Transocean Ltd (RIG) 2014 Q2 法說會逐字稿

Good day, and welcome to the Transocean Q2 2014 earnings conference call. Today's conference is being recorded.

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

Thank you, Chanel. Good day to everyone, and welcome to Transocean's second-quarter 2014 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 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 on this morning's call are Steven Newman, Chief Executive Officer; Esa Ikaheimonen, Executive Vice President and Chief Financial Officer; and Terry Bonno, Senior Vice President, Marketing.

Before I turn the call over to Steven, I'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, strategic projects and corporate financing activities, capital allocation and strategy, newbuild projects, and the prospects for the contract drilling business in general. 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 is inherently difficult to make projections or other forward-looking statements in a cyclical industry, since the risks, assumptions and uncertainties involved in these forward-looking statements include: the level of crude oil and natural gas prices, rig demand, the effects and results of litigation, assessments and contingencies, and operational and other risks which are described in the Company's most recent Form 10-K and other filings with the US Securities and Exchange Commission. Should one or more of these risks and uncertainties materialize, or underlying assumptions prove incorrect, actual results may vary materially from those indicated. Transocean neither intends to, nor assumes any obligation to, update or revise these forward-looking statements in light of developments which differ from those anticipated.

Also, please note that we may use various numerical measures on the call today that are, or may be considered to be, non-GAAP financial measures under regulation G. You'll find the required supplemental financial disclosure for these measures, including the most directly comparable GAAP measure and an associated reconciliation, on our website at www.deepwater.com under Investor Relations Financial Reports non-GAAP financial measures.

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

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

As you saw from our second-quarter press release last night, we reported both net income attributable to controlling interest and adjusted earnings from continuing operations of $587 million, or $1.61 per diluted share. Revenue efficiency for the second quarter was 95% compared with 95.7% in the first quarter, with revenue efficiency for the first half of 2014 of 95.4%. While we have experienced a few extended downtime events recently, we continue to make solid progress in our efforts to improve the operating performance of the Company, and I thank the operating and support teams around the world for the results they are delivering.

Second-quarter financial results also reflected our continued focus on controlling costs and improving margins. And I am similarly pleased with the progress in these areas. Esa will provide a bit more color on our progress when he reviews the numbers.

While the market remains challenging, which I will comment more on in a moment, our second-quarter financial results and the progress we are making in other strategic areas demonstrate the Company's continued focus on executing our strategy and improving the elements of our business that are within our control. As further evidence of this, we recently closed a highly successful IPO of Transocean Partners. There was strong investor demand for the offering, and the IPO was significantly oversubscribed, which is a testament to the quality of the structure, the Company, and the team. The implementation of this element of our strategy is consistent with our capital allocation philosophy, enhances our financial flexibility, and, as a result, will contribute to our fleet renewal efforts.

To the latter point, I am pleased to report that the Deepwater Invictus, the most recent addition to our industry-leading fleet of high-spec rigs, has commenced its three-year contract with BHP Billiton in the Gulf of Mexico at a day rate of $595,000 a day. The Deepwater Asgard is expected to commence its three-year contract at $600,000 per day, any day now. As a reminder, five of the remaining seven ultra-deepwater newbuilds under construction are backed by attractive long-term contracts with key customers.

Regarding the market, there is no question that we are in a challenging business environment right now. But this industry has always been cyclical. Our favorable long-term outlook remains unchanged, and we will continue to take the necessary actions to position the Company to weather the current downturn and capitalize fully on the inevitable cyclical recovery.

Regarding the tax litigation, which has been ongoing in Norway for some time now, I was very pleased with the full acquittal granted in the criminal trial in early July. While the state has appealed portions of the Court's ruling, we remain confident that our tax returns are materially correct as filed, and we will continue to refute any allegations to the contrary. At the same time, I was disappointed with the Norwegian civil court's ruling in the Danish dividend case, although I would point out that the Court waived the interest and penalties, which the state was seeking. We will exercise our appeal rights in this case, and will continue to pursue full exoneration for our actions.

Regarding the Macondo litigation, I have no updates. We remain confident in the merits of our case, and await Judge Barbier's rulings regarding phases one and two of the MDL proceedings.

Lastly, I am sure you are aware of our extraordinary general meeting scheduled for September 22. I urge you to vote your shares in favor of the Company's proposals. I am pleased about the prospect of adding Pete Miller to our Board. He is well known and respected in the industry, and likely well known to many of you. And I am confident he will bring to our Boardroom an excellent understanding of our Business and a long track record of success.

Additionally, we are taking this opportunity to again request that shareholders vote for a reduction in the maximum number of Directors to 11 from 14. This action is both shareholder-friendly and good corporate governance practice.

With that, I will turn it over to Esa to go over the numbers with you. Esa?

Thank you, Steven, and good morning and good afternoon to everyone on the call. As I normally do, I will discuss the key elements of our results, and then I'll comment on our 2014 guidance.

Our second-quarter results again demonstrate our ability to improve things that are within our control, and to deliver a strong operational and financial performance even in the context of a challenging market. As Steven already mentioned, for the second quarter of 2014 we reported both net income attributable to controlling interest and adjusted earnings from continuing operations of $587 million, or $1.61 per diluted share. This compares with similarly adjusted earnings of $1.43 per diluted share in the first quarter of 2014. Consolidated revenues from continuing operations were $2.33 billion compared with $2.34 billion for the first quarter.

We had another outstanding quarter, with the total fleet revenue efficiency at 95%, slightly lower than the 95.7% achieved in the first quarter. Fleet utilization of 78% was unchanged.

Second-quarter operating and maintenance expenses decreased $56 million sequentially to $1.21 billion. This decline in O&M is mainly associated with lower costs incurred on rigs undergoing shipyard maintenance, survey and repair projects.

General and administrative expenses increased by $6 million to $63 million. The sequential increase was due to project-related legal and professional fees, and severance costs associated with the Company's organizational efficiency initiative.

Second-quarter annual effective tax rate from continuing operations was 12.6%, compared with 15.1% in the prior quarter. This decrease was a result of idle time on certain rigs in high-tax jurisdictions, as well as the movement of rigs between jurisdictions.

Net cash flow from operations increased $500 million from the first quarter, to $636 million. During the first quarter, we paid $472 million to the US government related to the Macondo agreement with the Department of Justice in 2013. Capital expenditures were $351 million, down from $1.1 billion in the prior quarter, due primarily to the timing of payments on our ongoing newbuild program.

I will spend a moment now reviewing our guidance for 2014, which is mostly unchanged. We still expect to achieve fleet revenue efficiency of approximately 94% for 2014. Our revenue efficiency results for the first seven months of 2014 were in excess of this guidance. However, as Steven highlighted, our progress may not be linear, and we have experienced somewhat increased downtime during the early part of the ongoing third quarter.

There is no change in our O&M guidance. We continue to reduce our operating expenses, and still expect full-year 2014 operating and maintenance expenses to be between $5.1 billion and $5.3 billion.

The shipyard activity disclosed in our July fleet status report represents our current best estimate of planned out-of-service time. As noted in the report, we expect the total number of out-of-service days to be higher in the third quarter, as compared to the second quarter. The periodic increase is mostly due to contract preparation associated with certain drilling contracts signed during the year.

Please note that even though we will have a higher shipyard activity than originally planned, we have still maintained our full-year O&M cost guidance. Regarding the second half of 2014, we anticipate a substantial increase in the total O&M expenses in the third quarter, as compared with second-quarter levels, with the fourth quarter returning to levels seen in the first and the second quarters.

We are very encouraged by the results of our cost reduction efforts, and to date, we have achieved most of our 2014 onshore target of $200 million, as measured against our 2012 cost base. Most of these savings are related to onshore personnel costs.

We are equally focused on performance and delivering further improved financial results at the rig level. We will continue to ensure that we have what it takes to operate safely and with operational integrity, in line with our standards, and regulatory and customer requirements, while constantly challenging our offshore cost structure. As we have emphasized in the past, these steps are expected to further improve our profitability and cash flow in 2014 and thereafter.

We now expect net interest expense to be slightly lower than the previous guidance, ranging between $450 million and $470 million, with capitalized interest expected to be about $125 million, and net income about $40 million -- I'm sorry, interest income about $40 million. The annual effective tax rate for 2014 is now expected to be between 14% and 17%, down from our previous guidance of 18% to 21%. The updated guidance reflects our results for the quarter, and an updated forecast for each of our rigs.

As a reminder, it also fully accounts for the changes associated with the new UK tax law signed in July, but retroactive already from April 2014. This new law and its impact are discussed in more detail in our 10-Q.

Our expectations for depreciation expense, G&A costs, and capital expenditures remain within the respective guidance ranges provided in May.

Regarding the balance sheet, we continue to work towards reducing our gross long-term debt to below $9 billion. Scheduled debt maturities for the remainder of 2014 are about $80 million. We expect to complete our $1-billion accelerated debt retirement program in the fourth quarter, with a final payment of about $210 million. There is no change to our liquidity target, which remains between $3.5 billion and $4.5 billion.

Last Thursday, ahead of our plans, we completed a very successful initial public offering of Transocean Partners, contributing net proceeds of approximately $420 million to Transocean. It is worth noting that the IPO was about 14 times oversubscribed, priced well above the range, and the stock started trading very encouragingly in the aftermarket. As a reminder, [this bake will] provides Transocean with financial flexibility, and supports our capital allocation strategy, including renewing the fleet. Reiterating Steven's earlier comments, I would also like to add my thanks to our world-class team for their efforts in this project.

Regarding Caledonia offshore drilling, the UK North Sea-focused drilling company announced during the quarter, we have no additional updates at this time. We expect to establish this new entity during the second half of 2014, and at an appropriate time, separate it fully from Transocean. We have maintained full flexibility to pursue all options, including the potential direct sale to a public or private buyer, a spin, or a public offering. Our objective is simply to maximize the value of these assets in the context of their capability, cash flow, backlog, and the unique market in which they operate. You should expect updates on our progress in the future, as appropriate.

To conclude, our efforts to reduce our costs, improve our operating performance, optimize the value of our non-core fleet, and the IPO of Transocean Partners all contribute to our financial flexibility, enabling us to continue to execute our balanced capital allocation strategy. Even in the context of the market challenges, we are confident in our ability to achieve these objectives, including our commitment to pay a competitive, sustainable dividend to our shareholders.

This finally concludes my comments, and I will now hand over to Terry to provide you with an update on market conditions. Terry?

Thanks, Esa, and good day to everyone. Year to date, we generated $1.4 billion of contract backlog, including securing contracts for the KG1, Jack Bates, and the Celtic Sea. In addition, we recently executed a rig swap agreement between the Sedco Energy and the GSF rig 135. We should be announcing more positive news on the 135 shortly.

We increased our contract backlog by 75% over the first quarter, demonstrating the Company's solid position in this very challenging market. Since our last call, the ultra-deepwater market outlook is largely unchanged.

Tendering remained slow during the second quarter, and while we see a few opportunities on the horizon in the golden triangle, India and Mexico, continuing delays in customer programs and a growing sublet market continue to put pressure on utilization. Thus, we will continue to see some idle time on rigs, and increasing competition on the few available tenders with the influx of more supply into the market in the near term. Of note: We are returning an idle fifth-generation rig, Sedco Energy, to active status in the Congo, and relocating the KG1 from India to Brazil.

Deepwater and midwater markets remained weak, but largely unchained, and as in previous oversupply cycles, the most capable rigs will compete down and displace lower specification units. We expect this displacement will result in some units being permanently retired as continued investment in this fleet may not yield the necessary economic returns over the remaining life of the asset. This is an industry-wide issue, and this will play an important role in the future supply-and-demand picture.

The premium jack-up market remains steady with regards to rates, utilization and tendering. However, the large influx of uncontracted newbuilds will challenge the less capable units, and we are likely to see pricing pressure in the future from the increasing competition. Longer term, we remain positive on the fundamentals of growth, and we will strategically pursue every opportunity for the utilization of our assets in order to be in position to take advantage of an improving market.

Now to the quarter: Utilization for the global ultra-deepwater fleet is currently around 97%, with two existing and one newbuild rig available, including our rigs, Discover, Spirit and the GSF development driller 1, which we are actively marketing and hope to have positive news soon.

During the quarter, we were awarded a contract in Brazil for the KG1 for three years at $440,000 per day, and we will be relocating the rig from India later this year. We have a long history in Brazil, and an excellent relationship with Petrobras, and we view Brazil as a long-term growth market, thus we were excited to receive one of the two awards resulting from this exercise. In addition, we recently contracted to swap 200 days of backlog from the GSF rig 135 to return the Sedco Energy to the active fleet in the Congo.

The pace of tendering continues to be slow for the deepwater market, and marketed utilization has dropped below 90%. In July, we signed a contract for one well, plus a one-well price option in Angola for the GSF Celtic Sea at a rate of $337,500 per day. We also received positive news on the Jack Bates with a new contract in Australia for two wells, approximately 140 days, at $420,000 per day. Midwater and harsh environment tendering activity also remained slow in the second quarter. In Norway, the recent cancellations and suspensions of competitor contracts, coupled with a robust sublet market, are leading us to evaluate opportunities outside of Norway for our Norwegian rigs available in 2015.

Outside the North Sea, we are seeing some long-term demand coming to the market in India, with an expected tendering opportunity for four midwater semi's. Utilization and day rates for premium jack ups remain stable due to demand in Angola, Mexico, India and southeast Asia. We expect demand to remain high through 2014, and anticipate that the uncontracted newbuilds will be absorbed by the market through 2014.

In the medium term, we expect that the influx of supply of premium assets will put pressure on standard rig utilization and pricing to which we have no exposure. Longer term, we expect demand for energy to be strong, and our customers will pursue reserve of placement and production growth. As a result, we expect that the oversupplied market will improve to a more favorable balance. As this plays out, our backlog of $25 billion provides us with the flexibility to weather the current challenges, and position ourselves for the eventual increase in demand for offshore drilling equipment, providing opportunities for our 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, Chanel, we are ready to open it up for Q&A.

(Operator Instructions)

Angie Sedita, UBS.

Morning.

Morning.

Steven, this is a tough question, but I would really appreciate any thoughtful answer to it. As the CEO of Transocean, and if you had to choose between an investment grade rating and maintaining your current dividend, what do you think is more important to you and the Board?

Well by starting out by asking a tough question and asking for a thoughtful response, you've set me up.

Sorry.

Fortunately, Angie the decision is never that simple. It is never a binary trade-off. We've talked over the last several quarters about the various levers that I think the Company has to pull before we start thinking about pulling the dividend lever.

So, we will continue to evaluate the Company's ongoing investment in new build drilling rigs. We'll evaluate the Company's investment in our existing fleet. We'll evaluate the strength and quality of our balance sheet and the opportunities available to us, and we'll put all of that in the context of our outlook for the business, and we'll ask the Board to engage in a thoughtful review over the coming months. And, in anticipation of the May 2015 annual general meeting, make a decision on the dividend.

But as both I and Esa commented in our remarks, we are committed to maintaining a competitive and sustainable dividend so that is very important to the management and the Board.

Fair enough. I'll turn it to Terry. Terry, obviously you outlined what we are seeing in the market today, and we are seeing limited tenders and still two years of heavy supply coming into the floater market.

I know it's early. But, just in theory, in what you are seeing today in the market, when do you think we would have the first opportunity of having a truly balanced market for floaters? Do you think it is in 2016 after the floater deliveries are behind us? Or, potentially even later and when you really need to see the IOCs come back?

Angie, that is a really good question. To give you a really crisp answer, I think it depends on a lot of the demand that we are seeing forward in the future getting to the market quickly. That is going to predicate when this turnaround occurs.

There is a lot of opportunities, as we have talked about in numerous calls, in west Africa, and we are starting to see a bit more of that being executed which we find is encouraging. But, there is a lot more opportunities out there that we need to come to the market so that we can see in front of us when that turn is going to happen.

Also, we believe that we are going to see some incremental demand coming from Brazil. And then, we also like the news that we have recently seen in India, with them coming with four tenders and a deepwater tender. The conversations are percolating, but I think it's a bit early to say -- put your line in the sand and say this is when it's going to happen. But, it's going to happen. That is one thing that we know is going to happen. So, we like some of the things that we are seeing, but again, it is a let's wait and see how this plays out.

Then, as a follow-up to that, what level of tenders do you think you really need to see to have confidence that the IOCs are coming back?

Well, I think there is a lot of people are out negotiating right now, on their programs. We are in active negotiations, too. It's just taking time for these contracts to conclude. So, I think we are going to have positive news there, and you'll see in the customer base -- you'll see the folks that are really focused on getting back to drilling.

I think that we certainly can't talk about it now because everyone is out there trying to undercut each other and step into the shoes of where we are today, but we are encouraged by that. So, I think it's, again, it's a wait and see to see how they are behaving. But certainly, they are improving their cash flows now, so let's hope that's continuing good news and they get back to the market.

If I could ask, sorry, one more, Steven, is on the Caledonia of more to come. But, on the 21 midwater floaters that you have up for sale, given current market conditions, which are certainly likely to persist in the midwater market --.

Chanel, we've lost the feed.

I'm sorry, Ms. Sedita -- I'm not sure if her line went out. Greg Lewis, Credit Suisse.

Thank you. Good morning. So, I was reading in the 10-Q this morning, and it was out yesterday in upstream about Petrobras and potential withholding taxes. If you could explain about what that is. As I read in the note, it looks like it is just pertaining to 2008 and 2009, and it doesn't look like it is impacting more recent or future revenue streams?

If you could just provide color on what is going on with that? Clearly, you are denying -- or are going to fight this vehemently. But, just a little bit of color around that and what this actually means, if anything?

A little bit difficult to comment too specifically, Greg, this is a bit of an evolving situation. But, I will say that I think the Company has very strong contractual provisions in place. So, Terry talked about the strong relationship with Petrobras, which I will reiterate, but I will say we will resist the efforts to retroactively impose additional costs on us when I think our contract is pretty clear.

Okay. But, it's just 2008 and 2009? As the -- in the report?

That's the starting point, yes.

Okay. And then, another question. I believe you mentioned in the past that ideally Transocean wants to have a cash balance of about $1.5 billion to fund the fleet, working capital. Is there maneuverability to change that? Or, is that a hard-and-fast number where that is the cash on the balance sheet that Transocean requires? I guess that's for Esa.

Yes. Thanks, Greg. It's probably for me indeed. That is not anything other than a comfortable level of cash on balance sheet that allows us to operate the Company in different parts of the world without any short-term funding needs. There is nothing more to it. It's flexible. It can be less than that. It is just a comfortable level.

I imagine that is a function of the fleet. So, depending on the size of the fleet, there's maneuverability around that?

It's partially a scale. It's partially an issue regarding where we operate and how much trapped cash we've got regarding different tax structures and different restrictions on dividend distributions and so on, but generally speaking, it is a scale issue. If scale goes up, you would expect that to go up a little bit. If the Company becomes smaller for whatever reason, at least in theory, that would reduce a little bit. But $1.5 billion is a very comfortable level of cash on balance sheet, and as I said, there is flexibility there.

Okay, thank you very much.

Ian MacPherson, Simmons.

Thank you. Terry, I guess you might have said this. But presumably, the 135 goes to cold stack here? Can you update us on any other additional stackings that are more likely now than what you were contemplating last quarter? Or, is that the only one?

Ian, I actually said in the prepared notes that we hoped to have positive news on the 135 very soon.

Got it. Okay. So, the rig swap less the prospect for the 135 is additive? Got it.

Esa, based on the first half and your indication that the fourth-quarter costs should look pretty similar to Q1 and Q2, we would probably prefer the lower end, the lower half, perhaps of your full-year cost guidance, is that --? Are you comfortable with that?

Ian, that is a [cunning] question. I would definitely, actually prefer a number below the range. But, the reality is the range is a good range, and it actually accommodates for what we see coming our way during the second half of the year. Quite importantly, as I tried to point out, we do have some incremental contract prep work and other things that actually are adding to our expenses as opposed to our original guidance. But, as you heard me say, we reconfirm our original guidance, and we will absorb through our cost management efforts any incremental pressure we've got regarding those additional activities.

So yes, I'm squarely with you on that one. Definitely, lower is better. But, we manage this over time, as you have heard from us many times, we have to maintain safe operations and operational integrity whilst we do this, and therefore, we have given ourselves -- I think most people have appreciated that time over a period of a couple of years to really restructure our cost base. And, that's work in progress still. You'll hear more towards the end of the year as well as during next year.

Okay. Understood. Thank you very much.

Thanks, Ian.

Byron Pope, Tudor, Pickering, Holt.

Just had a question on your outlook with regard to the deepwater Gulf of Mexico. I think I heard you say in the prepared remarks, it felt like there were some opportunities for the development driller one. As you think about the few rigs you have there that are rolling off in coming months, coming quarters, do you like the odds of those rigs staying in the gulf? Or, how do you think about the prospects for those three rigs in the gulf in 2015?

Well Byron, I think, generally, we are again in discussions with our Gulf of Mexico customers. And, I think you are going to see a couple of one-off exploration wells that are going come to the market. We are certainly going to be poised to take advantage of that with the fleet that we have currently in the Gulf of Mexico. We are bidding our fleet globally. So, any opportunity we have to put these rigs to work and keep our utilization high is what we are going to do. So, that would include relocating these rigs out of the Gulf of Mexico.

Okay. And then, just an unrelated follow-up. In looking at the 2015 planned out-of-service days, very little planned for the midwater fleet, assuming -- relative to prior years -- and assuming that is just a function of looking at that class of your fleet, not necessarily being a part of the long-term core portfolio. Is that a reasonable way to think about it?

I'm not sure that it necessarily reflects the fact that we don't consider those rigs to be part of our core long-term portfolio. The more granular you get with respect to the fleet, the more lumpy the out-of-service time becomes. So, particularly with respect to our North Sea midwater rigs, we are coming out of a couple of years of intense shipyard activity on those rigs and the next couple of years don't have a lot of shipyard activity on the North Sea midwater floater fleet. If you extrapolate that to the entirety of the midwater fleet, you do see a little bit of lumpiness that is just the normal outcome of managing rigs over the course of a five-year inspection cycle.

That is helpful. Thanks.

David Smith, Heikkinen Advisors.

Good morning, thank you.

Morning, David.

Terry, on prior conference calls, you provided day rate ranges around the marketing outlook. I didn't catch any commentary around rate levels during your remarks, and I was just wondering if those thoughts might be available?

David, sorry about that. The rate ranges really hadn't changed much since we last reported, and we really haven't seen a lot of fixtures. But, we had previously reported and certainly in our last presentations on the road, I think the ultra Deepwater ranges reported were $375,000 to $500,000. Deepwater was around mid-$300,000 to $400,000. Midwater was, I think, around mid-$300,000 to $400,000 in the harsh environment and the low $200,000 outside of the [UK].

Totally appreciate it. Just to confirm, with the backlog transferred from the GSF rig 135 to the Sedco energy, would that be kept at the same day rate that the 135 was at, I think $365,000?

Well, it's going to go -- it is going to be dependent on if it is in DP mode or shallow water or Deepwater mode. The rate is going to be around the same. If we do more Deepwater work, the rate will increase about $10,000 a day.

To offset the costs with the fuel? Appreciate it, thank you. Real quick follow-up.

I know it is an evolving situation, just wanted to ask if you have a strong view on, regarding the potential Petrobras back tax assessments and their attempt to pass those on. Wanted to ask if you have a strong view on which court would have jurisdiction if that was pursued? And, whether that would be Brazil or US?

It is a little bit too early to start thinking about litigation in that context.

I appreciate that. Thank you very much.

Mike Urban, Deutsche Bank.

Thanks, good morning.

Good morning, Mike.

Obviously, you have talked repeatedly about continuing to high grade the fleet and moving away from the midwater market. But, for the time being yet you do have those assets and continue to manage them. Especially in the context of thinking about potentially monetizing them or selling them, if you do see some of the pressure that you talked about in terms of higher spec rates, competing down.

How do you think about those assets in terms of your ability or willingness to continue to work them at marginal profitability if it comes to that? In the past, you might have stacked that kind of asset. Would you keep working that to maintain value forward? And, just how you think about those assets to the extent you still have them and as we see this market potentially grind lower in the short-term?

Probably a really unsatisfactory answer for you, Mike, but it all depends. We will evaluate it on an asset-by-asset basis. When we think we have an asset that is likely to survive this current downturn and be a productive and profitable asset coming out, we are likely to try and maintain the utilization on that rig.

If, on the other hand, we think the asset is truly approaching the end of its life, we are likely to take a different decision. If the economics don't support continued operation of the asset in the near term, then we'll make a decision to either try and scrap the asset ourselves or attract some kind of a third-party offer that would allow us to reduce our exposure to that kind of an asset. So, it all just depends on our long-term view of the asset. And, the fundamental thesis that this is a cyclical business, and we'll see some cyclical recovery in the future.

Got you. The rest of my questions were answered. Thank you.

Thanks, Mike.

David [Batty], Plateau Bank.

Thanks for taking my question. It is related to the cost side. And, it's obvious that the costs have come down significantly since the level we saw in 2013. Quite sharply, actually. I was wondering -- I think this is for you, Esa, if you could share some highlights or just your thinking around how the 2015 cost side is going to look? How much more potential there is on the cost-cutting strategy? Thanks.

Yes, David. Thanks for the question. First of all, you can see -- and thanks for, by the way, recognizing that we've done a lot of work in this area and it has been quite successful. Beyond what we've achieved this year, we basically continue doing more of the same so as we have guided in the past, or outlined in the past, we should have about two-thirds completed with our onshore cost initiative in 2014. You remember the original number -- the total number was minimum $300 million. This year, two-thirds of that will be delivered so mathematically you've got another $100 million to go in 2015.

We are working really hard on our offshore cost structure as well as you heard from the prepared remarks. There's more opportunity there, and particularly the optimization of our shipyard execution provides further improvement opportunities going forward. So, there's more to come, but we haven't guided for 2015. That will take another few months before we do so.

It definitely won't stop in 2014. It will continue. As a matter of fact, our optimization efforts and opportunities to further improve our cost structure will carry us beyond 2015 as well. It won't stop there either. But, that's really all I can say in the absence of official guidance on the matter.

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

Jason Gilbert, Goldman Sachs.

Thanks for taking my question. I wanted to circle back to Angie's first question about the investment grade rating. You have said for a long time that it's important to you to be IG in part because your NOC customers require it. But, a number of your competitors like Seadrill are not IG rated, or not rated at all, and deal with the same customers. So, I was wondering, has your thinking on this changed at all?

I would tell you, Jason, as a starting point, we believe that financial flexibility in a cyclical industry is a competitive advantage. And, part of our approach to maintaining and enhancing our financial flexibility is represented by having a strong balance sheet.

And, we have taken other actions to support and enhance that as well. The recent IPO of Transocean Partners is an integral component of enhancing our financial flexibility. So, we still believe that as a fundamental premise. Financial flexibility is reflected in the strength of our balance sheet in the strength of our balance sheet is reflected in our investment grade credit rating.

Thanks. One more, maybe this is for Terry. You had alluded in your comments to some Deepwater developments slipping to the right a bit. I'm just curious as to what you think is driving this? Because crude prices we know have been relatively stable. What are you hearing on that front?

Well, I think it has been a lot of public commentary, and certainly some of the discussions we have had with our customers is they have got to prepare their balance sheets and focus on capital allocation and return to shareholders. They are taking a pause, and it's a timely pause. With the supply coming into the market, so they are going to see -- be able to reduce their costs on their development programs later on. But, we think that that comes -- that demand is going to come back to the market. But, that's what we hear they are focused on, and we are seeing it.

Darren Gacicia, Guggenheim.

Good morning or good afternoon, depending on where you may be.

Good morning.

I wanted to ask with regard to the cost improvement program, I understand that a large part of its a structural issue with regard to centralizing decision-making maybe to a greater degree where formerly things were a bit more regionally controlled, if you will. When I think about that with regard to Caledonia, considering I think part of the way that may look may include some of the onshore facilities in Aberdeen and the rest. How do we want to think about the part of the cost structure that maybe goes with the rigs with the Caledonia offering? Can you give us any color on how that looks so we can think of things going forward?

Darren, our approach to thinking about and structuring and separating Caledonia will be heavily influenced by what we learned as a result of the shelf transaction. I think we were pretty successful in establishing the entity and assisting the folks at shelf drilling with creating the kind of infrastructure they needed to be able to support the fleet the way they wanted to operate.

We'll do the same thing with the Caledonia management team. We feel like that is an extremely strong business today. That business is supported by a lot of infrastructure and back office support services there in Aberdeen. So it will be a bit of a process to go through with the Caledonia management team to identify what they need in order to operate the rigs according to their operating philosophy. So, it's a bit difficult to tell you exactly what that's going to look like until we get fully engaged and embedded in that process with the Caledonia management team.

Understood. Second, for Terry. I'm trying to get a sense thinking about your comments over the last several quarters where you have been early and right on the pause or push out of activity. Are you starting to get -- relative to the commentary we have heard on recent calls. Are you starting to get more optimistic, or are you feeling about the same? It seems like in your comments there are a couple of green shoots relative to how you felt before. I don't want to put words in your mouth, but I just wanted to ask you directly so I fully understood the nature of your comments.

Thanks, Darren. I think we have a consistent view. Nothing has really dramatically changed as far as how we've called the market and how we see it today. So, I can't say that -- I like your description of green shoots though. I'll probably use that again.

But, we are encouraged, I would say, because in this very challenged market, we are still able to put our rigs to work. I think that speaks certainly to our operational folks in the field and all the efforts that go into making sure our customers are satisfied. So, I think that speaks for itself. And, we are going to continue to fight for the green shoots, but again our view of the market really hasn't changed.

Okay. Thank you very much.

Harry Mateer, Barclays.

Hi, thanks. My first question, Esa, can you give us a sense for how you think working capital is going to flow in the second half of the year, given that it consumed over $1 billion of cash in the first two quarters?

Yes, we don't necessarily guide on -- we don't normally guide on working capital. But, end of second quarter, working capital level was higher than it should be and it will be. And, that's because of a few things that we actually know quite well. For instance, payables was exceptionally high as a result of certain movements since the beginning of the year, particularly on the shipyard side of things. So, you should expect that number to go up actually during the coming months.

Receivables, there is not an awful lot there. And then, on the inventory side, we've actually continuously added some critical spares to our inventory worldwide, and that is something that we continue to optimize towards the end of the year.

Okay. And then, I don't know to beat a dead horse on the dividend or the credit ratings, but I'm sure you are aware of the concerns out there and some of these estimates that have been put out there in terms of fairly low EBITDA numbers over the next couple of years. I'm just trying to get a sense for, given that, maybe a firmer comment on the credit rating priority. I think the first couple of answers were mixed, and I totally understand the sensitivity around the dividend.

Just give us a sense for -- not just to get to the dividend, but how do you consider the potential real tangible costs of falling to high yield? Given your debt maturity schedule, given the fact that you do have coupon steps in some of the bonds. How do you weigh that against all the options the Company can potentially pursue in the next couple of years?

It's Esa, Harry. I'll give Steven a pause because he tried to address these issues already during the previous discussion. But so, the immediate impact if we lose our investment grade rating isn't all that dramatic. It adds a little bit of cost to our existing debt profile. We've got billions of dollars of bonds out there so it would obviously add a little. It is not a key driver -- access to capital over a longer period of time. Strong balance sheet, allowing us to benefit from opportunities that a cyclical industry brings along more important than that.

And, of course, the current market conditions will have an impact on our operating cash flow. But, at the same time, we are adding financial flexibility. We are improving our operations, and we believe that the balanced capital allocation that we have outlined and we are committed to -- we can actually deliver on it.

Okay. Then last, you mentioned a little bit more debt reduction in the fourth quarter. Are there any other ways to perhaps accelerate some debt reduction beyond what you have identified so far in the next couple of quarters?

It will be fairly costly if we further accelerate that. That's why we've chosen actually this method of optimizing our balance sheet. So, we committed to this $1 billion accelerated reduction.

It will be completed by the year-end in line with our earlier communication and commitment, and thereafter we will continue to reduce our debt level in line with debt maturities as and when they occur. And, current mathematics will take us to a level around $9 billion or below by the end of next year or beginning the year thereafter. So, we don't have to do anything magical to deliver on what we've promised to do, and the commitment is still there to just continue doing that and delivering it.

Okay. Thank you.

Thanks, Harry.

Shyam Kumar, TT international.

Thank you for taking my question. Can I ask in terms of the ultra-Deepwater market, do you think there is scope for pricing to bifurcate between the new builds versus the old builds? I.e., will new builds hold pricing better vis-a-vis all the rigs please?

We are currently seeing in the market that there is a bifurcation occurring between higher spec equipment and lower spec equipment. This is nothing really new in how we have experienced the market over historical periods. There is a bifurcation. When there is an oversupply, that bifurcation becomes more pronounced. That is really where we are today in the market. There definitely is a bifurcation. That will continue until we get back to a market balance in the future.

Thank you.

(Operator Instructions)

[Dominick Frantius, Dubrose].

A follow-up question, and I understand it is an evolving issue around the Petrobras tax issue. You said the year 2008, 2009 is just the beginning. You put a number to it, $128 million. The reports today suggest that it could go back as far as five years. Could you give us some estimates if that really was to be extended to five years, what the impact would be? That's just a follow-up to Petrobras.

Then, could I ask you about the cash flow profile going forward? You burned about $1.1 billion in cash in the first half. You benefited from lower tax and lower OpEx, and a higher contract coverage. So, if this rate continues into, then you've got about within a year's time, you have no cash on the balance sheet left, given that going forward, you will have paid higher OpEx and higher tax and lower contract coverage. So, how do you think about the cash flow profile of the group in this environment?

And then, the last question is the risk of asset impairments. We have seen one of your competitors taking quite a sizable impairment on their assets. How do the current market rates compare to your assessment and expectations? When you do your NAV for the different rigs you employ, are they still [a bust]? What do you expect the rates to be, or are we getting to levels where asset impairments become more likely? Thank you.

Dominick, you made this a bit of a challenge by asking a three-part question. I'll take part one because I think it's the easiest, and then Esa can respond to part two and part three.

What we have disclosed in our Q with respect to the Brazil tax issue is what we have disclosed, and the way I have answered the questions this morning is the way I'm going to answer the questions. It is an evolving situation. We think we have excellent contractual provisions. The amount we have disclosed relates to 2008 and 2009 because those are the only years that have been assessed against Petrobras. As this situation develops, we'll continue to keep the market informed, and that's really all we are going to say about it at this point.

Dominick, it's Esa Ikaheimonen here. Challenging question, particularly the second one, the cash profile one because it really would require a different forum, a different discussion. It comes very close to modeling and a little bit beyond what we have guided the market with. As I said earlier, the market is challenging, and that obviously makes the situation a little bit less straightforward.

But, at the same time, if we look further forward through 2015, for instance, we've created a lot of additional flexibility with the MLP. We've got a healthy cash balance at the moment. We've got very significant level of liquidity that we can leverage if that's required. Our operations are improving all the time. Quarter after quarter, we do better, and we expect to continue doing it this way. So, put that all together, and there is a lot of elements that actually will help us to absorb the challenges that the marketplace imposes on our cash flow. And, that's probably all I want to say about it.

Further more, if you really within to study this, our 10-Q is actually a pretty good media for it. It does include a fair amount of intelligence around that issue. And, I would suggest and I would like to refer to that for further information.

In terms of the impairment, that is an interesting and that is a thoughtful question as well. I should also refer to the Q. I think it is page 38 of the 10-Q, that actually gives you a lot of insights. But, I'll give you a summary of that. As you would expect, we test our assets and our [goodwill] for impairment on a regular basis, and we will repeat that exercise as and when appropriate.

Clearly, the market conditions, share price depreciations have added some scrutiny to that. But so far, we've passed all the tests. And, don't want to go into the technicalities, because they are really covered by the 10-Q. And, I would really like you to just have a look at that and perhaps we can have another conversation about those technicalities, if it's not clear from the Q. It is quite transparent. You won't find too many Qs actually explaining impairment better than that one.

Okay. Can you just -- I think you mentioned it before. The minimum cash level you require to run your operations? What was the number there?

The comfortable level of cash on our balance sheet is about $1.5 billion. As I said earlier, it's not a magical number. We can go below that, periodically. We've got $3 billion of liquidity available to us through a committed revolving credit facility that was very recently put in place, with very favorable terms, actually. So, there is nothing particularly magical about that number, and we've got a whole lot more liquidity than that.

Thanks, Dominick.

David Smith, Heikkinen Advisors.

Thanks much for letting me circle back in. Wanted to ask, given the large number of the fifth-gen rigs that become available between now and November -- I think I count about 10 backing out the Sedco express? Was just wondering what initiatives you could pursue to reduce the daily idle costs for that fleet if it does experience a prolonged increase in idle days? And, how low could you get that daily idle cost down compared to the in-service costs?

There are some things you can do with respect to the crewing. Forcing people to do their training on their off time rather than their on time. Sorry -- forcing people to do training on their on time rather than their off time. That helps you reduce the cost.

The challenge with the fifth-generation rigs is they are almost exclusively dynamically positioned. They don't have very robust mooring systems typically. The idea of trying to put a fifth-generation rig up into cold stack status in sheltered waters is a real challenge, an operational challenge. Keeping the dynamic positioning system operating so that you can keep the rig somewhere in sheltered waters without the benefit of a mooring system does entail a certain amount of cost. So, I think you could do a lot to reduce the costs. The challenge is -- the fact of the matter that you can't put those rigs into cold stack status because of the absence of a robust mooring system.

When you talk about the ability to do a lot to reduce costs, are we talking about a 20% reduction? 50% reduction?

I think immediately we start looking at something like 10% to 15% to 20% reduction pending the award of a new contract. If we really decide that the rig is going to be long-term idle, we think we can get it down to about 50%.

Okay. That's very helpful. Thank you.

Thanks, David.

There are no further questions in the queue at this time. I would turn the conference back to Mr. Newman for any additional or closing remarks.

Thanks, Chanel. Thank you all for joining us on the call today. Appreciate your interest in the Company, and we'll talk to you on the third-quarter results call.

That does conclude today's conference. Thank you for your participation.