Transocean Ltd (RIG) 2014 Q4 法說會逐字稿

Good day and welcome to the Transocean Q4 2014 earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to your host, Mr. Thad Vayda. Please go ahead, sir.

Thank you, Paula. Good day and welcome to Transocean's fourth-quarter 2014 Earnings Conference Call. A copy of the press release covering our financial results along with supporting statements and schedules including reconciliations and disclosures regarding non-GAAP financial measures are posted on the Company's website at deepwater.com.

Joining me on this morning's call are Ian Strachan, Interim Chief Executive Officer and Chairman of the Board of Transocean Limited; Esa Ikaheimonen, Executive Vice President and Chief Financial Officer; and Terry Bonno, Senior Vice President, Marketing. 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. Such statements are based on the current expectations and certain assumptions of Management are therefore subject to certain risks and uncertainties.

Many factors could cause actual results to differ materially. Please refer to our SEC filings for more information regarding our forward-looking statements, including the risks and uncertainties that could impact our future results. Also please note that the Company undertakes no duty to update or revise forward-looking statements.

Finally, to give more people an opportunity to participate on this call, please limit your questions to one initial question and one follow-up. Thank you.

I'll now turn the call over to Ian Strachan. Ian?

Thank you, and welcome to our employees, customers, investors, and analysts. We very much appreciate your participation on today's call. I will make a few opening remarks and then we'll hand over to Esa and Terry to discuss Transocean's fourth-quarter results on current market conditions and to respond to any questions you may have.

First, I would like to thank our employees for their extraordinary efforts in delivering yet another quarter of solid performance. As you saw from our earnings press release, we reported adjusted net income of $344 million or $0.95 per diluted share. In the context of a very challenging marketplace, our fourth-quarter results reflect our continued focus on utilization, revenue efficiency and cost control.

Last week we announced that the Board of Directors and Steven Newman mutually agreed that Steven would step down as CEO. On behalf of the Board of Directors and all of Transocean's employees, I want to thank Stephen for almost 21 years of service to the Company and, during his five-year tenure as CEO, his outstanding leadership in what was unquestionably the most challenging period in the Company's history.

As CEO, Stephen initiated and oversaw a central changes that have and will continue to improve Transocean's fleet, operations, cost structure, and long-term competitiveness. As a result, the Company is well-positioned to weather the current industry downturn and emerge even stronger. The Board has formed a search committee and is urgently working to identify Steven's successor.

I want to assure all of our stakeholders that we remain focused on continuing to improve Transocean's performance and that our strategic initiatives remain firmly on track. There will be no change in our approach to managing an increasingly commoditized capital-intensive and cyclical business.

Management will continue to take actions necessary to create value for our stakeholders over the long term. These include: executing our disciplined and balanced capital allocation strategy, making accretive value-creating investments in the business, paying a competitive and sustainable cash distribution to shareholders, and maintaining a strong flexible balance sheet as characterized by an investment grade rating on our debt. With respect to the latter, while we are disappointed with Moody's rating action, and disagree with its conclusions, we will continue to take the appropriate actions to create long-term value.

Consistent with these objectives, the Board is recommending that shareholders approve the US dollar denominated dividend of $0.60 a share out of additional paid-in capital. This and other recommendations will be filed in our proxy statement in March. Shareholders will vote on the agenda items at the 2015 annual general meeting on May 15.

Turning to our current operations, as of February 17, the date of our recent fleet update, our backlog was approximately $21.2 billion, providing a stable and visible foundation for cash flow generation. We also discussed that we amended our construction contracts with Keppel FELS to delay the delivery of five newbuild high specification jackups by approximately six months each and to extend the delivery dates of each rig.

The first of the jackups is now expected to be delivered in the third quarter of 2016. This shift enhances our financial flexibility without compromising our fleet renewal objectives. We will continue to dispose of non-core rigs.

Over the last several months, the Company has announced that it has already scrapped or intends to scrap 12 lower specification floaters in an environmentally responsible manner. We are constantly evaluating the long-term economics of our fleet and may identify additional rigs for sale or scrapping.

Finally, Transocean recently received another favorable ruling in the ongoing Macondo litigation. The Texas Supreme Court concluded that BP is not entitled to insurance coverage under certain Transocean policies, for damages arising from subsurface pollution, because BP not Transocean, assumed liability for these claims. While this does not provide a final resolution, we remain confident in the merits of our case and anticipate a successful conclusion of this matter late in 2015 or early 2016.

Esa will now provide you with some additional comments on the Company's financial performance. Esa?

Thank you, Ian, and good day to everyone on the call. I will discuss the key elements of our Q4 results and then comment on our 2015 guidance. For the fourth quarter of 2014 we reported a net loss attributable to controlling interest of $739 million or $2.04 per diluted share.

These results included $1.083 billion or $2.99 per diluted share in net unfavorable items. Excluding these items, as Ian already mentioned, our adjusted net income was $344 million or $0.95 per diluted share generally, in line with the prior quarter. Net unfavorable items included a non-cash charge of $992 million for impairment of goodwill and $148 million related to primarily the impairment of eight drilling rigs that we intend to scrap.

As you recall in our last quarter's commentary we indicated that the deteriorating market conditions could result in additional goodwill impairments. As a result of these recent adjustments, we have no goodwill remaining on our balance sheet. Other net favorable items of $57 million or $0.16 per diluted share are associated with discrete tax benefits, loss on retirement of debt and some other items.

Next I'll cover our operational performance for the quarter. Consolidated revenues decreased by $33 million sequentially to $2.24 billion due to lower utilization on some of our ultra-deepwater floaters as a result of the increasingly challenging market. Significantly improved revenue efficiency of 95.3% versus 92.6% in Q3, lower out of service time and a full quarter contribution from the Deepwater Asgard and the Deepwater Invictus, the latest additions to our ultra-deepwater fleet largely offset the revenue impact of the increased idle time.

Fourth-quarter operating and maintenance expenses decreased $8 million to $1.31 billion, consistent with our guidance. Our full-year 2014 O&M costs of $5.1 billion came in at the low-end of our latest guidance range of $5.1 billion to $5.2 billion. G&A increased by $10 million to $62 million, primarily as a result of certain expenses associated with our cost reduction initiatives and higher costs related to Transocean partners.

Fourth-quarter annual effective tax rate was 26.5% versus 24.8% in the prior quarter. Fourth-quarter income tax expense included an unfavorable charge of $36 million, $0.10 per diluted share, reflecting the increase in the annual effective tax rate to 18.7% for 2014 from 16.7% for the nine months ended September 30, 2014. The increase is primarily associated with foreign currency losses on deferred tax assets denominated in Norwegian krone.

We ended the quarter with approximately $2.6 billion in cash and cash equivalents, down by $238 million. Cash generated by operations of $566 million was offset by capital expenditures of $318 million, debt repayments of $221 million, including $207 million associated with the completion of our $1 billion accelerated debt retirement program and, finally, $272 million for the third installment of the 2014 dividend.

I will now spend a few moments updating our guidance for 2015. Given favorable fleet operating performance throughout 2014 and so far this year, there's no change in our 2015 revenue efficiency guidance. We expect to achieve our target of 95%. Other revenues, which primarily include reimbursables, are expected to be between $115 million and $130 million. We currently estimate our full-year 2015 operating and maintenance expenses to be between $4.5 billion and $4.7 billion. This represents about 8% to 12% reduction net of inflation over our full-year 2014 O&M costs and reflects our intense and continuous focus on cost management across the Company.

The decrease in 2015 O&M costs as compared with 2014 is primarily due to the following. Firstly, a reduction in expenses associated with idle and spec floaters as well as the divestment of our assets held for sale. And secondly, cost reductions associated with our onshore and offshore initiatives, including continued optimization of our out-of-service expenditures.

Both of these comprise about half of the total estimated year-over-year cost reductions. Some of the savings are offset by a full year of operations on our two newbuild ultra-deepwater floaters which commenced operations in mid-2014. Due to seasonality as well as the number of planned shipyard days as noted in our recent fleet status report, we expect O&M costs in the first half of 2015 to comprise about 55% of the total for the year. We remain focused on operating performance and delivering consistently improving financial results on each of our rigs. Likewise, we're committed to scaling down our cost structure to align with lower activity levels.

We'll continue to aggressively reduce costs by quickly moving rigs with limited options for follow-on work to stack condition and scrap non-core rigs that we conclude are no longer economically viable. We also maintain an extremely disciplined approach to shipyard expenditures and we'll defer most projects associated with rigs lacking firm backlog. As we have emphasized in the past, these actions are expected to improve profitability and cash flow over the next several years.

We expect depreciation expense to be between $1 billion and $1.2 billion. We forecast our G&A expenses in 2015 to decline to between $200 million and $215 million, a reduction of 8% to 15% net of inflation, primarily due to our successful cost reduction efforts. We expect interest expense net of interest income and capitalized interest to be between $400 million and $450 million. Capitalized interest and interest income are expected to be approximately $130 million, and $20 million, respectively.

Our 2015 annual effective tax rate from continuing operations is expected to be within the range of 19% to 21%. This expedition reflects an updated forecast for each of our rigs as well as includes known changes in legislation and relevant tax treaties. As a reminder, as pretax income decreases, the annual effective tax rate will generally increase. We expect our 2015 capital expenditures to be about $1.8 billion including $1.3 billion associated with our newbuild program.

Regarding the balance sheet, we continue to work towards reducing our gross long-term debt to below $9 billion; scheduled debt maturities for 2015 are about $900 million. As a result of our focus on cash management, we have reduced the minimum amount of cash required to manage the Company by $250 million to $1.25 billion. With additional optimization ongoing, we believe we can reduce this further. Our targeted liquidity range is therefore also reduced and is now $3.25 billion to $4.25 billion, including our undrawn $3 billion revolving credit facility.

We're also taking other measures to optimize our medium term capital obligations. We announced on February 15th that our Board of Directors resolved to propose a significantly reduced dividend of $0.60 per share to shareholder consideration at the upcoming AGM. Additionally, as Ian already discussed, we have deferred the delivery of our five newbuild jackup rigs by six months each and extended the time between deliveries to six months. We will take additional steps as necessary to ensure that we retain adequate balance sheet flexibility.

Transocean Partners also remains a key component of Transocean's financial structure and balance sheet flexibility and we expect to continue to develop it. While the value of the Company's units have declined significantly with oil prices along with those of other similar companies, there's no change in our commitment and we will keep you up-to-date on our plans in this regard.

To conclude, you should expect us to remain very aggressive in our efforts to reduce our costs, improve our operating performance and optimize our capital expenditures to increase our free cash flow. To create value for all our stakeholders, we will continue to adhere to our disciplined balanced approach to capital allocation as delineated by Ian, in his remarks.

This 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. The market continues to be very challenging as we begin our journey into 2015. The low commodity price environment, significant reductions in our customers budgets for offshore spending, and overcapacity in the global floater fleet are negatively impacting the floater and jackup markets globally.

Despite these challenges, we booked $2.7 billion of contract backlog in 2014, including contracts for the Sedco Express, Development Driller I and the KG2. In addition, the option on the [jackup] space was exercised in Australia while the Transocean Searcher received a one-well contract in Norway.

We've added over $500 million in contract backlog since the last call, generally in line with what we delivered in each of the first three quarters of 2014, and demonstrating the Company's ability to continue to deliver value even in these unfavorable market conditions. Our backlog as of February 17th is $21.2 billion providing the foundation that will help us weather the storm until we get to a stabilized oil price environment that supports our customers' offshore programs and allows for a resurgence in demand for our rigs.

Ultra-deepwater day rates and utilization remain under pressure. Customers are keenly focused on cost-cutting efforts and are searching for opportunities to further reduce their 2015 and 2016 spend. We are in conversations with multiple customers to identify opportunities to capitalize on incremental term, employ higher specification rigs that can deliver more efficient performance to our customers, and provide a mutually beneficial contribution to the cost- cutting mantra heard throughout the industry. In this cyclical environment, Transocean is well-positioned to meet the needs of our customers and capitalize on value-creating opportunities with our high specification fleet.

The recent announcement that seven newbuild Suttee rigs will be canceled is favorable news for the industry out of Brazil, slightly reducing future floater capacity in an already oversupplied market. As a result in the medium-term, we expect Petrobras will take existing rigs off the market, contributing to the gradual rebalancing of supply and demand. Additionally, emerging delays in the delivery of newbuilds across the industry also helps to reduce near-term rig supply.

As we look forward over the next 12 to 18 months, we continue to expect challenging conditions. As we work to contract our rigs we are likely to experience extended periods of inter-contract idle time and significant competition for the limited tendering opportunities available. Deepwater and midwater markets remain weak as higher specification units compete down for lower spec jobs. We expect this will continue to drive older, less capable units out of the market and where they are uneconomical to maintain to the scrapyard. And this will also be helpful in balancing supply-demand in the future.

The premium jackup market is also showing signs of pricing pressure with lower rates for newbuilds expected in Asia and West Africa. While the large influx of uncontracted newbuilds will challenge the less capable rigs, we believe the newbuilds being offered by established contractors with a solid operating history will be preferred by our customers, all else being equal.

Utilization for the global ultra-deepwater fleet is currently around 90% with 17 ultra-deepwater rigs idle and available. This includes several of our rigs which we are actively marketing and expect to have some positive news soon. We are seeing a few tendering opportunities in Brazil, India, and West Africa for programs starting in 2016 and 2017. We are hopeful that Petrobras can contract a few ultra-deepwater rigs in the near term, despite the issues facing today.

Notwithstanding recent news about contract terminations, we think that Mexico could still be a source of incremental deepwater demand in the medium-term with the positive moves we are seeing in the regulatory by the regulatory authorities. In December 2014, we announced the long-negotiated two-year contract on the GSF Development Driller I in Angola, and a five-month extension of the Dubai Deepwater KG 2 in India, at rates of 382,000 and 395,000 per day respectively.

In January we extended the Sedco Express in Nigeria for two wells at 300,000 per day. The pace of tendering continues to be slow for the deepwater market and the market utilization is around 86%. During the fourth quarter the option for $370,000 per day was exercised for the Jack Bates in Australia. We expect to see two long-term tenders for Owen GC in the near future for rigs capable of drilling in shallow water depths up to 500 feet and deepwater depths up to 5,000 feet respectively.

Midwater and harsh environments tendering activity also remained slow in the fourth quarter. The impact of low oil prices has pushed customers to execute contract termination suspension in Norway and the UK, in addition to canceling and delaying programs. Overall, 2015 will be challenging for the UK and Norway and expect the market to remain oversupplied the near term.

A positive note, the Transocean's Spitsbergen is expected to return to drilling over the weekend after being on a standby rate for a couple of months in Q4. In 2015, we have five units available in UK and Norway and as you might expect we are seeking opportunities globally for our harsh environment units. We recently contracted the Searcher in Norway for one well at $340,000 per day.

Utilization for the standard midwater market is around 93%, but there was very little fixture activity in the last quarter. We do see some incremental demand coming to the market in India and Southeast Asia. Utilization for premium jackups is around 90% and day rates are beginning to moderate. However we expect some demand in West Africa, Mexico, India, and Southeast Asia.

In the near- to medium-term, we expect the influx of supply of premium assets will put considerable pressure on standard jackup rig utilization and pricing. As a result of the disciplined execution of our asset strategy over the last couple of years, we are no longer exposed to this vulnerable asset class. We are in the trough of the cycle and we had the experience to weather this one as we have done since the 1980s.

Every drilling cycle takes time to work through imbalances and return to a healthy market environment, the result of our customers again focusing on reserve replacement and production growth. Fossil fuels will remain the primary source of energy and our customers tell us that light tide oil and deepwater offshore have a solid place in their portfolios in the future.

Transocean will fight for every opportunity to position our fleet to take advantage of the upturn when it arrives. We will also continue to focus on high grading our fleet and opportunistic growth. We have the financial flexibility, unmatched operational and engineering strength, and our passionate and talented teams that will help ensure we emerge from this downturn as an industry leader.

This concludes my overview of the market so I will turn it back to you, Thad.

Thanks, Terry. So we'll start taking questions now. And just a reminder, one question and one follow-up question. Paula, please go ahead and give us the first caller. Thank you.

(Operator Instructions)

Ian Macpherson, Simmons.

Esa, with regard to your O&M expense guidance for 2015, I was going to see if you would be able to provide any sort of reference with regard to what's embedded in that range for stacking? If it contemplates cold stacking additional rigs and I'm really interested, most of all, in whether you're planning to cold stack any of your idle fifth-gen rigs this year if that's reflected in the cost guidance and what the magnitude of that might be? Thanks.

Good morning, Ian. Thanks for a good question. I was trying to provide some additional color and guidance already in my prepared remarks where I said that the reduction on a year-on-year basis would be roughly 50%, like-for-like cost reduction -- call them real cost reductions, in comparison with the previous year. So you can work out the numbers.

And the other half would be associated to lower level of activity, which means actually reduced O&M expenses as a result of the fact that we idled some rigs as well as stack some of them. We haven't provided detailed guidance in terms of what exactly is embedded in that in terms of individual rigs or any of that. For that you'll have to just keep an eye on our fleet status report that shows the evolution.

But you do know already from our previous announcements that we have taken a decision to stack 12 rigs -- scrap actually 12 rigs and that's obviously included in that and that has quite a reducing impact on our O&M.

Okay. Thanks, Esa. Follow-up question for you, Terry. I think we're all concerned about contract integrity. Three months ago when Statoil terminated the Stena rig, that was bad but at least Stena got the $350 million check, right? And the rhetoric that we are hearing from so many drilling contractors is that the concern is that it's really more a prospect now of termination for convenience without necessarily the prospects of being kept whole on your contract terms. Can you elaborate on that? Is that how you see the risk right now or is that more of an exception or more likely to be the rule for 2015?

Ian, we've been in a lot of conversations with our customers and we are trying to work together with them to come up with, as I said in the notes, some mutually beneficial win-win opportunities. From our perspective, we're not seeing what some of our other competitors have been exposed to just recently. And I know that there was probably some concern about some of the Petrobras contracts. Our Petrobras contracts can be terminated because of poor performance. And that is primarily the issue with most of our contracts, is that we have to perform.

We are not exposed to Pemex. We don't have a termination for convenience for number of days without payout on any of our contracts. Most of our contracts don't have a termination for convenience. And those that do have a contracted payout. So I like the position that we are in with our backlog because I believe it's very solid. And our teams have done a good job of negotiating these contracts over the years.

Praveen Narra, Raymond James.

Just to follow up on the last one, could you talk about the extent to which contract performance issues give the freedom to the customer to cancel contracts? Assuming that the rig meets the technical specs, how many days does a rig have to be down for before the operator can say they don't want the rig anymore? Is it a year? Six months? How should we think about that?

That's good question. It just depends on the contracts. It's just a range. And it depends on if it's a newbuild contract or if it's an existing fleet contract. Our newbuilds are generally no-cut contracts that we've negotiated pretty much an industry standard. You've got to really be down a long period of time. And then in existing fleets a little bit less, but it's usually consistent downtime performance for -- in some cases, as an example, it could be up for two months of downtime on a continuous basis.

Okay. And then different topic, as you mentioned, quite a few ultra-deepwater rigs in your fleet currently idled but not cold stacked. Does that imply that those rigs are big on work? And is there enough work or inquiries out there for eight or nine of your rigs in the next 12 to 15 months?

Well, clearly, the market is oversupplied with a lot of capacity and then you've still got newbuilds coming to the market. The demand doesn't does not exceed the available supply at this particular time but we are bidding a lot of our rigs on tendering that's ongoing now. We are seeing tendering, as I mentioned, for availability in 2016 and now some in 2017. So we're going to look for opportunities. We are going to look for one-offs.

Like I said, we're going to fight for every opportunity to get our rigs back to work so that we can weather this cyclical downturn and be poised and ready to take advantage when this market does turn. And it will.

And if I may add to that, it's Esa Ikaheimonen here, I'd like to add a couple of words. So while the marketing team are obviously fighting for opportunities, out there in the marketplace, we are also immediately ready to minimize OpEx to a level necessary to keep the rig available for new near-term opportunities, so that's an important element of 2015 cost optimization and management that we are touching upon already.

And if there's no such near-term opportunity in the marketplace, we're also prepared to cold stack. And that's going to be a key performance area for us in 2015. And we are very focused on that in order to make sure that, in the short term, we're not incurring any unnecessary expenses as a result of the challenges out there in the market. So that's just something I wanted to add to that so that would provide a bit more comprehensive answer including the cost management piece as well.

Dan Boyd, BMO Capital Markets.

You mentioned a number of times in the comments of looking for opportunities to grow out of this down cycle. So with that in mind, would you consider issuing equity in the secondary market if the price was right? Would those assets need to be contracted? And do you think you need to wait for a CEO before you would pursue anything?

Yes, probably for myself, Esa Ikaheimonen here, we have issued equity in the past and obviously that demonstrates that it's not entirely out of question. However, what we also try to communicate, and I think we've done that quite successfully, is that we do have enough near medium-term flexibility and other levers to pull so that an equity issue at current share price levels is not very high on our list of priorities.

So in theory, yes. In practice, unlikely. And that's for, I would think, quite understandable reasons. We actually feel quite comfortable about our medium-term liquidity and the levers we've got to pull and continuous overperformance against our own promises in several areas. And that looks like continuing through 2015.

Okay. Thanks. And then my second question would be, given the rising number of idle DP rigs, what are your options there? Are you aggressively pursuing rig swaps and how many of those rigs might actually be able to be swapped with other rigs that might be cheaper to idle or cold stack?

That's a good question. We are looking at everything. We are looking at opportunities to high-grade our fleet. We're looking at extending our current rigs. We're looking at potentially doing two-rig packages. I hate to go into any further detail because this is a very competitive market out there. And everyone's got their magic that they're trying to work today, so that's really about as deep as I can get into that.

Byron Pope, Tudor, Pickering, Holt.

Just have one question. Terry, when you gave your market outlook and talked about some of the deepwater theaters where there are opportunities, I heard Brazil, India, West Africa. I didn't hear the US Gulf of Mexico, so I was wondering if you could give your thoughts on the outlook there and if that might be one of the deepwater theaters where there might be some tenders for work starting in 2016, 2017?

I guess the thing about the Gulf of Mexico is we've got so many rigs standing by. There is some incremental demand, but we don't see that a lot of it coming meaningful until 2016 and then there could be private discussions going on that we wouldn't want to really talk about that could tip our competitors into pursuing that. So it's kind of difficult to talk about the near term, but certainly we believe that Gulf of Mexico in the medium-term is going to have some incremental demand.

Okay. Thank you.

Angie Sedita, UBS.

Esa, you talked about the -- a number of people have asked about the ultra-deepwater rigs and the stacking. And as Terry mentioned, you have eight idle now and I believe nine more up for contract in 2015. It does sound like you have some opportunities in 2016 and maybe even 2017, but what would be the thought process about [cold stack] obviously there are very high operating costs, especially if they are fully employed. What's going to be your thought process on stacking a number of these rigs? How long do you think you need to have as far as a gap in between contracts? Clearly it would appear you are going to have to stack some of these rigs. Can you talk about your thought processes, when you would stack the rigs, how long it would take and where do you think your costs would move from and to?

Right, Angie. As always, a very thoughtful question from your side. There's no really black-and-white answer to this because the fleet is diverse and there are different drivers associated to most of those rigs, but here's what I would say as a general answer to that. First of all, we've got a plan for each rig. And as a matter of fact, we've got several plans because the market outlook and the visibility is not perfect. And therefore you have to be kind of prepared to pull out plan B if A doesn't materialize.

It's all driven by the market evaluation and deevaluation provided by Terry's marketing team in terms of what's out there and how likely it is or unlikely it is that a rig that comes off contract will win a new one. As that happens and the rig comes off contract, we are immediately ready to minimize OpEx necessary to keep the rig available for the next near-term opportunity.

In some cases, that may -- again, depending on the rig and depending on the marketing evaluation, the marketability of the rigs, that may actually [be] very, very quickly. We're talking about days and weeks rather than months, lead to a decision to cold stack, because if there simply isn't such an opportunity or the probability is very low, incurring expenses on the rig and keeping it idle and ready for the job that doesn't come is not a very good idea. So cold stacking in that situation might follow very quickly. If the probability to earn a new contract is higher, it makes sense to keep that rig available for that opportunity. If it doesn't materialize, again, we are immediately ready to cold stack the rig and bring OpEx down as low as possible.

And as I said, depending on the rig categorization, which is pretty fine-tuned in our system. It may be instant, it may take a couple of months. But we're not going to let a rig without visible marketing opportunities float idle with full OpEx for a very long period of time. Whether that takes a week or three months really depends on the rig, the market evaluation and the quality and marketability of the rig.

Just to add a little bit, in the context of cold stacking it's not what a traditional cold stacking would imply for the moored fleet so this is a DP fleet. So it's just a little bit different scenario, but you would still have a significant reduction in costs associated with that. But there would have to be just a marine crew to ensure that the rigs were properly taken care of because of their DP mode. But again it would be significant cost reduction. So thanks for the question, Angie.

Thanks. That helps. Yes, I certainly appreciate the challenges with stacking a DP rig. You're right. I guess the follow-up question, when you think about serving cash and capital, Esa, do you have any ability on the two uncontracted ultra-deepwater rigs to delay those rigs as you did with the jackups and also can those jackups be delayed any further?

Another good question. When it comes to the ultra-deepwater floaters that we've got uncontracted under construction, our position currently is that those delivery windows are actually pretty attractive. So we haven't been actively pursuing deferral of those deliveries at this moment in time. If that becomes necessary, we will obviously engage in conversations, but right now the delivery windows are as they've been announced in the past. And until further notice, we will continue actually constructing those rigs in line with those schedules. Those schedules were chosen actually in line with our best estimate as to how the market will evolve going forward. And there's no fundamental change in our view on the market when it comes to late 2017, 2018 situation.

Jackups, I think we've done what needs to be done with jackups and we've actually significantly re-faced the CapEx associated to those and pushed it from 2016 to 2017 increasingly to 2018. And again, that has got a significantly positive impact on our liquidity and balance sheet in the shorter medium-term, and we are quite satisfied with the outcome, particularly because it didn't come at a material cost.

J.B. Lowe, Cowen and Company.

I just have one question and it involves the 50-50 cost savings that you mentioned between true cost savings and then lower costs due to lower activity. I recall that you had identified a couple hundred million of cost savings in 2014 and I'm wondering, what is the incremental cost savings going to be this year that weren't necessarily included in the cost savings that you had identified last year?

Yes. Good question. I'd actually like to take this into the context of the $800 million margin improvement that we announced in November 2013, if that's okay, because that kind of includes all of this but it's also a little bit more holistic way of looking at it. So the margin improvement from 2015 to 2015 was targeted at $800 million and that was a combination of revenue efficiency, revenue improvement, about $300 million in revenue and about $500 million, $550 million in offshore expenses, out of service or shipyard expenses and the overheads.

And I'm actually quite pleased to report that we are almost there already in 2014 on the revenue piece. So, as a matter of fact, anything more than what we've already achieved would be over and above on the revenue side of things in 2015. On overheads we are also almost there in 2014 and we've actually exceeded the $200 million offshore and shipyard expenses. So slightly ahead of that already a year ahead of time. And if we add the 50%, which indeed is the like-for-like and true cost reduction that we would like to get the credit for, [FELS] is activity driven and unfortunately more than offset by the reduction in revenue, if we deliver all of this in line with our plans, we will have delivered more than the $800 million in cost savings only by end of 2015.

So just slightly more holistically. I know I didn't answer your question exactly, but I wanted to put that into the context of our corporate target of delivering $800 million of margin improvement from one year to another or one year to the second year thereafter. And just demonstrate that we've quite considerably overdelivered on what we promised and we will continue to overdeliver increasingly on what we've promised. Unfortunately at the same time, of course, the marketplace has become very different and that means we have to do more and more quickly than what we originally anticipated and that's kind of what we are prepared to do and I think the guidance reflects that quite well.

Okay. Great. That was really helpful. Thank you.

Mike Urban, Deutsche Bank.

Was hoping you could maybe elaborate a little bit on sources and uses of cash. You laid out your priorities in strong balance sheet investment, distribution to shareholders. I know you said you disagree with the Moody's downgrade, but I suspect we'll see something similar from the others. So clearly they're seeing something else out there.

And you guys have done a good job of high grading the fleet, of cutting costs, and so I feel a little bit like that's being undermined by the uncertainty about the cash flow profile and how you finance yourself over time. So I think it would just be really helpful to lay out a path or is that something that you necessarily can't do until you have the new CEO in place? Any kind of color on that would be helpful.

Mr. Urban, if you would, please repeat your question.

Can you hear me now?

Yes. Sorry about that. Apparently the call got dropped.

Sure. You talked a little bit about your liquidity and then also that you disagree with the downgrade that was out there. And you've laid out these priorities in terms of strong balance sheet, continued investment, distributions to shareholders. But clearly at least one ratings agency and I suspect the others will follow, at least disagree with that.

And you guys have done a really good job of reducing costs of high-grading the fleet improving performance. And I think those things are kind of being undermined and overshadowed by this lack of visibility on a path. And so just wondering, to the extent you can, can you offer us any visibility or any kind of path on sources and uses of cash over the next year or two? Or is that something that has to wait for new CEO to be in place?

Mike, it's a good thoughtful question again. I don't think we need to wait for a new CEO to confirm the financial flexibility we've got nor to actually respond to your question. That was quite a multifaceted one, so I'd just like to put that into a little bit of a context when it comes to ratings and our balance sheet objectives.

I think it's worth noting that we've delivered on all of our recent promises, including the accelerated debt reduction that we completed by the end of last year in line with what we had communicated much earlier. We are continuously firmly heading towards the $9 billion debt level that we've targeted for the last two or three years. And we have a very healthy liquidity to start with at $5.7 billion as we speak. We also have a lot of further optimization potentially in expenditure and working capital that we've been trying to communicate here and also elsewhere.

And yes, we've recently pulled additional balance sheet levers to actually further demonstrate our commitment to those credit matrices. So when it comes to downgrading, that goes a long way to explain our language associated to how we felt about it, so it was just disappointing. Impact-wise, there's not a major impact.

You asked about sources and uses of cash. I'm not going to go into any sort of bridging or anything. I'll just repeat and list the key elements of our liquidity. So $5.7 billion of liquidity today. I think we were fortunate or foresightful or just successful in the timing of the revolver; with the benefit of hindsight, the timing of renewing that revolver is just perfect.

We've worked on the dividend and in line with our balanced philosophy, we still maintain a competitive but sustainable in the current marketplace level of dividend. We've done the refacings of CapEx increasingly into 2018. We've got more flexibility if that's what we need going forward. Significant operational improvements and continuing to deliver on cost reductions. We are furthermore adding some more focus on working capital. You realized our cash management comment that I made earlier and we continue to be very selective with shipyard activity.

We still need to work on Transocean Partners. But I see that as a great upside, given the firm long-term cash flow and contracted pipeline it's got. So in the medium-term we're quite comfortable about our liquidity. It's a challenging marketplace out there, but we do have we do have significant flexibility at our disposal to weather the storm, like I think Terry mentioned, or was it Ian, earlier in the prepared remarks? That's as far as I want to go in terms of the bridging of uses and sources, but medium-term, comfortable. Over longer term, it's really determined by how the market will evolve and how long lasting the down cycle is going to be.

Got you.

As the Interim CEO -- this is Ian Strachan -- I can assure you that we are not standing still. We're certainly not taking time out until the new CEO comes on. That CEO will find a Company that is firing on all cylinders and I think you heard a pretty impressive presentation just now from Esa about how we've achieved significant overhead reductions throughout 2013, 2014 and 2015, $800 million by the end of 2015 tells you what our team is capable of. We have unique qualities and strengths in our employees and, fundamentally, that's how we will deliver what we have indicated.

And specific to do the downgrade and assuming the other agencies follow, presumably in terms of any refinancings that will just come up at the time of the refi, and potential cost implications, but in the immediate term is there anything that you need to do with your credit facility if you don't have an investment-grade rating, any negotiations that have to take place with the banks?

First of all, I don't think it's a foregone conclusion that the other rating agencies follow. And we'll be incrementally more disappointed if that happens, given the reasons that I just mentioned, but I focus on the Moody's conclusion only. We don't have any onerous covenants in our existing debt agreements and that's a good starting point, of course. So no major headaches associated to that.

We can speculate about the potential impact, if any, on pricing of our future debt, but given the present trading and the spreads, we don't anticipate any negative impact, but that remains to be seen, of course. And then the most tangible immediate downside has to do with the fact that we do have coupon step-up rates in some of our bond agreements in the tune of 25 basis points per a rating agency doing a one-notch downgrade, and that's what Moody's just did. So that will have an annual impact of about $10 million on our interest expenses; no more, no less.

[David Smith], Heikkinen Energy Advisors.

Just a quick housekeeping question. I thought that the midwater UK business was getting a little under $500 million of bank debt. I was just wondering if that borrowing was contingent on a partial sale of Caledonia or if just one of the parties otherwise opted out of that?

David, that's a good question. There was, as a result of what we call the Caledonia separation, the intended separation of that part of the business and potentially creating that separate [vehicle], as you remember, we did obviously work in detail the capital structure for that new entity and that included a bank facility in the tune of the $500 million that you just mentioned. But as a result of the fact that we decided not to go ahead with that separation, that facility was never put in place. So basically business as usual from that perspective, that facility doesn't exist and it won't exist until further notice and until Caledonia potentially becomes a viable deal again.

I misunderstood on that. Thank you.

And quick follow-up question, looking at the idle assets in the US Gulf, it would make sense to have some of them clustered around the Louisiana offshore oil port, I think three of them were clustered there early this month. But I was wondering if there were other regions where the cost of idle DP units could be minimized or it might make sense to absorb remote cost to get a lower cost in the long-term idle time?

That's a good question. We have our rigs positioned all of the world and there is multiple areas that we use. So we're all conserving costs at wherever the locations for the rigs are. So there's some in the US, there is some in the Canary Islands, there's some in Walvis Bay, in the UK there are some. So then there's some in Asia, so there's plenty of places to place the units. And again, we will be looking to maximize cost reductions wherever our rigs are going to be idled.

Mark Brown, Global Hunter Securities.

Just had a quick question on the Spitsbergen, I just wanted to clarify, what was the update on that?

Yes. The rig has been on suspension for a couple of months and it's been put on the suspension rate, which is 75% of the current operating rates. So she will return to work and she'll go back to her normal operating rate and we expect that to happen over the weekend.

Okay. Great. Just a follow-up on the tax rate, you mentioned that that's going to be a little higher than previously expected. Could you just clarify again what the driver of the change was?

You're referring to the guidance now, Mark?

Correct.

Yes. So our tax rate is a mixture of typical corporate income taxes and deemed taxes in certain jurisdictions where we operate. And what happens when our pretax income declines, effective tax rate typically goes up because we've got that firm deemed tax component having a higher proportional impact on the effective tax rate.

So that's what you see happening. So the read-through, of course, is, not unsurprisingly, that pretax is reducing somewhat in 2015. And that doesn't surprise anybody given the context of the marketplace and challenges therein but that's basically what we are trying to communicate; a moderate increase in ETR as a result of the fact that the mix shift between deemed tax and typical corporate income tax will be different to what it was for instance in 2014.

Jason Gilbert, Goldman Sachs.

It's actually Matt Russell filling in for Jason here. Thanks for taking the question. Not to harp on the rating too much, but have you had discussions with S&P post the Board's dividend proposal? And now that you do have the Moody's announcement, is there any intention to strongly defend a rating cut at S&P beyond what you've done thus far?

We've got a really active engagement with all the rating agencies. We keep them periodically up-to-date and particularly if we've got something meaningful and material and impactful to talk about, we talk about that on the spot and without a delay. So our engagement is extremely frequent. And they know exactly what has happened and they are well aware of our plans and forecasts and our thoughts. And I don't see any particular need to intensify those engagements as a result of the Moody's situation.

S&P and Fitch will do their own evaluation. They'll evaluate our position, our balance sheet and our forward plans based on their own modeling and conclude on that basis. So we continue business as usual. We will engage very actively. We will be transparent as we've always been. And they will conclude when they'll conclude.

Sure. All right. And back to one of the earlier questions. In terms of opportunistic, being opportunistic in this market, how do you view the opportunity for M&A here and potential to accelerate the revitalization of the fleet?

It's a good question. I kind of expected that somebody would ask that. Everybody's talking about consolidation on M&A and all this exciting stuff. I should say the first and foremost, we focus on maximizing value of what we already have. And that's the core of our message here.

Consolidation is a possibility, but it's only a possibility and it's very difficult, actually meaningless, to speculate too much. And as always, there are serious challenges, most notably regarding the valuation. So I think there's moderately improved likelihood of something like that happening, but at the same time the challenges are pretty much unchanged. And therefore, speculating with M&A is probably a waste of our time. But there could be some consolidation later on in the industry but it might take a little bit deeper down cycle.

Could I just add here, you recall how Transocean has performed in the past. The downturn is clearly a problem for all of us. But coming out of this downturn, we expect there to be a lot of opportunities. And as a historically natural consolidator, we aim to look at those very seriously. And we are positioned to do so. You can think in the last 10 years of what has happened; the last 15 years at Transocean. But I think again, as Esa said, it's idle to speculate about that right now. We're really focusing on the blocking and tackling and getting through this downturn to be in a position to look at all these opportunities that will arise.

Ian Macpherson, Simmons.

Thank you for the follow-up. We've covered all the CapEx flexibility questions except for, I think, the biggest one, which is regarding the drillship [newbuild] (technical difficulty) and Chevron, which are really your biggest chunk of growth CapEx. Have there been any discussions with those customers to delay those rigs?

Ian, that's a good question. We are always, again, in discussions in this type of a market for what can we do and is there some opportunities? As of today, there's been no decisions made on that. So there's nothing that we can actually share with the market at this point.

Okay. But it's not entirely implausible that those might scoot to the right?

I think that you would guess that the customers are talking about the art of the possible of all of their business, so I wouldn't say that it wouldn't be unlikely. But I'm just saying that at this point, we're not planning at this point to do anything.

Understood. Thanks.

That's all the questions we have at this time. I'll turn it back to our presenter, Mr. Thad Vayda, for any additional or closing comments.

So thanks to everyone for participation on the call today. We are available, as always, after this call to respond to any questions you might have and we look forward to chatting with you again when we report our first-quarter 2015 results. Have a good day.

Once again that does conclude today's conference. We'd like to thank everyone for their participation.