Transocean Ltd (RIG) 2013 Q4 法說會逐字稿

Good day everyone, and welcome to the Transocean Q4 2013 earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Thad Vayda. Please go ahead, sir.

Thank you, Lynette. A good day to everyone, and welcome to Transocean's fourth quarter and year-end 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 www.Deepwater.com.

We have also posted some 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 Financial Reports under the Investor Relations tab. Joining me this morning 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 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, strategic projects and corporate financing activities, capital allocation and strategy, and new build 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, 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 proven incorrect, actual results may vary materially from those indicated. Transocean neither intends to nor assumes any obligation to update or revise these forward-looking statements in light of developments which differ from those that are 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 will find the required supplemental financial disclosure for these materials, for these measures, including the most directly comparable GAAP measure and an associated reconciliation on our website at www.Deepwater.com, under Investor Relations, Financial Reports, Non-GAAP Financial Measures.

Finally, to give more folks an opportunity to participate in this call, please limit your questions to one initial question, and one follow-up. Thank you very much for your cooperation in this regard. I will now hand the call over to Steven Newman. Steven?

Thanks, Thad, and welcome to all of our employees, customers, investors and analysts. Thank you for joining us on the call today.

Before I comment on the quarter's results, I would like to review some highlights from 2013. We started the year on a positive note by reaching an agreement with the Department of Justice to resolve certain claims against the Company related to the Macondo well incident. This agreement removed some of the uncertainty associated with this complex and ongoing litigation.

Additionally, later in the year, we settled 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.

We initiated a dividend of $2.24 per share which was approved by our shareholders at the 2013 annual general meeting and represents one of the industry's largest yields and highest implied payout ratios. We are committed to a sustainable and growing distribution of capital and as you know recently announced that our board will recommend that our shareholders approve a $3 per share dividend at the 2014 annual general meeting.

During 2013, we added approximately $7.9 billion in backlog, including the five-year contract with Chevron for the Deepwater Conqueror to be delivered in the second quarter of 2016, as well as four and five-year contract renewals with the same customer on two existing ultra-deepwater drill ships. This backlog highlights the strength of our marketing team and the deep customer relationships which they have nurtured over the years. Our current backlog of approximately $27 billion includes seven new build ultra-deepwater drill ships.

As part of our fleet renewal, we announced shipyard contracts valued at approximately $1.2 billion, to construct five Super B400 Bigfoot Class jackup rigs with options for five additional rigs. We continue to expect strong demand for these rigs as the renewal of the industry's jackup fleet continues. Our three new-build high-specification jackups commenced operations and achieved revenue efficiency for the year in excess of 100% with zero recordable safety incidents.

In addition to adding rigs to the fleet, we continue with our fleet transformation efforts by divesting eight noncore assets in 2013. To improve the Company's competitiveness, we committed to eliminating the margin differential between Transocean and our comparable peers by the end of 2015.

We have taken important steps to continue to improve the Company's financial flexibility, including executing our accelerated debt repayment program, and announcing our intent to launch an MLP in 2014. We announced a three-year partnership with Shell to develop a next generation BOP control system designed to be fault-resistant and fault-tolerant, with the goal of eliminating BOP control system downtime.

And finally, reflective of the progress we have made, and the support from our shareholders, we reached an agreement with Icahn Associates to recommend an additional Icahn nominee for election to our board of directors. Needless to say, 2013 was a very productive year.

I am pleased to highlight that in early 2014, we continue to make progress on our fleet renewal objectives. Last night, we announced that we had signed contracts with Jurong Shipyard in Singapore for the construction of two ultra-deepwater floaters with options for three more.

The two firm ships are expected to be delivered in the second quarter of 2017 and first quarter of 2018 and continues our fleet renewal process. At a capital cost of approximately $620 million each, for each drill ship, we expect attractive returns on these investments.

Additionally, we have negotiated very favorable payment terms of 5% at order placement, and 95% at delivery for the first rig, and similarly favorable terms for the second rig. The ships will be outfitted with 15K well control equipment, one single BOP, and 8000 feet of risers. As part of the agreement with Jurong, we have the ability to add a second BOP and additional riser to each ship should we choose to do so.

Moving now to the fourth quarter 2013 results, we reported adjusted earnings from continuing operations of $267 million, or $0.73 per diluted share. Including $34 million in net unfavorable items, we reported net income attributable to controlling interests of $233 million, or $0.64 per diluted share.

While our adjusted earnings are generally in line with consensus expectations, our fourth quarter operating results reflected a sequential decline in revenues, driven mainly by lower utilization. Average fleet utilization was 75% for the fourth quarter, compared with 83% in the third quarter, the result of an expected increase in planned out-of-service time and idle rigs.

Fleet average revenue efficiency was a disappointing 91.7% in the fourth quarter, compared with 94% in the third quarter of 2013. This deterioration in revenue efficiency was the result of well control equipment related downtime on certain ultra-deepwater rigs. The increase in average daily revenues we realized in the quarter was not enough to overcome lower utilization and revenue efficiency results.

As expected, we incurred sequentially higher O&M costs during the quarter, primarily as a result of the higher shipyard-related out-of-service time. Esa will take you through the numbers in some detail, including our updated guidance for 2014 in a moment.

The unacceptable setback in revenue efficiency in the fourth quarter highlighted specific rigs and geographic regions where additional focus on operational improvement is required, and we are taking aggressive steps to address the issues we have identified. These include a focus on continuously improving the training and competency of our people, regularly enhancing the procedures we expect our people to implement and follow, and further strengthening our relationships with the key vendors whose success is so important to our own. Notwithstanding our disappointing operational performance in the period, I remain convinced that we continue to take the right actions to drive improved performance across the Transocean fleet.

Regarding our longer term strategies, we continue to pursue a balanced approach to capital allocation by making value-enhancing capital investments, returning excess cash to shareholders, and reducing debt to ensure financial flexibility. In a cyclical industry, financial flexibility is an important and essential competitive advantage. Our investment grade credit rating, which we intend to retain, and the MLP light vehicle are both in pursuit of maximizing our financial flexibility, and enhance our ability to be opportunistic.

Also, the actions I alluded to earlier regarding operating performance, along with our cost reduction efforts, will support our ability to translate contracted backlog into improved operating margins. We remain intently focused on eliminating the margin differential between Transocean and our comparable peers.

Regarding our ongoing efforts to transform our fleet, the three new-build high-specification jackups which commenced operations in 2013 were delivered on time and under budget, and due to performance-related bonus payments, achieved revenue efficiency for the year in excess of 100% with zero recordable safety incidents. I commend the Transocean project management and operations teams for this best-in-class performance. I anticipate similarly trouble-free startups and excellent operating performance on the Deepwater Asgard and Deepwater Invictus when they commence operations in the second quarter of this year.

The other 12 new build projects including seven high-specification ultra-deepwater drill ships and five high-specification jackups remain on track for delivery starting in late 2015. All of our new build ultra-deepwater drill ship deliveries are backed by contracts.

We also continue to focus on the divestiture of noncore assets to reduce our exposure to less capable and less differentiated rigs. To this end, we recently sold the GSF Monitor which had been working in Nigeria.

Our overall objective is to continue to position Transocean as the industry's leader in high-specification assets, both floaters and jackups. As we announced on our analyst day in November, we expect the long term targeted Transocean fleet to be comprised of approximately 50% ultra-deepwater floaters, 40% high-specification jackups, and 10% harsh environment rigs.

We continue to pursue a variety of options for divestiture of noncore rigs to improve the overall age and capability profile of our fleet, and to fund high-return reinvestment. As we have said previously, assuming a fair valuation, we are evaluating all divestiture options, including individual or packaged rig sales, an IPO, or a spin. As one example, we believe that our North Sea mid water floater business represents an attractive and relatively easily packageable and separable business with strong cash flow, significant contract backlog and a highly respected reputation in the region.

Also, with the continued focus on reducing our exposure to noncore assets and activities, in late February, we sold ADTI UK, marking Transocean's exit from the turnkey drilling business. You may recall that we had previously exited the same business in the US Gulf of Mexico. I appreciate all of the efforts by the ADTI team over the years in achieving customer goals through integrated project management and turnkey drilling services.

During the fourth quarter, we paid the third of four installments of our 2013 dividend. As previously mentioned, the board intends to recommend to our shareholders an approximate 34% increase in the dividend to $3 per share, an implied yield of nearly 7%. This will be formalized in our upcoming proxy, and shareholders will be asked to vote for this increase at the 2014 AGM.

With respect to the ongoing litigation resulting from the Macondo well incident, Phase II of the trial concluded last fall, and all of the parties have now submitted their post trial briefs. Judge Barbier has not provided any clear indication as to when or if he will issue rulings on Phases I and II or any of the other Transocean motions pending before the court.

As it relates to the Macondo litigation, we remain confident in our overall position and the merits of our case. At the same time, we remain open to the possibility of a reasonable business resolution of the outstanding claims against us.

In Norway, the criminal trial related to our historical tax positions and filings also concluded last fall, and we await the court's ruling which we expect sometime in the next few months. We continue to believe that our Norway tax returns are materially correct as filed and will continue to defend against any claims to the contrary.

I want to close with a few comments on the market. As we have regularly reminded folks, offshore drilling is a cyclical business. At this point, while commodity prices remain robust, there is a near-term increase in the supply of drilling rigs, concurrent with delayed demand for rig capacity on the part of our customers.

As you know, drilling contractors cannot create demand. That said, we have all been through cycles before. And I have not observed anything about the recent market conditions that causes me to question the favorable long-term fundamentals for our business.

Our objective at Transocean is to position the Company to compete effectively regardless of where we are in the cycle, and I believe we continue to take the right actions to position the Company for success. With a backlog of about $27 billion, we have a strong and stable foundation to see us through current market conditions.

With that, I will turn it over to Esa to take you through the numbers after which Terry will provide her perspectives on the market. Esa?

Thank you, Steven. And good morning and good afternoon, everyone. I will discuss the key elements of our fourth quarter results and then update our 2014 full-year guidance.

As Steven mentioned, we reported net income attributable to controlling interests of $233 million, or $0.64 per diluted share for the fourth quarter of 2013. These results included $34 million, or $0.09 per share, in net unfavorable items already detailed in our press release.

Excluding these items, our adjusted earnings from continuing operations were $267 million, or $0.73 per diluted share. This compares with similarly adjusted earnings of $1.37 per diluted share, in the third quarter of 2013. For the fourth quarter, our consolidated revenues from continuing operations decreased from the prior quarter by $226 million, to $2.33 billion.

Contract drilling revenues decreased by $200 million, and this decrease was due to two main factors. Number one was a decline in fleet utilization from 83% to 75%, primarily as a result of an expected increase in planned shipyards, as well as idle and stacked rigs. The increase in out-of-service time was in line with our prior quarter's guidance, and was reflected in our fleet status reports and updates.

Number two, was the decrease in revenue efficiency to 91.7% from 94%. This decline was mainly due to well control equipment downtime on certain ultra-deepwater rigs, as Steven already mentioned. These unfavorable variances were partly offset by higher average day rates and the commencement of operations of the high-specification jackup Transocean outside.

Other revenues decreased by $26 million due to a decrease in our low margin drilling management services business. Largely consistent with our expectations, and below our guidance range, fourth quarter operating and maintenance expenses were $1.53 billion, compared with $1.49 billion in the third quarter of 2013, an increase of $41 million.

Shipyard maintenance costs increased by $107 million. This increase was partly offset by lower overhead expense resulting from the ongoing shore-based organizational efficiency initiative.

Drilling management services costs declined by $28 million, in line with the mentioned reduction in other revenues. General and administrative expenses increased to $75 million for the fourth quarter compared with $67 million in the previous quarter, largely due to higher professional fees and to a lesser extent personnel costs.

Interest expense net of amounts capitalized on the interest income was $126 million, compared with $131 million in the third quarter of 2013. Depreciation and amortization expense for the quarter was $275 million compared with $273 million in the prior quarter.

On tax rates, the fourth quarter annual effective tax rate from continuing operations after adjusting for unusual items was 17.7%, compared with 19% in the prior quarter. The full-year 2013 annual effective tax rate from continuing operations was 20%, which is within our guidance range, and reflected the slight decrease from an adjusted 20.6% for the nine months ended September 30. This decrease was primarily due to the blend of incomes that is tax based on gross revenues versus pre-tax income and usual rig movements between jurisdictions.

Net cash flow generated from operations increased to $773 million in the fourth quarter, compared with $623 million in the third quarter of 2013. This increase was mainly due to reduction in working capital.

On CapEx, capital expenditures were at $948 million in the fourth quarter, up from $450 million in the prior quarter. This was primarily due to the timing of payments of our new build program.

During the fourth quarter, as already mentioned, we paid $0.56 per share, or approximately $202 million, the third installment of the dividend approved by shareholders at the 2013 AGM. This all together resulted in a healthy $3.24 billion in cash and cash equivalents at the end of the fourth quarter, a decrease of $316 million from the end of the third quarter.

I will now turn to our full-year 2014 guidance. Firstly, we maintain our revenue efficiency guidance of approximately 94% for the fleet, for 2014.

Although the fourth quarter had its challenges, we have experienced periods of improving revenue efficiency and continue to believe that our 2014 guidance and historical revenue efficiency levels of about 95% are achievable. Our revenue efficiency for the first two months of 2014 is in excess of this guidance.

The shipyard activities that you will find in our most recent fleet status reports continues to represent our current estimate of planned out-of-service time in 2014. As we have said many times before, we advise caution, as it is not uncommon for unplanned or exceptional major shipyards to significantly increase out-of-service time, and expenditures. We are not able to accurately predict such exceptional shipyards, and consequently they cannot be included in our guidance or fleet status reports and updates.

I would also like to reemphasize that prevailing market conditions have the potential to have an adverse impact on our near term utilization. Terry will provide a bit more color on this topic.

As a result of the sale of ADTI UK that Steven already mentioned, other revenues are expected to be between $125 million and $150 million for the full year 2014. Other revenues now primarily include recharged revenues from our customers.

We currently estimate our full year 2014 operating and maintenance expense to be between $5.2 billion and $5.4 billion. This represents about 7% to 10% reduction over our full-year 2013 O&M costs, and is $300 million lower than our preliminary 2014 guidance, partly due to the ADTI sale.

The decrease in 2014 O&M costs as compared with 2013 is due to the following. I cover the increases first.

We foresee continuing inflation in both labor and maintenance, and we are anticipating a global average inflation of approximately 4% to 5%. As a reminder, some of our contracts include cost escalation clauses aimed to offset these cost increases with additional revenue.

The second is increased activity associated with our two new-build ultra-deepwater rigs, the Deepwater Asgard and the Deepwater Invictus, commencing operations in 2014. And the full year of operations of the premium new-build jackups which commenced operations in 2013 as well as our continuous training and development of our ongoing new build program.

And then the most important decreases which more than offset these increases all together. Putting them together, it leads to year on year reduction in O&M costs.

So firstly, further savings associated with the ongoing reduction of our shore base cost. Secondly, discontinuation of our turnkey drilling services activities with the divestiture of ADTI. Thirdly, ongoing offshore cost reductions initiatives as well as improved shipyard execution. And finally, a reduction in activity associated with rigs divested in 2013 and early 2014.

To continue with the guidance, we expect that depreciation expense will be between $1.1 billion and $1.2 billion for 2014. General and administrative costs are expected to range between $230 million and $250 million. This is slightly increased from our preliminary guidance as a reflection of fees and costs associated with our ongoing strategic initiatives.

Furthermore, we expect our interest expense net of interest income and capitalized interest to be between $460 million and $480 million. Capitalized interests and interest income are expected to be approximately $130 million, and $30 million, respectively. We currently expect the annual effective tax rate for 2014 to be between 18% and 21%.

The next one is CapEx. Our 2014 capital expenditures guidance is increased by approximately $300 million to about $2.6 billion as compared with our preliminary guidance of $2.3 billion. The increase primarily reflects the change in timing and shipyard payments on the Deepwater Asgard, shifting from late 2013 into early 2014, as well as the two new build ultra-deepwater drill ships announced yesterday.

As you have seen, our 2013 CapEx was below guidance, partly due to the same refacing issue relating to the Asgard. But $2.6 billion total CapEx comprises new build CapEx of approximately $1.6 billion, sustaining CapEx of about $750 million to $800 million, and about $150 million of CapEx associated with spare parts for our ongoing efforts to improve operational performance. These costs relate to items such as BOP and subsea equipment and we expect to have largely completed the buildup of the capital expense pool by the end of 2014.

After 2014, capital costs related to the spares pool should decrease considerably. The sustaining CapEx that I mentioned is a combination of maintenance and upgrades. A schedule of expected annual payments for our entire new build programs is now included on our website.

Finally, a few updates on the balance sheet. Consistent with our balanced capital allocation strategy, we are progressing well with our plans to reduce our costs, long term debt to a level below $9 billion. Also, our goal of retiring approximately $1 billion in excess of existing repayment obligations, by the end of 2014, remains well on track, with no more than $210 million remaining.

Scheduled maturities for the remainder of 2014 are modest, about $160 million. These amounts exclude the $460 million payment obligation associated with the partial DOJ settlement on Macondo which was already paid earlier this month.

There is no change to our short-term liquidity target, which remains between $3.5 billion and $4.5 billion. We maintain that this is a prudent and responsible targeted short-term level of liquidity until the uncertainties the Company currently faces are reduced. This liquidity target includes consolidated cash, the undrawn $2 billion revolver, and the secured credit facility of $900 million.

Our liquidity target continuously excludes the $594 million cash collateral that is on deposit to pay the [arc] for unpronounced debt. Considering the debt retirements, capital expenditures, and the dividend distribution, we expect to maintain our liquidity within the target range through 2014.

In the context of our balanced capital allocation strategy, our commitment to return excess cash to shareholders is unchanged. The board of directors recently reiterated its intention to propose a $3 per share dividend to shareholders at the 2014 AGM. This increased level reflects our commitment to pay a sustainable and competitive dividend to our shareholders.

We are also on track with Transocean Partners, our MLP, with a plan to launch an IPO during the third quarter subject to favorable market conditions and final approval by the Transocean board. The MLP in conjunction with the monetization of our older, lower specification rates, and our margin improvement initiatives significantly increases our financial flexibility and our ability to execute our strategies.

These strategies, just to remind, include completion of our accelerated debt repayments, the distribution of a competitive dividend, and value creating investments in new rigs. Even in the context of the near term softening of the market, we remain confident about our ability to deliver on these strategies. This concludes my prepared comments, and now I will hand the call over to Terry to update you on the markets.

Thanks, Esa. And good morning to everyone. Before we cover specific markets, I would like to make a few general comments.

In 2013, we generated $7.9 billion of contract backlog, including securing contracts for one existing new build, the Deepwater Asgard, the additional Chevron new-build drill ship, the Deepwater Conqueror, in a direct negotiation, and the continuing growth of our relationship with Shell with a long-term contract on the Polar Pioneer. Tendering for the first half of 2013 was generally stable, and the market provided numerous opportunities to take advantage of high market rates across all classes of rigs. The second half of 2013 was characterized by delays in awards due to regulatory issues, a slowdown in tendering activities across the floater market, and customers delaying exploration programs to the end of 2014 and into 2015.

Recently, the outlook for 2014 has been variously described as clouded, muted, stagnant, spending slowdown, or entering a cyclical pause. As many of you are aware, we have been discussing the gradually deteriorating market trends for the last nine months or so, and unfortunately, the market is behaving as we predicted.

I currently think that this pause looks similar to that observed in 2002 to 2004, a period characterized by an initial decrease in demand with the markets remaining stagnant over a period of 18 to 24 months. Weak deepwater and mid water markets, as we are already seeing, customers delaying programs, and an increase in sublet activities.

While these characteristics are certainly similar to the market we see today, we expect year on year demand to continue to grow, assuming as we and our customers do that commodity pricing remains healthy. The prompt oversupply is allowing our customers to high-grade their fleets, and absent an urgency to contract, refocus on capital allocations.

While there is little question that the near-term market is challenging, we have a solid backlog foundation of $27 billion that provides comfort and financial flexibility as we bridge this cyclical pause. We continue to believe long-term fundamentals remain positive for the future growth of our business, as evidenced by the continuing demand from our customers to increase their activity level, another year of promising discoveries, expansion into emerging markets and increasing interest in the Arctic. With the positive longer term backdrop, we believe the oversupply will gradually diminish as demand increases over the next 18 to 24 months.

Now to the quarter. Fleet utilization decreased to 75% from 83%, largely due to shipyard stays, while the average daily revenue increased slightly. We have experienced another quarter where awards are on hold for outstanding tenders for ultra-deepwater units, particularly in West Africa, resulting in more pressure on near-term day rates for available units. Additionally, during the fourth quarter, farm-out opportunities increased significantly in the ultra-deepwater and mid water floater markets.

During the fourth quarter, the contracting activity decreased across the entire floater fleet. Generally, near-term projects on which we are currently bidding indicate a start within the next six months. However, we have seen projects stall thus far in 2014.

Now to specific markets. Utilization for the global ultra-deepwater fleet is currently 98%, with two units available including the Sedco Energy, which we are actively marketing. However we believe she will experience some idle time until the demand picture improves.

Rate expectations for high-specification ultra-deepwater units have shifted downward from the previous quarter to around $500,000 per day to $550,000 per day, depending upon area of operation, and duration of the contract. I might add that fixtures negotiated earlier this year will exceed this level of pricing.

For the lower specification ultra-deepwater rigs, day rate expectations are around $450,000 per day to $500,000 per day, at least in the shorter term, due to the preference of customers for higher spec units with newer equipment that are perceived to offer greater reliability and higher performance capabilities. We also expect to see day rates for short-term opportunity bridging to longer-term work to be somewhat lower than this range. That said, the older, lower spec units are fully capable to drill in most markets, and we expect that an improving market for ultra-deepwater assets will provide ample opportunities in the future.

While ultra-deepwater demand is being driven by sub-Saharan Africa, other emerging markets in the US Gulf of Mexico, we expect demand in Brazil to increase in the medium term due to interest in northern licenses in 2014 and 2015, development of the [Lieber] project and some bridging opportunities with Petrobras, pending the delivery of the Sete rigs. With two thirds of the golden triangle taking an extended period of time for opportunities to mature, to contract awards, fleet utilization and day rates will be under pressure for prompt availability. Longer term, we expect typical exploration success to lead to significant development drilling, as our customers resume their focus on replacement of reserves and increasing production.

We were pleased to return the deepwater discovery to active service this month with Shell in Nigeria and to contract the Cajun Express for work offshore Cote d'Ivoire, keeping both fifth generation units booked through most of 2014. With the oncoming availability in the next six months of several of our fifth generation ultra-deepwater fleet, we will strategically pursue every opportunity to manage idle time between contracts.

The tendering pace has also slowed for the deepwater market, and the actively marketed utilization has dropped to about 90%. The day rate range is expected to be around $400,000 per day to $450,000 per day, although there have been relatively few new indicative global data day rate points. While we are in active discussions with our customers on several deepwater floaters available in 2014, we expect to see some idle time between contracts for these floaters in the near term.

Mid water and harsh environment tendering activity also declined in the fourth quarter; however, we are actively engaged for several units for extensions on the North Sea and Norway for availability in 2015, and we should be able to report positive news shortly. While the farm-out activity is increasing in the UK market in the near term, we believe the UK and Norwegian North Sea will remain stable. Outside these harsh environment areas, we are seeing idle capacity and rate expectations outside the UK, or in the mid to high $200,000s per day.

Utilization and day rates for premium jackups remain strong, due to demand in Mexico, India, and Southeast Asia. We expect demand to remain high through 2014, and anticipate that all the new builds will be absorbed by the market. Rates remain stable for high specification jackups at $180,000 to $185,000 per day.

In summary, the ultra-deepwater market is beginning a corrective cycle in the near term due to oversupply. While the pace of fixtures has been decreasing steadily over the last six months, we believe demand will rebound as our customers refocus their efforts on 2015 and beyond.

Deepwater market utilization has dropped below 90% today. We are seeing incremental idle capacity in the near term, so we expect this situation to reverse as the ultra-deepwater market strengthens in the long term. Mid water activity in the UK and Norway in the premium jackup market remain healthy.

Longer term, our customers will refocus on reserve replacement and production growth, and with a solid expiration of successes they have experienced, they have the foundation to do so. As a result, we expect an increase in demand for offshore drilling equipment within the next 18 to 24 months, providing 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.

Thank you. Lynette, we are now ready to open up the line for Q&A.

(Operator Instructions)

We will take your first question from Angie Sedita from UBS.

Thanks, good morning. Terry, you were right on the money on talking about oversupply nine months ago, and as you mentioned here, we are seeing a cyclical pause in contracting and tendering. What gives you the confidence, or what are you seeing in the marketplace that gives you the confidence that you believe that it will recover or start to improve in 2015?

Well, in conversation with our customers, Angie, they fully expect to get back to more drilling, and they are going to have to do more development drilling. So as we look over the next couple of years, we can see the programs that they're focused on. So that gives us confidence. They have got to replace their reserves, they've got to increase production.

I think that you also heard Petrobas with their discussion about their forward business plans; they've got to do the same thing. And that gives us the confidence in the customer discussions, and then we also believe that there is going to be some, hopefully some near-term opportunity, with Petrobas, with again bridging to the Sete rigs. And I think they are going to take -- surprise us a little bit and take a couple more rigs.

And then as a follow-up to that, is there, at least over the near term, more risk to utilization? And you do have quite a bit of your fleet up for renewal in 2014, I believe 42% of your fleet, of which most is ultra-deepwater, and deep water. If you look at your fleet, where do you think the risk is, or are there extended periods of idle time or even potentially a warm stacking or a cold stacking?

Angie, we do fully appreciate the near-term softness and the fact that we've got a lion's share of the availability. I mean, if you look at certainly the ultra-deepwater space alone, we've got 12 of the 38 that are out there available.

So we're focused on all of the opportunities that are out there. We're going to be fighting for work. Again, the issue, as Steven said earlier, is that we can't create demand.

And so again, we are concerned. But like I said, we are going to do everything we can to get these rigs placed.

We are in conversation on a couple of the rigs that are certainly coming available here for prompt availability, so we like those conversations. We can't talk a whole lot about them, because we're all listening to each other's earnings calls, and trying to figure out where the positioning is with our competitors, so I will just say that we are optimistic on a couple of the rigs.

We have had a bit of -- I hate to say luck, because I don't believe in luck; we have had some stumbles here recently, we have been in negotiation on the first four rigs available. We had LOIs on all four of the rigs, which would be the Energy, the DD1, the DD2, and the delays occurred, approvals weren't received from certainly some of the opportunities in West Africa. And then most recently, with one of the integrated oils here in the Gulf, we had a contract negotiated on the DD1, and when it went to approval, then it was -- everybody was surprised and informed that they were not going to drill for 2014.

So this is the kind of thing that we are going to see in this market. But we have been through this before. I've got a fantastic seasoned marketing team that have been through every downturn since the '80s so I think we've got the right strategy, we are focused on the right programs, and again, I hope to announce some positive news shortly.

We will hear next from Ian Macpherson from Simmons.

Hi, thanks. Terry, hi, Steven. The DD1 and DD2, as of your January report, were up in February. Given I can't ask you about every rig that is going this year, but those two, given the timing, can you provide any more specifics with regard to when those rigs have rolled or when they are rolling and what the immediate prospects are?

Well, we actually are in discussions on both of them. We have them in live tenders as we speak. So we are just waiting for the tenders to be announced and reviewed.

So we, like I said, we're in play there. I can't really give you specifics of the actual opportunities, because we're in direct discussions, and we obviously don't want to tip anybody's hand there. So all I can say is that we're actively putting this rig forward.

One more fleet question, ODS reported that you bid the KG1 to Petrobas at [$440,000]. Everyone has been talking about that. One of your competitors talked about it on their conference call.

You haven't addressed it. You probably don't want to. But will you anyway?

Well, you're right, Ian, I can't talk about the specifics, because the tender is not over, and there is a 45-day validity to any tender that we place in Brazil. I will talk about the process briefly, and the process is that when Petrobas -- there is a water depth capability.

Petrobas likes to classify their tendering opportunities based on water depth. So what they're trying to do, it is a 2400-meter tender, and they're trying to understand where the levels of the market are. We like the opportunity.

And also, we think maybe they take a couple of rigs in this opportunity. And certainly we would be excited about that.

But look at where we are. We got 12 rigs that we've got to place. And this is a nice long term program.

And then it is something that we're certainly interested in. And again, we will just have to wait and see how it plays out.

But the one thing that you should remember, and I don't think that it gets discussed very much, but in this tendering process, we bid a single activity rig. You get a 6% penalty for a single activity rig. So let's just -- and that is about all I can really say about it.

Okay. I will pass it over. Thanks, Terry.

(Operator Instructions)

We will move next to Greg Lewis from Credit Suisse.

Yes, thank you, and good morning. I just have a couple of questions. Terry, just to follow up on that, the Brazil tender, the one rig was bid on a tender, is that part of a rig package?

Or if that rig were to get -- win a tender, would there then be a rebidding from other contracts? Is that the way to think about it? Or is this one rig going in and you could just tie in other rigs on that?

I'm sorry, I didn't really fully understand the question. Can you repeat it, please? Also a little hard to hear you.

Sorry, I apologize for that. So I guess with the Brazil tender, you mentioned that it was part of -- is that part of a bigger rig package, or just more just an initial tender where then there will be other potential tenders to follow?

This is just, when Petrobas puts out their rig tendering, they put out the request for one or more, so they get to choose how many rigs that they take.

Okay. And then just shifting over to the new builds, I guess this question is more for Steven or Esa, as we think about those rigs, the new builds, I guess the first one is scheduled to deliver in mid 2017, is the right way to think about it going forward, as Transocean continues to renew and upgrade its fleet, that is the new window where we should expect new builds to come in line? I guess what I'm asking is, is there the potential for Transocean to go back to the yards and get deliveries for either late 2016 or early 2017 at this point? Or is that window closed?

Well, the construction process for our rigs, Greg, provided you go to an existing yard with a well-developed design, it is 36 to 38 months for delivery, between the time you sign the contract and the time you take delivery of the rig. If you include everything that goes into constructing the rig and commissioning the equipment and preparing it to go to work. So I think the announcement that we issued last night, that indicated we signed contracts with deliveries about 38 -- the first delivery about 38 months from now is I think about what you would expect if you go to a yard.

Okay. And then just really following on that, clearly the financing terms sound very favorable, with 95% on delivery. Is that what other -- and that was in Singapore, and that was at Jurong.

Are the Korean yards offering similar type terms to that? Or is that more specific to that yard and that contract?

Well, this was a competitive tender exercise, with Korean and Singaporean yards, and in addition to the design of the ship and the cost of the ship, we incorporated into our evaluation the payment terms that were on offer. And certainly in the context of the arrangement with Jurong in Singapore, we found the payment terms that Jurong offered to be very attractive.

Thank you very much.

We will move next to Jacob Ng from Morgan Stanley.

Good morning, thank you for taking my question. Just wondering if you could provide some more color on your rationale for going ahead with the drill ship orders at Jurong versus one of the more established Korean yards, and would you be able to help us handicap the construction risk as it relates to this prototype rig design?

When we went through this exercise, Jacob, as I indicated with Greg, we included the Korean yards and the Singaporean yards, and we reflected into our evaluation the specifications of the ship and the cost of the ship and the payment terms. And in our evaluation, we reflected in there the fact that this would be only the -- I guess the second or third ship that Jurong is constructing.

So they have an Espadon 1 design under construction right now, and our team visited the yard and reviewed that design with Jurong and toured the facility and got comfortable that the transition from the Espadon 1 design to the Espadon 3 design is not a huge leap for Jurong, and we got comfortable that Jurong could deliver the ship within the context of the proposal they had made to us. So we were comfortable with the overall offer that Jurong made.

Great, thanks. And this one is for you, Esa. I want to dig a little bit deep into your O&M guidance. I was wondering if the lower end of your guidance range might be baking in the assumption that additional rigs get stacked on top of the ones you have already chosen to stack?

You're right, and that's why there is a range because the activity level is a little bit difficult to predict. And market conditions determine that to some extent.

So you take your best estimate and you provide a range around it. That's the way it works. So there is an element of potential movement regarding what happens to several rigs that might be candidates with stacking or might actually end up being idle during the year.

So you are right, that is the way it works, and it is very difficult to give you a very specific number because of that very reason. What you know is of course your ability to reduce costs both on the short base side of things, as well as offshore. You know what is already divested or held for sale, and you do know what the new build impact is, and then the uncertainty has to do with some of the other rigs that either are stacked or may become stacked during a period.

Got it. Okay. Thank you. I will turn it over.

We will move next to Jud Bailey with ISI Group.

Thank you. Good morning. A question first, I guess for Terry; Terry you mentioned in your comments that you think the current time period seems similar to what we saw from 2002 to 2004. My recollection is we had a slow bleed in day rates over an extended period of time during that time frame.

Would you see, if we don't see demand start to pick up again, for another 12 to 18 months, do you think a similar scenario could unfold? And if not, why would it -- how could rates stay stable if demand does not start to pick up?

Well, I mean, we are in a supply-demand business, so obviously if demand doesn't come up, it is going to pressure the rates down. I don't know if the behavior of the rates are going to mimic.

I just think that initially, when you looked at the different downturns, that that one to me seems to look the most similar, but I would also say that it also provided the highest increase in rates once you got beyond the downturn. I mean, rates went up, from I believe at the time, it was $200,000 to $400,000 a day. And I remember it quite vividly.

It was such a quick ramp-up. And, as we look out, beyond 2016 and the deliveries with the new build in 2017, we like the way the market looks at that particular time.

It is all about timing in this market, Jud, as you know, and we are just going to have to fight through it, and we are going to do the best we can. So let's see how it plays out.

Got it. Okay. Understood. And I just also want to make sure I am on the same page.

When you discuss high spec rates, ultra-deepwater rates between $500,000 and $550,000 and I believe you said lower spec between $450,000 and $500,000, you have various degrees of specification in your fleet. Would I be accurate in assuming that the KG1 would be in that high spec category?

Well, the KG1 is a single activity rig. It is a Samsung design, and it is not on the same design as the rest of our fleet. And we also, we are a little concerned about what is going on with pricing in India, so we felt like this would be a good opportunity, the gas pricing in India could be a good opportunity to relocate the rig, and so that is how we looked at the decision to do what we did.

Got it. Okay. I will turn it back. Thank you.

Thank you.

(Operator Instructions)

We will move next to Darren Gacicia from Guggenheim Securities.

Thank you very much. So one of the questions I guess I wanted to ask is that we're obviously starting to add some rigs as part of the fleet renewal process. Do we have any parameters around maybe rigs that -- the number of rigs that may need to be stacked or maybe some expanded commentary on the assets that may be for sale.

I know you mentioned the mid water floater possibly being attractive selling as a package from the North Sea, but how do we equate that? How do we look at the net fleet maybe two years from now in terms of what you think still remains and maybe what is sort of on the sidelines? Because it seems like the definition of cold stack for the industry may be changing.

That is an excellent question, Darren, and I guess I would point you to our commentary at the analyst day and then what I reiterated today. We set ourselves sort of a five-year time frame over which we expect to transform the fleet. And we have given indications about what that long-term fleet looks like, 50% ultra-deepwater, 40% high spec jackups and 10% harsh environment.

We have been purposefully silent on absolute rig numbers because I'm not sure how important that is. As long as the fleet migrates towards that kind of an allocation, we think we will be appropriately positioned to compete effectively across the asset classes that we're competitive in and regardless of what kind of a cycle we're in.

Well, just drawing from Terry's comments though, that if the KG1 is a single activity, and it is probably technically an ultra-deepwater rig, is there any -- are there candidates, without giving a number of specificity, there are candidates in the ultra-deepwater listing that may be actually on the divestiture list? And maybe part two, if you think about what is in the ultra-deepwater, deepwater portfolio, in terms of what you may want to keep, is there any parameter to know what may need to spent to upgrade some of these rigs maybe to put them in the class of the type of rig you would like to keep?

All really good questions, Darren. And they speak to the heart of the strategic conversations we have on an ongoing basis. So just as an example of the kind of discussions we have, if you look at our fleet status report, and the assets that we characterize today as high spec floaters, within that, even within that category, there are degrees of high spec.

We've got some rigs that are rather more limited in water depth capability, and we have one or two of those rigs that only carry a 10,000 stack, and so that is a very different asset than something like the discover clear leader that came out full dual activity, capable of drilling in 12,000-foot water depths, really state of the art vessel, and you step forward to the vessels that are under construction today, with 20,000 capability. And so even within our high spec asset category, there are rigs that we would characterize as divestiture candidates.

I don't want to be too public about which those rigs are because my expectation for Terry's marketing team and for John's operations team, is that those teams continue to do their absolute best to keep the rigs working and they do their absolute level best to keep the rigs in the best possible condition, and providing the best possible service to our customers. And if somebody comes along and makes us an offer that we think matches our valuation expectations, then the asset becomes a divestiture, rather than a component of Transocean's operating fleet. That's the nature of the strategic challenge we face with respect to the ongoing transformation of our fleet.

If I could sneak another corollary to that end, would you say that the preference on incremental capital employment would be towards new construction, or are you open minded to maybe some of the upgrades that would work on some of the older rigs as well as a way to deploy what I would consider sustaining capital, if you will?

I think we're probably at a starting point, anyway; we are probably indifferent with respect to building versus buying. The question of upgrading an existing rig is a little bit of a different beast.

You've got to -- when you think about undertaking something like that, you have got to factor into the economic evaluation the opportunity cost of taking the rig out of service, while you undergo the upgrade. And so it is a bit of a higher hurdle to overcome, with respect to doing something like that.

It is not out of the question. We have done it in the past. But I would say our starting point is we either want to build what we design, or we buy something that somebody else has built that meets our asset -- our long-term asset strategy.

At this time, we would like to move to a follow-up from Ian Macpherson from Simmons.

Thanks for taking the follow-up. Esa, I had a CapEx question.

You mentioned that you underspent your CapEx guidance last year partly because of the new build phasing, but it seemed like it was bigger than that, almost $0.5 billion less than your guidance. Did you have any organic savings?

And then secondly, you said that your spares CapEx should decline after 2014. What about the sustaining CapEx? With the fleet getting smaller and more modern, does that sustaining CapEx shrink in the out years as well?

Let me take the first one first. So your observation is correct, the 2013 CapEx was more significantly below the guidance, so it is not all explained by the Asgard refacing. There are other elements associated with it, one of them being for instance the shipyard expenditure capitalization and the other one being the spares pool CapEx.

So there is another rephasing area, or actually some of the expenditure that was supposed to be incurred in 2013 actually will be incurred in 2014, and that is captured by the existing guidance. It is a little bit more of a mix back than what I said, but the prime reason has to do with the Asgard refacing.

Okay. Sustaining CapEx going forward?

Yes, sustaining CapEx going forward, it is part of the fleet renewal strategy to reduce that element. So the younger the fleet, the lower the sustaining CapEx component going forward.

And the other element that should have an impact is the ongoing emphasis on shipyard execution and the targeted improvement on that side of the business. So expectation is that it will get lower, but it only gets significantly lower as the result of the fleet high grading exercise.

Okay. And then finally, the Polar Pioneer was scheduled to finish with Statoil and commence, I guess getting ready to go over to Alaska. We know from Shell that is not happening this year. How do we assess that backlog risk at least for 2014, if not the full term of that contract at this point?

Hi, Ian. This is Terry. We are scheduled to conclude our contract with Statoil I think somewhere in late March, early April, and then we will be mobilizing over to Singapore to get her ready and go through some upgrade on the rig. And that is what we know today.

Okay. Thanks.

Thank you.

That does end our question-and-answer session. Mr. Vayda, I would like to turn the conference back over to you for any concluding remarks.

Thank you to everyone for your participation today. We will be available this afternoon if you have any questions or additional comments.

Thank you very much. We will talk to you when we report the first quarter 2014 results. Have a good day.

And that does conclude today's teleconference. We thank you all for your participation.