Transocean Ltd (RIG) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Transocean second-quarter 2015 earnings conference call.

Today's call is being recorded.

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

Thank you, Catherine.

Good day and welcome to Transocean's second-quarter 2015 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 Jeremy Thigpen, President and Chief Executive Officer; Mark Mey, 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 fact.

Such statements are based upon the current expectations and certain assumptions of Management and 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 participants an opportunity to speak on this call, please limit your questions to one initial question and one follow up question. Thank you very much. I'll now turn the call over to Jeremy Thigpen.

Thank you, Thad, and a warm welcome to our employees, customers, investors and analysts participating in today's call.

Before we discuss the quarter's results, I'd like to take a moment to publicly welcome Mark Mey to Transocean. I've known Mark for a number of years, and I'm very pleased to have the opportunity to finally work with him. As you already know, Mark brings extensive industry and leadership experience to the CFO role, and he's already made a meaningful and positive impact on the transition team.

I'd also like to take a moment to remind our listeners that during the quarter we reached two important Macondo-related settlement agreements with the Plaintiffs' Steering Committee and with BP. These agreements together cover almost all outstanding claims against Transocean arising from the April 20, 2010 Macondo well incident in the Gulf of Mexico. The agreements provide substantial closure to five years of litigation and arguably the most challenging chapter in the Company's history. Though this is not the end of all Macondo-related litigation, we have put behind us what we consider to be the significant financial exposures.

Moving forward we will continue our efforts to resolve any residual exposure in the same efficient and successful manner. Now onto the results, we reported another outstanding quarter with adjusted net income of $408 million, or $1.11 per diluted share on about $1.9 billion in revenues. Including the impairment of the Midwater floater asset class and the retirement of non-core assets, net income attributable to controlling interests was $342 million, or $0.93 per diluted share. Mark will take you through the figures in more detail shortly.

Needless to say we are very pleased with the results as our second quarter financial performance clearly demonstrates the continued success of the Company's cost management and operational improvement initiatives. Indeed, total fleet revenue efficiency in the period was an impressive 97.3% up from 95.9% in the prior quarter including 97.2% on our ultra deepwater rigs.

This high level of operating performance results from steps that the Company has taken to enhance maintenance programs, to reduce subsea equipment related down time as well as down time associated with other critical rig components. I commend our operations teams and rig crews for their hard work and dedication to supporting our customers in the delivery of their operational and financial objectives.

In addition to the excellent revenue efficiency results, we continue to improve our cost structure through the optimization of overhead and maintenance expenses. The entire organization is intently focused on more effectively and efficiently supporting the fleet. In fact, as part of our efforts to aggressively manage our costs and eliminate waste, we commissioned cross-functional teams to actively analyze every element of our business to ensure that we are generating value with each dollar invested.

We are also doing an excellent job of planning, organizing and executing shipyard repairs and in-service maintenance, where we have taken a fresh approach to completing work that has historically required out of service down time. In addition to completing more maintenance during offshore operations, which improves up time for our customers, we are cancelling or deferring non-essential projects and we are accomplishing all of this while driving several new health, safety and environment initiatives that have resulted in a continued reduction in our rate of incidents.

Although our second quarter results were negatively impacted by reduced activity, the Company's improved revenue efficiency and cost management efforts still yielded a second quarter operating margin, excluding the favorable Macondo-related settlements, depreciation and G&A expense of 48%. This is up about 100 basis points sequentially, highlighting another solid quarterly performance as we navigate this challenging market. I'd like to extend my sincere appreciation to our employees around the world for achieving this notable result.

Since the last call we've classified the GSF Celtic Sea and the Transocean Amirante as held for sale. The Amirante will be recycled in an environmentally responsible manner. The Celtic Sea will either be sold for use in a non-drilling capacity or recycled. Excluding the Celtic Sea we have indicated our intent to scrap a total of 20 floaters and on a go-forward we will continue to evaluate our rigs on a case by case basis and will take the decisions necessary to ensure that the Company emerges from the downturn with the most competitive fleet in the industry.

We also recently announced that we amended our construction contracts with Jurong to delay the delivery of the two new build ultra deepwater floaters by 24 months. The two drill ships are now expected to be delivered in the second quarter of 2019 and the first quarter of 2020. The delays reduce our capital expenditures in the medium term and provide additional flexibility, while still allowing us to continue to high grade the fleet. We ended the quarter with a cash balance of $3.8 billion representing a $1.1 billion increase over the previous quarter. In addition to including most Macondo-related insurance proceeds and other settlement funds, the cash balance reflects improvements in the Company's underlying cash flow generation.

We all recognize that the current market is challenging, and unfortunately it seems likely to remain this way through 2016. Regardless, Transocean will continue to build on a strong foundation, which includes, at $18.6 billion, the industry's largest backlog; the largest fleet of competitive, high specification floaters; an experienced and dedicated team; and excellent liquidity which provides considerable flexibility to not only weather this downturn but to capitalize on opportunities that will likely present themselves.

In summary, the Company's second-quarter results provide clear evidence of a transition team focused on managing those things within our control to permanently improve the Company's competitiveness and position us for the industry recovery. More specifically, we are actively working to further strengthen and solidify our customer relationships, eliminate waste and costs from our business and high grade our fleet.

I will now hand it over to Mark who will provide you with additional comments on the Company's financial performance. Terry will then provide an update on the market, and then we will open it up for questions. Mark?

Thank you, Jeremy, and good morning and good afternoon to all.

Let to me begin by saying that I'm delighted to address you from my new seat at Transocean. This is an exciting opportunity in the midst of a very challenging time for the industry, but Transocean is very well positioned to navigate the severe downturn and thrive when the macro environment improves in the future. Let me also thank the Transocean employees that I have met thus far for their warm welcome to the organization.

During today's call I plan to briefly recap the second quarter results, provide an update on our balance sheet and liquidity position, and update our cost cutters for the third quarter and remainder 2015. For the second quarter of 2015, we reported net income attributable to controlling interest of $342 million or $0.93 per diluted share.

Net income includes $66 million, or $0.18 per diluted share in net unfavorable items, including a non-cash charge of $653 million for the impairment of a midwater floater asset class, and as previously announced further $144 million impairment for non-core floaters that we intend to scrap. The impairments are offset by $735 million of favorable net items associated with the Macondo-related settlement agreements and insurance recoveries. Excluding these items, our adjusted net income was $408 million, or $1.11 per diluted share.

Moving now to operating results. Consolidated revenues decreased by $159 million sequentially to $1.9 billion, due mostly to loan utilization which was partly offset by higher revenue efficiency. As mentioned by Jeremy revenue efficiency was excellent at 97.3%, up from 95.9% in the prior quarter. The outstanding revenue efficiency also reflects bonuses earned for exceptional operating performance on seven ultra deep water floaters, two deep water and one mid-water floater.

We also recognized about $69 million in contract termination fees associated with Sedco Energy and the Transocean Spitsbergen in the period. These fees appear in other revenue. The quarter's results were unfavorably impacted by a decline in fleet utilization to 75%, down from 79% in the prior quarter.

We recognized a $788 million, or $735 million after-tax, in favorable net reductions to operating and maintenance expenses associated with the Macondo-related settlements. Excluding this, O&M totaled $195 million, down $99 million from the prior quarter, mainly due to lower utilization previously mentioned reflecting 490 fewer operating days during the quarter. In addition to our ongoing cost reduction initiatives, the quarter was also impacted by a reduction in stacking preparation and other stacking costs as these rigs are released from contracts.

The second quarter annual effective tax rate was 16.9% versus 25.8% in the first quarter. The decrease was due to the improvement of adjusted pretax income for the year, primarily reflecting a reduction of operating expenses that supports an estimated annual EPR of 21.6% for 2015. We ended the quarter with approximately $3.8 billion in cash and cash equivalents, up $1.1 billion over the last quarter, reflecting capital expenditures of $195 million, $55 million in dividends out of additional paid in capital and cash flow from operations of $1.3 billion, including $445 million in proceeds from Macondo insurance recoveries.

Note that in July we received an additional $218 million in Macondo-related reimbursements and insurance proceeds. In accordance with the settlement agreement we expect to deposit $212 million into escrow in the third quarter, pending final court approval of the settlement with the PSC.

I will now provide guidance on our 2015. We continue to anticipate fleet wide revenue efficiency of 95%. Other revenues which include reimbursables and other early termination fees are expected to be between $200 million and $210 million. We are lowering our full-year operating and maintenance expense guidance to between $3.7 billion and $3.9 billion. This represents a substantial reduction versus our full year 2014 O&M costs and our initial expectations for this year.

The decreases in expected 2015 O&M costs is partly due to scrapping of non-core assets. It also reflects a significant reduction in expenses resulting from the rapid transition of assets from idled to a stacked condition and in cases where we consider assets to be uncompetitive, stacked to scrap. Regarding the stacking of Osteborder rigs we are implementing an innovative cost effective methodology that optimizes the cost of laying out these high specification assets.

We now believe we will be able to reduce the cost of stacking these rigs to less than $50,000 per day depending on the rig. We are lowering our G&A guidance to between $170 million and $190 million. Further we're taking a hard look at all processes across the organization and implementing a number of initiatives which should further improve our underlying cash flow generating capability beginning in the next few quarters. In the final analysis, some of these may appear perfectly mundane, but will contribute measurably to cost efficiency.

Others are inspired by best practices of companies and, in some instances outside the oil-field services and offshore drilling industry. We don't need to discuss -- we don't intend to discuss this in detail today, but will provide periodic updates as we make progress towards these objectives. We expect depreciation expense to be between $900 million and $1 billion, a decrease from our prior expectation, and it reflects rig retirements and impairments.

We expect interest expense, net of interest income, and capitalized interest to be between $425 million and $440 million. Capitalized interest and interest income are expected to be approximately $140 million and $20 million respectively. Our 2015 annual effective tax rate from continuing operations is expected be within the range of 21% to 25%. This expectation reflects an updated forecast for each of our rigs, as well as known changes in legislation.

We are increasing our 2015 capital expenditures guidance by about $170 million to $1.85 billion, which includes $1.5 billion associated with our new build program. The increase is primarily associated with our decision to delay the Jurong new build drillships by 24 months each, which included acceleration of certain milestone payments. These drillships are now expected to be delivered in the second quarter of 2019 and the first quarter of 2020.

As a result of deferrals, new build capital expenditures in 2017 and 2018 have declined by more than $900 million in total favorably impacting our liquidity and cash flow visibility, while allowing us to continue to high grade our fleet. Additional detail is provided on our new build schedule available on our website.

Please note that we discovered a minor typographical error in the drilling fleet MD&A on page 42 of our form 10-Q filed last evening. The 10-Q incorrectly indicates that our capital spending for 2015 is expected to be approximately $1.7 billion. As indicated in our guidance, the correct figure is 1.85 billion.

On July 30, 2015, we redeemed a 4.95% senior note due in November of this year with a cash payment of $914 million. This early retirement was favorable from a cash flow perspective.

Now turning to the balance sheet and our capital structure in particular, we have an industry-leading liquidity position. After factoring in the repayment of our bonds discussed above, we currently hold cash and cash equivalents of $2.9 billion, and have available to us an undrawn $3 billion revolving credit facility for a total of about $6 billion in liquidity. Although we will continue to take steps to augment the flexibility of our balance sheet, based upon our current forecast, we are comfortable with our financial position for the next several years.

Now let me comment on Transocean Partners. As some of you may be aware, Partners celebrated its one year anniversary as a public company last week, and RIGP remains an important component of Transocean's financial structure and balance sheet flexibility. However, as many of you know, as current market conditions have deteriorated since late 2014, the value of the Company's units that have also declined to the point where the market does not currently support a transaction between Transocean and RIGP. We will continue to monitor market conditions and update you on our thinking in the future.

To conclude, we are very pleased about operational improvements, including our strong safety performance, sustained revenue efficiency of 95% or better in the five of the last six quarters, and improvements in our cost structure, project planning and execution. However, there is more to do. We will continue to challenge the status quo to build upon this momentum and strive for even greater performance to help mitigate the impacts of reduced rig activity.

This concludes my prepared comments, and I will now turn it over to Terry.

Thanks, Mark, and good day to everyone.

The market continues to be very challenging and is likely to remain so through 2016. The low commodity price environment, corresponding reductions in customer budgets and over capacity in the global floater and jackup fleet are negatively impacting utilization and pricing in every market around the world.

Despite these challenges, we have added $178 million of contract backlog since the last earnings call bringing the year-to-date total to $212 million. We are happy to report the contracting of the Sedco Express, Development Driller II, the Deepwater Champion, Transocean Barents, the GSF Rig140, Sedco 704, Transocean Andaman and the GSF Galaxy II since our last call, highlighting our strong relationships with our customers and the ability to contract our diverse fleet regardless of the asset class.

In addition, we are also very close to concluding on several opportunities already in the pipeline. Our backlog as of July 15 was $18.6 billion comprising a stable and diverse customer base and reflecting favorable contracting terms with very limited exposure to early termination without compensation. This foundation provides a solid base of cash flow generation and visibility of future revenues to help us weather the downturn.

Now to the market, we expect challenging conditions to prevail through 2016, negatively impacting rates and utilization for all class of rigs. Contracts are being early terminated contributing to growing idle capacity, and drilling contractors are also more frequently competing with our customers as they are not subsidizing to market rate on farmed out rigs. Indeed, ultra-Deepwater marketing utilization is down to 88% with 17 rigs idle and 10 cold stacked. Year-to-date 17 ultra-Deepwater fixtures have been executed primarily in the Golden triangle, Mexico, and UK/Norway. Deepwater is down to 73% with only four fixtures being recorded, primarily in Australia. Midwater utilization is at 75%, posting nine fixtures contracted mainly for UK/Norway.

As of today, there are a total of 25 cold-stacked and 38 retired floaters. We expect these numbers to continue to increase with the overcapacity of supply and simply not enough demand in the near to medium term. However, we are seeing the NOCs and the independents providing some term work primarily in India, Australia, UK, and Africa taking advantage of the counter cyclical opportunity to lock up capacity at very attractive rates.

Our customers are also taking advantage of performing P&A and decommissioning work required by regulatory authorities. Additionally, recent discoveries in the US Gulf of Mexico, Colombia, India, and Guyana are increasing the likelihood that we may see incremental rig demand emerge from these regions in the medium term. We are also optimistic about the bidding rounds in Mexico and Brazil, opening up critical Deepwater markets for future opportunities. The premium jackup market is suffering from the same oversupply dynamics as the floater fleet with pressure on utilization and rates.

Marketed utilization is around 84%, with 81 rigs currently warm stacked and 48 units cold stacked. Given the majority -- sorry, given the major players that are old standard jackups, we have seen limited jackup retirements to date compared to the floater fleet. With the influx of the expected new build deliveries challenging the less capable rigs, we expect to see more retirement activity over time. Delays of new build deliveries provide some medium-term relief in excess rig supply, and attrition stacking will continue to assist the necessary and more permanent correction in the global oversupply situation.

Our customers tell us that they remain focused on the long-term outlook for offshore oil and gas drilling, increasing global energy consumption, replacement of reserves and increasing production, while quickly resetting their cost basis. As commodity pricing recovers, customer programs will need to be executed and wells drilled, fueling a rapid increase in demand for rigs. While these are very challenging times for the entire industry, we believe that our customer relationships, global fleet, operational performance, strong backlog, and passionate teams will position us to capitalize on opportunities in any market.

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

Thanks, Terry. Operator, we're ready to open it up for line for questions. And as a reminder to the participants, please one question and one follow-up question. Thank you.

(Operator Instructions)

Ian Macpherson, Simmons.

Terry, your July 15 fleet status had a couple of ultra deepwater rigs rolling in July and quite a few midwater rigs rolling in the third quarter, as well. Is there any updated status on any of those rigs, or should we assume those rollover dates held and anything that's not been updated at this point remains idle?

I think the only thing between the July fleet status that we actually contracted, and you probably saw that, was the Transocean Barents on a short term rollover, and other than that, that's all that we currently are showing. However, I would tell you that we are in advanced discussion on a few opportunities, and that's really about all I can say about that, Ian.

Okay. I'll stay tuned. To follow up, Mark, if I may, you highlighted some of the near and medium-term CapEx relief that you've negotiated, however, your total new build spending looks like it has increased by close to $400 million over the duration of the program. Is that entire increase attributable to the payments for deferred delivery, or have there been any scope changes to the new builds that explain any of that?

If you look at the rigs in particular, and certainly referring to our schedule on the website, you can see that the Jurong new builds were increased by about $100 million in total with part of that -- and that's each. Part of that is associated with the fees to delay delivery by two years each, but also part of that is pushing out the final payment, so the capitalized interest that will be accrued over that time period is included in the amount that we have posted out there.

There's also some fees and capitalized interest associated with the jackup new build deliveries, which we delayed, as well. So overall it looks like a big number, but you are looking at five jackups and two floaters for two years or more in the case of jackups. I think on a per rig basis it breaks out to a relatively minor increase in the overall CapEx of those rigs.

David Smith, Heikkinen Energy Advisors

Congratulations, Mark. I think you all now have about five drillships that are warm stacked near Trinidad, I think some moved from the Gulf of Mexico. Some moved from West Africa. I was just hoping to get some color on that move, maybe the cost savings you're targeting, but especially how that cost savings is achieved, whether it's sharing the minimum crew requirements or fuel or where that is coming from?

We don't want to get into too much detail, because we actually view this as somewhat of a competitive advantage. But I will tell you we like all of our competitors are kind of learning as we go, and as we stack more rigs we learn more about the process and we get more efficient. So location is very important, the process is very important, and when you can park them in the same area you can certainly take down the manning a little bit.

So when we think about the long-term storage costs for modern drillships, did I understand correctly that $50,000 a day is kind of the new target, or am I mis-hearing that?

No, David, as you know, as Jeremy stated very eloquently, this is a process. And as the industry works through this process, we get better at it all the time. So if you recall back to last quarter, we used the range of $50,000 to $85,000 per day for ultra deepwater assets, Today we can say it is going to be less than $50,000. We are not done looking at this.

Our team is continuously looking at opportunities as to how we can save costs around this stacking of these floating rigs. You are well aware that the two biggest costs are going to be people and fuel. So we can certainly keep looking at this and see how we can get that number down to even lower levels in the future.

Sean Meakim, JPMorgan.

I was just hoping, Terry, maybe you could give us a little more detail or navigate between some of the exploration versus development opportunities that are out there. In the current oil price environment it seems like exploration projects are even more likely to get pushed right, but can you give us some indication of what kind of demand is out there for maybe development opportunities?

I think the biggest news in the market is certainly that everyone is focused on right now is the ONGC tender. So -- but I would say that's where the biggest demand lies today, and overall they've got five -- I'm sorry, four rigs that are pointed for development. And they also have three other rigs that are pointed for exploration, so it's going to be one of those things that the competition is going to be very fierce for that one.

We are also seeing quite a few other development opportunities and that's going to bring some long-term work, and that's mainly in Australia with the Chevron and the Woodside program that's just come to market. So we are starting to see a little bit more as you look out into now end of 2016, 2017, you're seeing a bit more of the development opportunities coming to market. I would say it is a bit encouraging, because there are a few things that have popped up recently where we've been in direct discussions that haven't come to tender.

So that always makes us feel a little bit more confident when you're getting a direct negotiation opportunity, and it is something that a lot of folks are unaware of. So we like that kind of opportunity. It gives us a little bit more confidence, but having said that we all know we have got a bit of a slog to get through 2016. So I'm just trying to be a little bit balanced with the commentary, but I would say there quite a few. But I would say more development opportunities are coming forward now than we're seeing exploration, unfortunately.

That's helpful, and I just wanted to talk a little bit more about managing cash flow and managing down costs. Are there -- can you give us a little more indication of -- are there any more levers to pull in the new build program to manage cash flow, or do we think that -- we've kind have gotten -- we've extended that opportunity as best we can at this point?

Sean, I'm not sure what you're referring to with additional levers. You enter into a contract to build a rig, there's a certain cost associated with that. There's costs associated with the project management team that you have there from Transocean. And there's costs associated with the time -- hold -- cash payment at the point you actually make that. So I think by delaying these rigs what we've done is improved liquidity visibility, whereas as ultimately the overall cost of the rig is not going to come down much. If obviously you could go out and order a new rig today, you'll get a different price which would be substantially less than what it was in the past, but as far as levers on the current rigs under construction, I'm not sure there are levers to actually reduce those costs.

J.B. Lowe, Cowen and Company.

I just had a question on the Macondo -- the remaining payments on the Macondo issue. Are there any further payments that you -- or any further scheduled payments that you still need to make on the PSC settlement, for example?

As I mentioned in my prepared comments, J.B., we intend to fund the quote, finalizing the settlement with the PSC. We intend to fund $212 million during this quarter.

Okay, I missed that. Thank you. And just a follow up question on the -- Terry, you mentioned you are in some direct negotiations. I know you can't provide that much color on it but could you maybe give the geographies that you are working on some of those opportunities in?

I'm really sorry, J.B., I can't do that.

Jud Bailey, Wells Fargo.

Terry, if you could maybe talk -- you discussed it little bit in your prepared comments about Brazil. Could you talk a little bit about what you're seeing in that market? Petrobras has obviously released their budget, and it sounds like their rig count is going to be coming down, but other operators in the area are looking for some rigs. Could you comment a little bit on what you're seeing and in that market specifically?

What we're seeing right now, and you're absolutely right, Petrobras is reducing their rig counts in the near term, but I'd like to say we're certainly delighted that -- I'm sure that the peer group and ourselves are delighted that we're able to transfer term and not lose our margin, so we're happy about that. But as far as the other folks tendering in Brazil, we're not seeing a lot of activity, but we do know that several of our customers are saying that they hope to get some of their programs drilled -- start drilling in end of 2016 and 2017. So we anticipate there will be a bit more.

Again, we're very hopeful about the 11th bidding round, but I think that there's going to have to be some sort of further concession on the local content. I know that's going to provide some cause of concern for the general operator population, but certainly things seem to always in a downturn correct themselves, so we're hopeful that people can find a way to get in there and start drilling the presalt.

You mentioned some of the recent discoveries in Colombia and Guyana. Can you say -- are the customers in those areas already talking to you guys on maybe bringing another rig in to do some appraisal work, or how early stage is that and do you have any visibility at all on those kind of new markets?

Yes, actually our tender just closed with Exxon Mobil. They are going to try to get a rig in there first-quarter of 2016 to do some appraisal work. We also know Anadarko has a big discovery in Colombia, but we believe they're going to take a bit of a pause and then ramp up a little later. So I don't anticipate you'll see incremental work there yet, but I think that certainly the Guyana opportunity looks very promising, and hopefully they'll have more opportunity to put some more rigs there.

David Anderson, Barclays.

Jeremy, your time at NOV gives you a pretty unique perspective on your competition, and considering how many of them have been your customers over the years. I'm interested in your thoughts on how you think attrition plays out here. You talked about on the call a couple of times about overcapacity, but we've only seen I think 20 rigs retire in the industry since the beginning of the year. Everybody seems to agree more need to be retired, but why aren't we seeing more go away with such a bleak outlook? And, secondarily, are you concerned that the pace of this attrition isn't fast enough and can kind of push out this, or is there an inflection point that you're starting to get some visibility on?

I don't know that we're seeing any inflection point amongst our peers. I think they are probably taking a similar approach to us although we've been far more aggressive in terms of looking at each of the assets and kind of looking at long-term viability and capability and the competitiveness of each asset and then making a decision as to whether they want to incur the cost of stacking versus just retire the asset.

All I can control is what we are doing here, and as we said on the call, we're going to continue to look at each asset as they roll off contract to see are these assets that we want to incur the cost of stacking, or are they assets that we just want to -- we want to retire because we don't think they are going to be competitive going forward. I'd say in total we probably see maybe 10 to 15 assets in our fleet that we're carefully considering, but it does depend the market.

That was actually what I was going to ask you. I think you've retired nine since the beginning of the year. So we can assume there will be some added to that by the year end?

I wouldn't assume it. I would say that we're looking at each asset, and as they roll off contract, we will determine whether or not we think they are going to be competitive going forward.

I would encourage you to consider that ultra deepwater rigs that are cold stacked are going to be effectively removed from the competitive fleet for a while and while it could be three, five, seven years because the cost of reactivating these rigs will be substantial, and you would need to have a very good [theron] environment which means terms and rates if we are able to bring these rigs out of the stack mode.

Angie Sedita, UBS

So, Mark, I appreciated the details on the liquidity on the CapEx side, but this is probably a question for both Jeremy and Mark. When you think about it from high-level, and you think about Transocean and obviously you are both fresh faces at Transocean, but else do you think can be done differently than what was done in the past at Transocean from a strategy perspective, financially you talked a little bit about but also operational? Can you talk about how you're going to think about the Company differently from strategy perspective, different decision-making processes?

Angie, I'll take it first, and Mark can chime in. I think there are three things that we are really focused on, and I mentioned them in my prepared remarks. I think from a customer interface standpoint, customer relationship standpoint, Transocean has always been viewed as a company that delivers exceptional assets and exceptional performance, but it has sometimes been viewed as not as easy to deal with as it could be.

And so we're working hard on that and our customer relationships and managing those. The second and probably the most urgent for us at the moment is taking a fresh look at our entire organization and the cost structure. So we have basically taken a zero-based budgeting approach to the organization and said, listen, if we're going to be much smaller company than we were two years ago, what is the organization that we need to support this smaller and more efficient organization?

So Mark is leading that charge, and he can talk more about it in a moment. And then the final is really high grading the fleet, and we're doing that by getting smaller first of all, retiring some of the older less capable assets, but we've still got our new build program in place. We think this market, the longer the downturn lasts could present some interesting opportunities to upgrade the fleet through potential acquisitions, so we're interested in that. And then we've also got our technical teams working closely with our customers, as well as our supply partners to look at what's the next generation of technology that can help differentiate us in the future.

So those are really the three key areas where we are putting the majority of our focus right now. Mark, I don't know if you want to comment on anything there.

I don't want to say too much on this because obviously these are steps we are taking which need to be internally discussed, but suffice to say that every lever that we have we will be looking at and in general we are looking at reducing complexity around the organization. And obviously as I said in the prepared comments, Angie, we will update you on a quarterly basis as this progresses, but I don't want to get into details on the steps.

Okay, both of you, that was very helpful. And then ask the next one for Terry. Terry, can you talk a little bit about how your conversations have changed from last May when we had higher oil prices and seemingly maybe a little bit more tangible interest in rigs. And if that has been the case, have you seen a change in the conversations or the tone of conversations from May somewhat implying at oil price they may be willing to come back to the market, and if you've also seen increase in subletting since that time?

Those are great questions, Angie. I think that the tone back in May when there was some stability and there was actually an increase in commodity pricing, conversations from my perspective became very positive, so I think we were talking to quite a few of our customers to do a bit more conversations around blend and extend, and then when we saw the retreat of commodity pricing here recently, and it's become -- we want to take a wait-and-see. We'd like to have a little bit more stability.

So that's what going to require. It is going to require more stability in commodity pricing. As I said in my opening comments, anything that's below $50 is just very concerning for all of our customers. And then on the other side of that, of course you're going to see the NOCs and the independents jump out here and take some opportunity to contract their work at some low pricing. We've also seen a pickup in the UK and in the US Gulf of Mexico for the decommissioning and the PNA programs, so that might help a bit, but again, you are just going to see that kind of trickle as far as we can see today.

Gregory Lewis, Credit Suisse.

I guess this is to Jeremy or Mark, and you touched on it at the start of the call. Clearly as we look at the MLP right now it is probably not in a position to take advantage of dropping or taking assets down. But I guess I really just have two questions about the MLP. One is how committed is Transocean to the MLP as in your prepared remarks or in the press release, Jeremy, you mentioned about the potential of acquiring assets in this market now.

I realize Transocean owns 50% of Transocean Partners. Probably three of those assets that are in Transocean Partners are probably three of the best assets that you can get your hands on probably in the near medium-term. And then with that also as you think about that as the Development Driller III rolls off contract in next year, given the outlook for the market, does it make sense to potentially reabsorb Transocean Partners?

I'd say, Greg, at this point we are evaluating all options. And Mark said that earlier everything is on the table, but at this point in time we see RIGP as a critical piece of our financial structure, and we're going to see how this market plays out over time. I don't know if you want to add anything to that.

No, I think that's right. As I said in my prepared comments, it is an important part of our capital structure and financing flexibility, and until the market proves to no longer be able to support Transocean Partners, we are going to keep it in that context.

(Operator Instructions)

Andreas Stubsrud, Pareto Securities.

Question on the new builds. Is it correct that all the four Shell new builds will go to Gulf of Mexico?

As of now, the discussions have certainly been with Shell that they are going to be coming to the Gulf of Mexico, so that's what we know today.

My main question is related to those long ten year contracts and the day rates about $500,000. How do you see the risk for renegotiation of those contracts, Terry?

Andreas, we are not really having any of those types of conversations with Shell at this time. I mean Shell and Transocean worked very closely together to design these vessels, so they are a very special type of design fit for purpose for their programs, so as I've said we don't see that that's actually going to be put on the table at this time.

Mark Brown, Global Hunter.

I was wondering if you could give an update on the ONGC tender, just what you're hearing about that and what rigs you might be looking to bid for that.

This is a pretty exciting tender for all of us, because it's going to take quite a bit of the capacity off of the market. I would say that as far as what we're tendering I really don't want to show that hand, but I think you will expect a heavy, heavy participation from the industry, so it would be anything from your shallow water semis all the way up to your brand-new drillships that will be in semis bid into this opportunity, but they're going to close around -- they have different dates that they're due in August, so they just firmed up the dates, but we expect that it's going to be on time and that they will be -- they will be worked very quickly, so we're very hopeful that we have many rigs that are successful in that opportunity.

Very good. The other question I had was just with lower oil prices, could that potentially accelerate the incentive to stack and scrap some of your rigs, because it just reduces the probability that there will be demand in the near or medium-term, and is that something that have you changed your perspective on scrapping or stacking since three months ago when oil prices were around $60?

Mark, I'd argue that we have probably been -- we have been the most aggressive with respect to recycling older and less competitive rigs, and we will continue down that process. Obviously, the lower oil prices means less demand around the market, and so if we look at our rigs and we don't think they're going to be competitive in the near to midterm, then we will certainly have that conversation internally.

David Smith.

Just a quick follow-up on the first question, which was as you managed to bring down the cost of warm stacking the drill ships, I wanted to ask if anything has changed to your estimated cost to bring those rigs back to service eventually?

At this stage, David, nothing has changed there. Obviously this is something that is going to be very later in the future, because we are a ways away from that. But we will update you as we get close to that time in point.

Ian Macpherson.

A quick follow-up just on balance sheet efficiency now that the Macondo uncertainty is substantially eliminated, $3.8 billion of cash is obviously not efficient. How quickly and to what extent do you plan to bring that down to an optimal level?

You're absolutely right, Ian. In fact we just used almost billion dollars of that to repay our 2015 maturities, so we will look at reducing our cash on hand because our risk exposure to Macondo related issues has been eliminated for the most part. So at this stage I'm not going to give you a targeted cash position or targeted liquidity, but suffice to say we're in the midst of a downturn so cash is our friend, so will have more than you would typically have in an up cycle, but certainly it would be less than $3.8 billion

With no additional questions, I'll go ahead and turn the conference back over to Management for any additional or closing remarks.

Thanks everyone for your participation and questions today. As usual, we are available to respond to any modeling or other questions you may have over the balance of the day. Look forward to chatting with you when we report our third-quarter results. Have a good day.

Thank you. And again, ladies and gentlemen, that does conclude today's conference. Thank you all again for your participation.