as well as paid the second dividend installment to our shareholders, totaling $0.56 per share or approximately $202 million. This, all together, resulted in $3.6 billion in cash and cash equivalents at the end of the third quarter, or an increase of $202 million from the end of the second quarter.

I will now provide some updates to our 2013 guidance. Given the steady and improving operating performance throughout the year, we are well capable of achieving revenue efficiencies similar to that reported in the second half of 2012, which averaged at about 95%. However, as we did not quite reach that level in Q3, we currently expect our full-year revenue efficiency to be about 92.5%, just shy of our 93% objective. This assumes that we continue to perform in the last couple of months at the current levels. Other revenue is expected to be between $380 million and $400 million, which is slightly lower than we originally anticipated.

Our annual operating and maintenance costs are now expected to be between $5.7 billion and $5.8 billion, primarily due to the accelerated delivery of our cost improvement initiatives. As a reminder, this is at the low end of our original guidance range for 2013. We expect to incur sequentially higher operating and maintenance expenses in the fourth quarter of 2013, primarily due to the increase in shipyard activities and projects, which are largely reflected in our latest fleet status report. Due to the shipyard activity, we expect our Q4 O&M expenses to increase to the range from $1.55 billion to $1.6 billion. Furthermore, we expect full-year interest expense, net of interest income and capitalized interest, to be between $530 million and $540 million, which is slightly lower than our original guidance.

Our full-year 2013 G&A expenses are now expected to between $270 million and $280 million. Our full-year depreciation expense range of $1.1 billion to $1.15 billion is largely unchanged. Our annual effective tax rate from continuing operations is expected to fall between 19% and 21%, a slight improvement relative to prior expectations. Capital expenditures guidance increased to approximately $2.7 billion as a result of the recently announced construction agreement for an additional ultra-deepwater drillship and the order of five high-specification newbuild jackups. As a reminder, a schedule of expected annual payments for our current newbuild program is included on our website.

Turning now to our preliminary guidance for 2014. Please keep in mind that we are still working through our budget and forecasting process and we will provide more refined guidance for 2014 when we report our fourth-quarter 2013 results in February. The shipyard activity that you'll find in our most recent fleet status report continues to present our best and most up-to-date estimate of out-of-service time in 2014. As we've said before, we advise caution as it is not uncommon for unplanned and exceptional shipyards to increase our out-of-service time even significantly. We are not able to predict such exceptional shipyards and consequently they cannot be included in our fleet status reports.

For 2014, we currently expect revenue efficiency to average approximately 94%. Operating and maintenance costs for 2014 are expected to be between $5.5 billion and $5.7 billion. Recalling our original guidance for 2013, and adjusting for inflationary trends of some 5% per annum, as well as the costs associated with the delivery and operation of newbuilds in 2013 and 2014, this represents a considerable reduction year-on-year. This reduction reflects our commitment to reduce onshore overhead costs by $300 million by 2015 compared with our 2012 cost base. In excess of $200 million of those savings, net of inflation, are now included in this guidance for 2014, as well as the first phase of our other margin improvement initiatives aiming to further improve our competitiveness.

We've forecast our G&A expenses to decline to between $220 million and $240 million in 2014. Furthermore, we expect our capital expenditures to be approximately $2.3 billion in 2014, assuming no further newbuild commitments and associated progress payments. The $2.3 billion already includes our recently announced newbuild drillship and progress payments on our five-rig jackup newbuild program. The expected future payments for our entire newbuild program are included in our third-quarter 10-Q. As our 2014 budgets are still not complete, our estimates could change and will also be affected by changes in timing of shipyards, decisions to reactivate more rigs, and industry inflation trends, among other things.

We continue to work to improve our entire cost base, with the objective of achieving additional increases in our operating margins. We have recently intensified our 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. We will provide further guidance on these improvements when we report our fourth-quarter results.

Finally, a few updates on the balance sheet. In line with our balanced capital allocation strategy, we are progressing well with our plans to reduce our gross long-term debt to a level below $9 billion, and our goal of retiring approximately $1 billion in excess of existing repayment obligations by the end of 2014 also remains on track, with approximately $370 million remaining. Scheduled maturities for the remainder of 2013 and 2014 are expected to be modest, about $20 million and $190 million, respectively. These figures exclude the payment obligations associated with the partial DOJ settlement on Macondo, which is expected to be about $460 million in 2014.

There is no change to our short-term liquidity target, which remains between $3.5 billion and $4.5 billion. It is a prudent and responsible targeted short-term level of liquidity until the uncertainties the Company currently faces are further reduced. The liquidity target includes consolidated cash, the undrawn $2 billion revolver, and the secured credit facility of $900 million. Our liquidity target excludes the $599 million cash collateral that is on deposit to pay the Aker export financed debt. Considering the debt retirements, capital expenditures, and the dividend distribution, we expect to maintain our liquidity within the target range throughout 2014.

In the context of our balanced capital allocation strategy, our commitment to return excess cash to shareholders is unchanged. During the third quarter, we distributed the second of four installments of the approximately $800 million dividend approved by the shareholders at the May AGM. Given our margin improvement and the healthy long-term market outlook, we believe that the current $2.24 per share dividend provides a solid basis for material future increases.

Final point. We have completed our evaluation of the MLP as a potential element in our capital structure and intend to present the conclusions of our study to our Board of Directors at the upcoming November meeting. We expect to provide an update no later than at our Analyst Day on November 21.

This concludes my prepared comments. I now hand the microphone over to Terry to update you on the markets. Over to you, Terry.

Thanks, Esa. And good morning to everyone.

Before we cover specific markets, I would like to make a few general comments. The third-quarter tendering activity slowed a bit over the previous quarter for the global floater fleet, but it still provided solid contracting opportunities for our fleet. We increased contract backlog to $29.8 billion as of October 16, 2013, from $27.3 billion as of July 17, representing approximately $4.5 billion of contracts signed during this period. Additionally, 95% of the contracted backlog we added, including the ultra-deepwater newbuild, was achieved through direct negotiations with satisfied customers, avoiding the time and expense of an open tender. Year-to-date, we have added $7.6 billion of backlog and have now exceeded the 2012 year-end contract backlog of $29.4 billion. Needless to say, we are very proud of this accomplishment.

Fleet utilization improved to 83% from 80% and the average daily revenue jumped to $392,000 per day from $383,000 per day. Numerous outstanding tenders for ultra-deepwater units remain open, particularly in West Africa, as the pace of tendering has slowed due to regulatory requirements and governmental sanctioning of development programs, putting pressure on near-term day rates for available units. Additionally, during the third quarter, we observed an increase in the number of farm-out opportunities in the ultra-deepwater and mid-water floater markets. While the near-term softness has resulted in idle time for some of the floater fleet, we remain confident in the long-term fundamentals and our customers' willingness to continue to increase their future activity levels, as evidenced by the contract with Chevron for a newbuild ultra-deepwater drillship to be delivered in 2016.

Now to specific markets. Utilization for the global ultra-deepwater fleet is currently over 99%, with one unit available, the DWD, which we are actively marketing and should have an update soon. We expect to see some short-term programs emerge that will provide opportunities for the available fleet into 2014. However, the near-term will be choppy, dependent upon the timing of the sanctioning of the outstanding programs in West Africa.

Rates have remained flat from the previous quarter of $550,000 per day to $600,000 per day, depending upon area of operation and duration of the contract. The lower specification in ultra-deepwater rigs may experience declining rates between $500,000 per day and $550,000 per day, at least in the shorter term, due to the preference of customers for higher specification units with newer equipment that are perceived to offer greater reliability and higher performance capabilities. As a result, day rates for bridging opportunities could be somewhat lower than this range. That said, the older, lower-spec units are fully capable to drill in most markets and we expect the improving long-term ultra-deepwater market will provide ample opportunities in the future.

Ultra-deepwater demand is currently being driven by the US Gulf of Mexico, Sub-Saharan Africa, and in certain emerging markets.

We expect demand in Brazil to increase in the medium term, with the interest of the customers to quickly explore the recently-awarded northern licenses in 2014 and 2015, and the recently-announced high-profile partnership to develop Libra. Longer-term, we expect typical exploration success to lead to significant development drilling, as our customers remain focused on replacement of reserves and are clearly looking to the deeper waters to fulfill this objective. We were very pleased to announce the ultra-deepwater newbuild with Chevron for five years at $599,000 per day, plus a bonus opportunity. In addition, we recently received a 9-month extension of the Discoverer Enterprise at $615,000 per day. The tendering pace has also slowed for the deepwater market and the actively marketed utilization has dropped to about 88%. The most recently observed day rate range was $425,000 per day to $475,000 per day, although there have been relatively few new indicative global data day rate points.

We expect to see some idle time between contracts for these floaters in the near term. We are pursuing opportunities for our available 2013 and 2014 fleet and are currently in advanced discussion on several opportunities with our customers.

Mid-water and harsh environment tendering activity reduced in the third quarter, with some contracting occurring in markets outside of the North Sea, such as the 150-day extension on the Transocean Legend in Australia at $425,000 per day. However, the Norwegian North Sea and UK market are at 100% utilization and we expect this to continue for the next couple of years. Norway will become even tighter, with the exit of the Polar Pioneer in early 2014, as she has received a contract for three years at $620,000 a day in Alaska. We are excited about the opportunity to enter into a new frontier harsh environment market and further strengthen our excellent relationship with Shell. Our availability is now limited to 2015 in the UK and Norway with our recent extension of the Transocean Winner at $499,000 per day for 18 months in Norway.

Additionally, we are already in discussions with customers for extensions beyond 2015, demonstrating the longer-term strength of the UK and Norway markets. Outside these harsh environment areas, we are seeing idle capacity, including the Transocean Amirante and the Arctic I. We are in active discussions on a few opportunities for our available fleet.

Utilization and day rate for premium jackups remains strong due to improving demand in the Middle East, Mexico, India, and Southeast Asia. We expect all the newbuilds to be absorbed by the market and demand will continue to outstrip supply through at least 2014. As demand growth continues to outstrip supply additions, rates for high-specification jackups have increased to over $180,000 per day in West Africa; $210,000 per day in the UK; and $250,000 per day in Saudi Arabia.

In summary, the ultra-deepwater market remains healthy. While the pace of fixtures has moderated, we see multiple exploration successes, leading to significant development opportunities, which we expect to absorb all the available capacity over the next several years. Deepwater market utilization has dropped below 90% today and we are seeing incremental idle capacity in the near term, though we expect this temporary softening to reverse as the ultra-deepwater market strengthens.

Mid-water activity in the UK and Norway and the premium jackup market remain robust. Longer-term, we expect that customers' focus on reserve replacement will create demand for offshore drilling equipment and provide ample opportunities 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, Tim, we're ready to open it up for questions.

(Operator Instructions)

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

Good morning, guys, and congrats on a great quarter. We're all digging into what seems to be pretty impressive cost guidance for 2014.

Maybe just on that topic, could you give us a little bit more specificity in terms of where the cost reductions are coming from? We talked about the $300 million cost-cutting effort a while back?

Is that all of that? Is there more to come following that? And then what other onshore or back-office initiatives are in place on the margin improvement side of things?

All right, thanks. It's Esa Ikaheimonen here speaking. I'll start and then maybe others will complement.

Thanks for, first of all, for recognizing that it is actually pretty impressive guidance. I wouldn't mind giving some further color to that given the opportunity.

If you look at the original 2013 guidance, including the G&A, our guidance was $6 billion to $6.2 billion -- just a reminder, that's including G&A. Now if we include G&A to our preliminary 2014 guidance, the corresponding figure is between $5.7 billion and $5.9 billion to $5.95 billion, so there's a $300 million reduction at a headline level already, and that's not even accounting for inflation. So I think you're right, it's pretty impressive.

Now, where does it come from? It really comes from across the piece.

A fairly significant onshore reduction, in line with our earlier commitments to reduce about $200 million in comparison with the 2012 base. So that's included now. It's not exactly $200 million in a year-on-year basis because part of the expenses, the onshore expenses, also got transferred as part of the jackup deal, but it's a significant part of that.

Another significant part has to do with our project execution performance in our current budget and guidance. And the third one is that we are starting to see improvements on the offshore cost base, as well, which has to do with the way we operate the rigs. That's maintenance, that's manning at the offshore level and all the associated expenses.

So that's the way I would like to break it down. We will provide further information about that when we report in more detail and in a more refined format. That will be in February when we report our Q4.

When you say project execution, I'm looking at the out-of-service cost per day in the ultra-deepwater space, came in considerably lower than the last couple of quarters and maybe where a lot of people were modeling. Is that the number that reflects your statement of project execution?

Yes, it's volatile is one way of looking at that. So quarter-on-quarter comparisons are potentially a bit misguiding, but that's what overall is going to reflect the improving performance.

But you have to keep in mind that it's not just out-of-service time related because the mix of projects has got a big impact. The more we do live enhancement projects, the more we capitalize; the more we do periodic survey-type activity and five-year [SBSes] and so on, the more we expense.

Okay.

So it really is a mixed bag but that's the activity that drives the improvement there.

Okay and then last one from me is a detail one. The payments that you've outlaid in your press releases for Macondo, where do those show up in the cash flow statement? Is there a specific line item that we should see or is it in one of the different buckets?

Yes. They are part of the operating cash flow.

Okay.

Yes, so working capital comes down as a result.

So it's in operating cash?

Correct.

Okay. Thanks, guys.

Thanks, Collin.

We'll take our next question from Jud Bailey with ISI Group.

Thank you. Good morning.

I wanted to ask a couple of questions on -- just follow-up on Terry's comments on the ultra-deepwater and deepwater segment, if I could. Terry, did I hear you right that you expect some weakness for, you say, lower-tier ultra-deepwater rigs to the $500,000 to $550,000 range? Is that predominantly for some of the smaller fifth gens that you have?

How are you doing, Jud?

I'm doing okay, thank you.

Great, great. Yes, that's what we're seeing right now is that pattern. We know that as we look at some of the open opportunities and as we put our ear to the street, trying to figure out where we are, that's the range that we end up in.

Okay and then on the deepwater side, you noted recent fixtures, and there hasn't been a lot of them, are $425,000 to $475,000. You're suggesting that there could be more weakness probably below that range and we may see some competitors maybe lower rates below that range? I just wanted to clarify that we could see more of a step-down, whether it's temporary or not, for some of the deepwater rigs?

I think what we may see here is we may end up seeing a few of the deepwater rigs being bid into the midwater market.

Okay.

So I think that's -- we're going to see that phenomenon just like we saw in the last cycle.

Okay.

Since there's very few data points and not a lot of tendering, I expect that the tendering is going to be very competitive. So I think there's a chance that that may happen.

Do you think that is a dynamic that is going to be -- can continue throughout 2014 and into 2015? You've alluded that some of this stuff could be temporary. Do you think that dynamic will reverse itself or do you think that's just going to be how the market is going to be for the next couple of years as all these ultra-deepwater rigs come in?

I think it's temporary. I think we could get a lot of help in the market if we could get these multiple opportunities in West Africa and if we had any help from the Brazilian market, I think this market looks a lot better.

I don't really have an exact time frame that we're looking at, but -- and another thing I think that potentially could help the market, it's unfortunate -- is the delays of the rigs coming out of the shipyard. So if you see some of those delays then we may have some filler opportunities for our fleet and for our competitors' fleets.

Okay, and then my last question would be, it sounds like we're going to have some gaps between jobs for some of your deepwater rigs. Can you give us any type of insight as to what's a decent time frame? Should we count on three months, six months, or is it just going to vary depending on the rig and the specification and the location of the rig?

I think the latter part of your commentary is fairly accurate.

Okay, so it's going to depend on a lot of variables. Okay, I'll turn it back. Thank you.

Thanks, Jud.

We'll take our next question from Lukas Daul with ABG.

Thank you. Good evening.

Terry, if I may continue the bifurcation theme that you touched upon. You were saying most of the lower-spec'ed rigs are able to drill the prospect that the high-end rigs are getting contracted for. I was wondering, is there a meaningful spread in the day rate where operators would be willing to go for the older, lower-spec'ed rigs, or is the technical specification of the tender just excluding them?

Lukas, to answer the first part of your question, there's always a meaningful differentiation in numbers depending upon the type of equipment. When we look at our competitive tendering, that's what we like to look at. Are we completing against dual activity, single activity, offline handling, and I think you have to look at the programs that are being drilled, you have to look at the efficiencies, and you have to figure out what's competitive.

But to look at what's happened recently, we haven't seen that phenomenon because of the availability of the ultra-deepwater newbuilds. There's clearly a preference so there hasn't been a price differentiation that has actually come into play yet. So we're looking at every opportunity on a case-by-case basis, and like I said, these rigs, once this market gets tight, these rigs are perfectly capable of drilling a huge portion of the world's resources.

Okay and when you talk about the licensed project sanctioning in, for example, West Africa, is that coming from the operators or is it coming more from the authorities?

Well, the governmental authorities have to sanction the projects and approve the programs that are to be drilled. If you look at a couple of examples in West Africa, we've got one tender there that we participated in Angola that's still on the plate and that started a year ago.

So it's just something that we deal with in West Africa, and it's pretty typical. But there's a tremendous amount of demand there, and like I said, as soon as we see those programs being awarded, I think our market looks a lot better.

Okay, I'll hand it over. Thank you.

(Operator Instructions)

We'll take our next question from J.B. Lowe with Cowen and Company.

Hey, good morning, guys.

Good morning, J.B.

I just had a quick question on the West African opportunities again. Could you guys give us an idea of how many rigs could actually be taken if all of these projects were sanctioned?

Today we're looking at anywhere from 8 to 10 that are already been tendered and then we know that there's more to come. There's a lot of capacity there that could be fulfilled. So you look at 8 to 10 rigs in 2014, that changes things up quite a bit.

Sure. And same question on Brazil. What -- if projects there were accelerated, particularly around the Libra side of things, same question, how many rigs do you think -- of the older rigs -- do you think Brazil could take?

I think we have to look at numbers instead of older rigs. I think they will have to take -- in order to develop that program -- what we're hearing is preliminary numbers are that the wells to be drilled are between 200 to 300 wells.

Got you.

And if you add that to the northern opportunities that we know the independents are trying to quickly put a consortium together to start drilling those prospects, and then the majors are looking to a 2015 season, again, I think it helps the numbers and it supports what we're saying. As we get through this near-term softness to the other side of development of more demand because of the success in the exploration programs, I think this market starts to look really good.

Okay. One final one, just rig-specific, on the Polar Pioneer, when you move it to Alaska, what's the daily operating cost there compared to Norway? Is it about the same?

Right now we're going through that. I don't want to really talk about the specifics of the contract, but what we didn't know, we protected ourselves, and then the pricing that we did know. So I wouldn't say it's very dissimilar to the UK but we're just going to have to wait and see.

Okay. Thanks so much. I'll turn it back.

And at this time, there are no other questions in queue. I'll turn it back to Thad Vayda for any closing remarks.

We thank everyone for their participation today. We look forward to speaking with you again on our fourth-quarter call, early next year, if not sooner. Have a good day.

That concludes today's conference call. We appreciate your participation.