Transocean Ltd (RIG) 2016 Q3 法說會逐字稿

Good day and welcome to the Transocean Ltd. third-quarter 2016 earnings call. Today's conference is being recorded. At this time I would like to turn the conference over to your host, Brad Alexander. Please go ahead, sir.

Thank you. Good day and welcome to Transocean's third-quarter 2016 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 facts. Such statements are based upon the current expectations and certain assumptions of management and are thereof 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 get more participants an opportunity to speak on this call, please limit your questions to one initial question and one follow-up question during the question-and-answer period following the prepared comments.

Thank you very much and now I will turn the call over to Jeremy.

Thank you, Brad, and a warm welcome to our employees, customers, investors and analysts participating in today's call. Following my prepared remarks, Mark will recap the quarterly financial performance, comment on our recent secured debt transaction which further bolstered our strong liquidity position and provide our expectations for the fourth quarter. Then Terry will provide an overview of the market and discuss some of the latest developments with our customers around the world.

As reported in yesterday's earnings release, the Company generated adjusted net income of $93 million in the third quarter or $0.25 per diluted share on $903 million in revenue. We were again very pleased with our quarterly results as they reflect the organization's continued commitment to maximizing uptime and performance for our customers while simultaneously streamlining and optimizing all facets of our business.

For the quarter, revenue efficiency which was 96.5% in the prior quarter improved to an extraordinary 100.7%. Needless to say, we are proud of this outcome as it validates the important work that our teams have been doing to redesign processes, rewrite and reformat procedures, enhance and expand our training programs and heighten our focus around procedural discipline.

It is also a testament to our team's unwavering commitment to maximize uptime which continues to differentiate Transocean in the eyes of our customers. As such, I would like to take this moment to recognize them personally thank our crews and our shore based support personnel for driving this tremendous performance.

I would also like to recognize and thank the team for delivering this result while simultaneously continuing to reduce our cost base. As a direct result of their efforts, our adjusted normalized EBITDA margin improved to 51% despite a 4% sequential decline in revenue.

In addition to posting exceptionally strong operating results, we continue to take other actions necessary to further strengthen our liquidity. I'm pleased to report that in October we raised $600 million by collateralizing one of the newest additions to our fleet, the Deepwater Thalassa, which commenced its 10-year contract with Shell earlier this year.

Speaking of new additions to the fleet, during the quarter our newbuild team once again did a masterful job delivering another high specification ultra-deepwater drill ship, the Deepwater Conqueror. This rig is currently en route to the Gulf of Mexico where it will commence its five-year contract for Chevron early next year. This will be the third world-class asset that we've added to the Transocean fleet this year and our expectation is that the Deepwater Conqueror will perform at a similar level to the Deepwater Thalassa and the Deepwater Proteus which both delivered impressive uptime results averaging 98% in the third quarter and have proven to be highly efficient drilling machines.

In addition to upgrading our ultra-deepwater drillship fleet with new assets, we are also excited about securing new work for one of our most capable harsh environments, semi-submersibles. Just as the third quarter ended, we added a 15-month contract for the Transocean Barents to our backlog. The rig will be working for Suncor and is scheduled to commence operations in mid-2017. This is the second rig that we have reactivated for harsh environment work off the east coast of Canada and serves as yet another indication that our customers place significant value on relationships, rig capability, technical support and operational performance. It also demonstrates that our customers are confident that our meticulous approach to preserving and maintaining stacked rigs will result in efficient reactivations and assets that perform as intended and when needed.

When preparing for reactivations, it is important to remember that crewing our rigs with the industry's most capable, experienced and motivated individuals is as important as preparing the rig itself. In fact in recent discussions with our customers they have placed greater emphasis on the reactivation of our crews than the reactivation of the rigs. Recognizing our customers' priorities, we are doing our best to retain our most seasoned talent and to maintain contact with former employees through outreach efforts with the expectation that we can keep them engaged and attract them back to Transocean as our rigs return to work.

Although we are proud of the outcomes that we produced in the quarter, many of you will know that during the month of August we had an unfortunate incident with the Transocean Winner. While on tow from Norway, the rig encountered a strong late summer storm which ultimately caused the grounding of the rig off the coast of Scotland. Fortunately the incident did not result in any personal injuries and no environmental impacts were reported. And with the assistance of a local community, UK and Scottish government agencies and other partners, we safely refloated and moved the rig to nearby sheltered waters for evaluation and removed all debris from the grounding site. The Winner has now arrived in Turkey where it will be recycled.

In addition to the Winner, we also made the decision to recycle two other midwater floaters, the Transocean Driller and the Sedco 704. This brings our current total of floaters to be retired and recycled to 29. And as we have previously discussed, we will continue to actively assess our fleet within the context of the market and make prudent decisions to ensure Transocean continues to have the most competitive fleet in the industry.

Somewhat offsetting these rig retirements, since 2008 we have added 17 new high specification ultra-deepwater floaters to our fleet and with the Deepwater Pontus and the Deepwater Poseidon joining the fleet by early 2018, this number will soon increase to 19. We also have two more high specification ultra-deepwater floaters that are under construction and currently scheduled for delivery in 2020.

Turning to the macro environment, in the last month oil prices have rebounded somewhat exceeding and holding above $50 per barrel until just recently. As was the case earlier in the year when oil touched $50 per barrel, our customers, primarily the independents and national oil companies, are once again approaching us with inquiries around rig availability and day rates. For the major integrated oil companies, we still think that an oil price approaching $60 per barrel is required to compel them to commence new projects. However, as long as oil prices remain around $50 per barrel, we would expect them to engage in conversations around blend and extent opportunities which would enable them to reduce their near-term obligations and secure additional term and discounted rates.

With 2016 coming to a close and most operators' budgets for next year nearing completion, our current thinking is that 2017 will represent the trough for spending in the offshore market. But looking forward, we are encouraged by the fact that global demand for oil continues to be resilient. Due to a lack of investment, the global supply of oil continues to decline and given OPEC's recent announcement, ultimately we might see an additional 1 million barrels per day of oil production taken off-line. As such, it is becoming more likely that supply and demand will soon converge leading to continued improvement in oil prices.

Additionally the entire offshore industry has worked to eliminate costs from the value chain making deepwater projects economically viable at lower commodity prices.

The combination of these factors continues to give us confidence in the long-term fundamentals of offshore exploration and development and ultimately in the recovery of the deepwater drilling industry.

In the near-term based on current commodity prices and market conditions, we expect to see an increase in both interest and contracting activity as we move through 2017 with a stronger recovery forecasted in 2018. As we prepare for that eventual recovery, we continue to take the necessary steps to successfully navigate this downturn and position Transocean to remain the undisputed leader in this space.

The aforementioned $600 million secured placement combined with our $1.25 billion senior unsecured July bond offering and simultaneous tender offer where we purchased approximately $1 billion of our outstanding debt, demonstrates our commitment and wherewithal to further strengthen our liquidity position and extend our runway.

Furthermore following unitholder approval, we are expecting to close our requisition of Transocean Partners this month. In addition to simplifying our administration and governance, reducing our cost and further improving our liquidity, this merger will provide Transocean Partners holders with the opportunity to rotate into Transocean stock.

In conclusion, I would like to once again thank all Transocean employees for delivering another great quarter. As a team we delivered over 100% revenue efficiency. We reduced our OpEx sequentially by 19%. We reduced our SG&A by 7% and delivered adjusted normalized EBITDA margins of 51%. We also added $195 million to our cash balance, secured several new floater contracts and closed a secured financing transaction. Most importantly, we delivered these results while never losing sight of our most sacred responsibility, the safety of our operations and our people.

I will now hand the call over to Mark.

Thank you, Jeremy, and good day to all. During today's call, I plan to briefly recap the third-quarter results and discuss our balance sheet and liquidity position including the recent capital market transactions. I will also provide an update to our 2016 guidance and an early look at our cost expectations for 2017.

As stated in our press release for the third quarter of 2016, we reported net income attributable to controlling interest of $229 million or $0.62 per diluted share. These results include $136 million or $0.37 per diluted share in net favorable items primarily associated with gains on the early retirement of debt and discrete tax benefits. Excluding these items, adjusted net income was $93 million or $0.25 per diluted share. This amount includes costs of $21 million associated with the grounding, salvage and preparation for recycling of Transocean Winner. We anticipate an additional charge of approximately $10 million in the fourth quarter related to this rig.

We ended the third quarter with $2.5 billion in cash and cash equivalents reflecting cash flow from operations for the third quarter of $440 million which includes approximately $70 million of working capital release.

I will now provide an update to our financial expectations for the fourth-quarter 2016. Our fourth-quarter 2016 revenue efficiency guidance remains at 95%. Other revenue for the fourth quarter of 2016 is expected to be between $170 million and $180 million which includes the early termination revenue for the Discoverer India and customer reimbursables.

Fourth-quarter O&M expense is expected to be between $375 million and $385 million consistent with activity and excludes the additional costs associated with the salvage and recycling of the Transocean Winner. We expect fourth-quarter G&A expenses to range between $40 million and $45 million excluding restructuring costs.

Fourth-quarter net interest expense is expected to be between $100 million and $110 million reflecting the repayment of our 5.05% senior notes due 2016 and our recent debt capital market transactions. Net interest expense includes capitalized interest and net interest income.

The fourth quarter 2016 annual effective tax rate is expected to be between 8% and 10%. This lower range considers changes in the jurisdictional mix of operating results. Depreciation expense for the fourth quarter is expected to be approximately $230 million. Capital expenditures including capitalized interest for the fourth quarter are expected to be approximately $350 million mainly associated with the contracted newbuilds. We expect maintenance CapEx to be approximately $10 million.

Now for an early look at 2017's preliminary cost expectations. We are in the midst of preparing next year's annual budget and will provide greater detail regarding our 2017 expectations on our next earnings call.

Operating and maintenance costs for 2017 are expected to be between 20% and 25% lower than full-year 2016. We expect the overall reduced operating activity of our fleet to be partially offset for the full-year effect of three ultra-deepwater newbuilds. At this time we are committed to one reactivation in 2017 which is associated with the contract preparation and mobilization from the Transocean Barents. Our most recent fleet status report has been updated to include 2017 out of service time for each rig.

We expect our G&A expenses in 2017 to decline to between $145 million and $155 million, a reduction of approximately 10% year on year reflecting the results of our restructuring and other cost saving initiatives.

Capital expenditures for 2017 are anticipated to be approximately $450 million. This includes $400 million in newbuild CapEx largely associated with the final shipyard payments on the Deepwater Pontus and Deepwater Poseidon. Maintenance CapEx is forecasted to be approximately $50 million reflecting one planned SPS as well as the reactivation of the Barents.

You will note that our out of service debt associated with special periodic surveys have decreased substantially as compared to prior years which is further evidence of Transocean's process reengineering initiatives whereby we perform certain survey required activities while rigs are operating, (inaudible) potential impact of special periodic surveys.

Turning now to our financial position. During the quarter, we opportunistically repurchased $137 million of debt at a cost of $134 million. As a reminder, since July 2015, we have repurchased debt with a face value of $869 million for $812 million saving approximately $180 million in interest expense through the maturity of this debt. This excludes debt repurchased in conjunction with the July 2016 tender offer.

Following the $1.25 billion of priority guaranteed senior unsecured debt in July, we accessed debt capital markets again in October successfully placing $600 million of senior secured notes with a 2024 maturity. We received net proceeds of $583 million from this offering. The proceeds will be used partially to refinance the ultra-deepwater newbuild drillship, Deepwater Thalassa, which is working on a 10-year contract with Shell in the Gulf of Mexico.

We will continue to take advantage of opportunities to enhance our liquidity and strategically address our debt maturities. As you are well aware, we have a number of options available to us including additional unsecured and secured debt. In this regard, the second of our four Shell contracted drillships, the Deepwater Proteus which commenced operations in May 2016, is also an ideal candidate for a secured financing transaction.

Finally, as a reminder, we issued $1.25 billion of priority guaranteed senior unsecured debt in July. In addition, we have full availability on our undrawn unsecured $3 billion revolving credit facility further enhancing our liquidity position.

Let me spend a few moments on the Transocean Partners transaction. As you know on July 31, 2016, we made an offer to purchase the publicly held common units. As stated in the proxy statement related to the special meeting of unitholders, this action was taken due to the increase in Transocean Partners' cost of capital and its inability to act as an alternative financing vehicle for Transocean. To date, all three major proxy advisors have published opinions supporting the transaction and we look forward to successful conclusion to the transaction.

We expect this merger to generate important synergies and value creation benefiting both our new and existing shareholders. However, in the event the transaction is not consummated as expected, Transocean Partners will need to make some difficult decisions regarding its capital needs and adequacy of cash reserves. We recognize the current challenging market conditions and reduced cash flow with fewer rigs forecasted to operate in 2017, and Transocean Partners will need to decide whether to warm or cold stack the DD3 if it is not re-contracted by the time the contract expires in November.

Costs associated with the mode of stacking can vary greatly as can reactivation costs. In order to appropriately plan for scenarios in which Transocean Partners revenues may come from only two of its three assets, a significant portion of cash may need to be reserved for operational and planning purposes which may impact Transocean Partners' future cash distributions. Such impacts may include the elimination of a distribution to subordinated units owned by Transocean as well as a reduction in a distribution to common unitholders.

Turning now to our projected liquidity. We now expect liquidity at December 31, 2018 in the range of $3.6 billion to $4.1 billion including the impact of the senior secured notes issued in October. Operating assumptions include revenue efficiency of 95%; a limited number of new contracts that are assumed to be at or near cash breakeven costs through 2017 with marginal dayrate improvement in 2018; a net cash flow reduction of approximately $60 million associated with the termination of the Discoverer India; no speculative reactivations and a closure of a Transocean Partners merger after the unitholder approval.

In 2018, we expect total CapEx of approximately $375 million. This includes approximately $130 million in newbuild CapEx and $245 million for maintenance CapEx. This strong liquidity position combined with our industry-leading contract backlog positions us very well for the future.

This concludes my prepared comments and I will turn the call over to Terry.

Thanks, Mark, and good day to everyone. With oil prices generally holding around the $50 mark during the quarter, we have experienced an increase in customer inquiries and engaged more productive conversations as compared to the first half of the year. As a direct product of those conversations, we successfully executed several new contracts since the last earnings call resulting in the addition of $214 million of contract backlog bringing our 2016 total to $515 million.

Year-to-date, we have announced 17 floater contracts representing more than one-third of the global floater fixtures contracted to date. We continue to win more work than our competitors and we fully expect to continue that trend as we hope to announce a few more contracts before the end of 2016.

As Jeremy mentioned, we are pleased to announce that Suncor's development work for offshore Eastern Canada was awarded to our harsh environment semi, the Transocean Barents. This 15-month contract added approximately $119 million to our already industry-leading backlog. After a brief reactivation and mobilization, the floater will commence operations in July 2017. With the Henry Goodrich starting its contract in the second quarter of this year, the Barents will be the second harsh environment semi reactivated for another independent in Canada increasing our operating base and positioning us for longer-term work in the region.

In the UK North Sea, we are pleased that hurricane energy recently exercised options on the harsh environment submersible, the Transocean Spitsbergen. This contract also has the potential for two additional options before moving to the Norwegian North Sea to begin operating for Repsol.

Also in the North Sea, the midwater floater, Sedco 712, was awarded 16 well contract and a one well contract with Fairfield and ConocoPhillips, respectively, keeping her contracted until mid-2018. You may recall that the 16 well award was a very competitive tender with 16 rigs offered and is another example of our ability to successfully execute against our competition. We see multiple opportunities for harsh environment fleet in 2017 and 2018 as our customers are becoming more active in executing projects with creative commercial solutions and some improvement in access to capital.

Just last week in Myanmar the KG2 was awarded three appraisal wells plus five option wells for Woodside commencing in early 2017 following the conclusion of its current contract for Reliance in India. Should the options be exercised, the program duration is expected to be approximately one year. With this contract we are now well-positioned with an operating rig in the area to capture future work which we see on the horizon with multiple customers. Unfortunately some of this good news was offset last month when we received the early termination notice for the Discoverer India effective December 15, 2016.

Per the terms of the agreement, we will be compensated through a lump sum payment of approximately $160 million. To be clear, this was a modest termination payment based on a contract executed early in 2008 which was convertible from five years to 10 years. This early termination payment was negotiated as part of the original contract providing only for nominal payback after the first five years of operation. It is important to note that the remaining contracts in our backlog are either noncancelable or provide many make whole provisions in the event of the early termination for convenience.

For the contracts we have recently executed, we will receive at least 75% of our expected cash flow in the event of an early termination or convenience. While certainly disappointed by the cancellation, the India is a highly capable drillship which is well suited for some near-term opportunities that we are actively pursuing. Factoring in the impact of the cancellation and the addition of a new contracts, our backlog as of October 24 continues to be industry-leading at $12.2 billion which provides us far more visibility to future earnings and cash flow than any of our competitors.

Of the $12.2 billion, 84% is contracted with IOCs, 8% contracted with the independents, and 8% contracted with the NOCs.

Turning now to the global market, as of today, marketed floater utilization is down to 77% with 59 rigs idle and 65 cold stacked. Year to date, 45 floater fixtures have been announced mostly in Asia, India, UK, Norway and Canada with the majority being short-term work except for Canada and India. Although commodity prices have been positive as spare capacity continues to diminish, we still need to see further improvement and stability in oil prices as we move forward. As a result of oil prices fluctuating in the $50 barrel range, tendering looks to be picking up with respect to the independents and the NOCs. While the IOCs have greatly reduced development and production costs, we believe that $60 a barrel is needed to jumpstart the sanction of their new programs.

Additionally new legislation in Brazil is expected to pave the way for international investment by some IOCs and the excitement in country is infectious. Statoil, Chevron and Shell are already looking at their portfolio drilling opportunities and we expect to see a few wells being drilled as early as late 2017. Our customers continue to view their deepwater assets as vital to their future production knowing that the lack of investment coupled with certain depletion in offshore drilling is unsustainable.

In conclusion, we will continue to position Transocean to increase our market leading position as we press through the downturn looking for the light at the end of the tunnel.

This concludes my overview of the market so I will turn it over to Brad.

Thanks, Terry. We are ready to take questions. As a reminder to the participants, please limit your inquiries to one question and one follow-up question.

(Operator Instructions). Blake Hancock, Howard Weil.

Good morning, guys. Jeremy, I just wanted to dig in a little bit on the 2017 guidance or the initial guidance for the O&M cost. Can you help us understand A, what is the expected cost on the Barents here? And then also kind of -- I know you don't want to give the exact number of kind of what the expectations for the working fleet will look like but are you guys assuming -- can you give us an idea of how many new contracts you are maybe expecting or the number of floating rates you think might be working in 2017 to get to those numbers?

Blake, this is Mark. Good morning. On the Barents rigs, we are expecting around $25 million to reactivate the rig for its contract with Suncor. Our guidance at the moment as you can see we gave you a range of a reduction from 2016 O&M spend of 20% to 25%. We are comfortable with that based upon our operating fleet at the moment together with the full activity of the three newbuilds that started during the year and the reactivation of the Barents.

We are not going to speculate with regard to any further reactivations until we actually have contracts for that and if we do that, obviously O&M costs will increase to reflect the additional rig count for 2017.

That is helpful. Thanks, guys. And then Jeremy, we have seen the Canadian activity pick up and it just really seems like the North Sea and the harsh environment has kind of been the place to be right now. As you are talking to the independents and the NOCs, is that still kind of the flavor or when do we think these guys actually come back to the market? Are they startups in the second half of 2017? Just help us think about where and kind of timing of what we see out there today.

Yes, I think it is going to be largely driven by the price of oil and we have talked about this in the past. As oil ticks up to $50 a barrel and it looks like it is going to be sustainable for a period of time, the independents and the NOCs approach us and they are asking about rig availability and they are asking about dayrate and people around here start to get really excited. Unfortunately that doesn't seem to last very long and oil prices dipped down into the mid-$40s again and those conversations start to abate.

So I think if we can see oil prices hang around in that $50 a barrel range for a period of time, you will see activity pick up and I think first in kind of that North Sea, UK end Norway, we will see more activity again in India, some in Asia-Pacific. And I actually think we can start to see some toward the end of the year in Brazil. So I think those are going to be the hotspots moving forward? And I don't know, Terry, if you want to add anything to that?

No, I think that is true but again as Jeremy suggested, that any movement we seem to be having these one-off wells that appear and have some encouragement and we take a few steps back.

That is great. I appreciate it, guys. Thank you.

Angie Sedita, UBS

Thanks, good morning, guys. So Terry on Brazil, can you give us any other color on what you think as far as the timing? You mentioned 2017 as far as some incremental work. Do you think that you could actually see incremental rigs move in, mobilize into the market or would it be existing rigs in the market? Can you talk about it a little bit further if you would.

I think it is not going to be a whole lot of work in 2017 because obviously folks that are going to be buying some new portfolio there it is going to take some time to work that up. I think what we would see something that is meaningful not until 2018, perhaps late 2018 for that opportunity. And you are absolutely right for the incremental wells, they will try to find rigs that are already currently in Brazil that could potentially be rolling off contract.

Okay. And then for either of you, just thoughts on -- I know you use the term recycling -- but recycling or scrapping of not your fleet but necessarily more so the industry's fleet I think we were thinking that maybe 100 to 120 floaters would be scrapped and instead they are being cold stack very, very cheaply. At what point do you think the rigs are no longer viable? How many years before the rigs are no longer viable to come back, number one? In other words, how and when will these rigs be scrapped over time?

It is a good question, Angie, and recognizing that we as an industry have been able to reduce the cost of cold stacking there are many of our competitors who will hold on to that option for as long as they possibly can. My expectation moving forward is that ultimately customers retire those rigs, that they opt for the higher performing rigs, the more capable rigs and that the older less capable rigs just don't get contracts as the market starts to pick up. And ultimately therein lies your answer that customers just won't have demand for some of these older lower performing assets.

Kurt Hallead, RBC Capital Markets.

Good morning. So I continue to be impressed by the industry's ability to reduce operating costs it seems on a quarterly basis. And you indicated a 20% to 25% reduction I think year-on-year on 2017 versus 2016. Can you give us a little bit of color around what the drivers are around these operating cost reductions because for quite some time I have been under the impression and hearing a lot there is about as much as can be wrung out of these system as possible yet again impressively you find ways to take a bit more out?

Some of it is just a measure of activity. So you think about the number of rigs we were running at the beginning of 2016 and as these came off contract, they go into some sort of a sacking mode, the number of rigs being run at the end of 2016 is substantially less. So if you look at full-year 2016 costs incorporated in full-year 2017, some of that, 20% to 25% reduction is just going to be a measure of reduced activity.

But as we discussed at conferences and previous calls, there's also several initiatives ongoing whereby we are looking at technical sourcing and strategic sourcing to drive down costs. The easy part of that is speaking to and calling your vendor to say give me an extra 2% or 3%. That is behind us now. Now it is doing things differently.

As I mentioned in my prepared comments, if you look at our SPS days for next year and compare that to what we used to have two, three, four, five years ago, and they are substantially done. So what are we doing? We engineered the process around performing the special periodic survey work to incorporate some of that work prior to the rig going off into these shipyard and getting its survey completed. By doing that while the rig is working, you have fewer days in the shipyard which means fewer costs in the shipyard. And this is just a matter of folks thinking about it, looking at it differently when you are faced with oil prices that have been as low as they had been in the most recent past.

I will just add to that. Mark provided a great example around the SPS but it is happening around the organization. It is really the reengineering of all of our processes from top to bottom to find and eliminate wasteful activity that leads to unnecessary costs. And so I think the organization is doing a great job across every function and across every process of identifying efficiencies.

Great. And then your commentary as well seemed to be suggesting greenshoots for the offshore drilling industry which would be a very pleasant development after the downturn here.

Just one -- didn't mean to interrupt you but the one dynamic here that I just wanted to square up, so the comments on the outlook about rig rates at or slightly above cash free breakeven vis-a-vis the commentary about greenshoots and I just want to get your perspective on the pricing relative to activity as you go through 2017 and into 2018.

The greenshoots again are going to be driven by oil prices. We were encouraged here recently with the OPEC decision and oil prices moving above $50 a barrel and staying there. We started to get far more interest from our customers at that point in time and our belief is whether right or wrong that we will see oil start to move above $50 in stay there as we move through next year and that will lead to more contracting activity.

To be clear that contracting activity is going to be very competitively priced and it is going to be of short duration. And so it is not anything that is really going to be material but it is going to be at least get things moving. And so we can see oil move even north of $50 and get closer to $60, then we start to get more activity, we start to get a little bit better pricing at that point in time. So I think activity in terms of contracting activity should pick up next year but in terms of actual drilling activity, it is probably late next year and into 2018 before we see that impact.

Gregory Lewis, Credit Suisse.

Thank you and good morning. Jeremy, in your prepared comments you mentioned about blending and extending. Can you just elaborate a little bit more on that? I kind of thought that sort of the blending and extending, sort of thought conversations had kind of moved beyond that but --. So I am just curious on maybe how those could be developing?

They come and go and again it is all driven by oil prices. I mean if you are sitting in the chair of one of our customers and you think that hey, we definitely have hit bottom and we need to find a way to reduce our near-term obligations because some of them are in contract that were negotiated when market was hot, and so if they see an opportunity to reduce their near-term obligations and simultaneously extend at something closer to today's discounted day rates that is something that some of them start to consider as they see oil prices start to tick up. Again now that we've seen kind of a pull back here recently, those conversations come off the table. So it is something that kind of ebbs and flows with oil prices. Nothing that is imminent today, they are just conversations that start to take place as oil prices tick up.

But when I think about those, I mean is it safe to say that if you're going to do a blend and extend that you've got to have at least 12 months of term or could it be something -- hey we have another three to six months, let's do a blend? Is it that type of short or is it more for longer type stuff?

I think it depends on a case-by-case basis and what are the objectives of our customer. We just recently saw maybe it was unannounced day before yesterday with Anadarko just did a blend and extend on one of their rigs. I don't think it was a lot of long-term but it could have been around the six month blend and extend. So it is going to be dependent upon the circumstances and the longevity of the next follow-on program for the customer.

J.B. Lowe, Bank of America.

Good morning. My first question is probably for Terry. I know you guys don't want to give a lot of color for competitive reasons but can you give an idea of how many opportunities you are seeing in the floater market for 2017 and 2018 commencement?

Looking into 2017, I would say there is probably about five to seven interesting opportunities out there that if you know the customers can get their boards to approve them, then those will move forward. But I would say those are going to be like mid-2017 into 2018. But today the active tendering that we are seeing is more in the 2018 timeframe.

Any numbers around that?

Again, depending upon the oil price they are ebbing and flowing and then they become requests for quotes and then they will migrate to maybe a direct negotiation but it is pretty much being impacted by the oil price.

And Terry is being a little bit coy because some of these are direct negotiations so we don't want to disclose too much.

Haithum Nokta, Clarksons Platou Securities.

Congrats on the quarter. You obviously did very well on the cost but you also did very well on the revenue efficiency. Can you walk us through some of the mechanics there? Obviously I was surprised to see you put in above 100% and even in the jack-ups you did 114. So can you walk us through how that calculation works?

I will start and then Mark will probably chime in or correct me where I am wrong. But if you look at revenue efficiency, the primary component of that is going to be based on uptime but it is not the only component. So obviously the operations group, our crews and our shore-based personnel did a fantastic job of keeping our rigs running and ensuring really high uptime.

Other elements to that though, there are puts and takes. We had some contracts where we have performance bonuses and so obviously in this quarter and in previous quarters we earned those performance bonuses for fantastic performance but we also since it is revenue efficiency, that is our ability to convert backlog into revenue, if we have provisions for doubtful accounts. So if we have revenue at risk of collecting, that impacts revenue efficiency negatively. So those are really the three primary components, uptime being the primary driver, performance bonuses offset by provision for doubtful accounts.

I can't improve on that.

And then I wanted to just maybe get a sense for the liquidity outlook that you updated your $3.6 billion to $4.1 billion. Mark, you said limited new contracts included in that but obviously you've had a very good hit rate over the last 12 to 18 months if not longer. Can you give us a sense for -- are you assuming a similar hit rate or are you being more conservative in that outlook?

No, I am certainly assuming a similar hit rate as we have in the past but bear in mind, my caveat was that is only a cash breakeven so even though we expect to be signing and operating more rigs next year as Terry and Jeremy have said previously, we aren't going to be generating significant liquidity enhancement to our current position. So the vast majority of our liquidity for next year that is generated is by legacy contracts that were signed in the better days of the market when we were earning rates of $500,000 per day or more.

Mike Urban, Deutsche Bank.

Thanks, good morning. Wanted to follow up on Angie's question a little bit. You guys have done a good bit in terms of certainly retiring rigs and also stacking. And I know you go through a pretty detailed individual evaluation of those rigs and you are looking for certain capabilities and I guess on a micro level or as you look at it specific to Transocean, those are good rigs and that is probably true. But is there a macro overlay associated with that? In other words, you kind of talked about the competitive situation and there is just too many rigs out there in general when it seems like you are kind of relying on the competitors to do that.

So I guess from our perspective almost no matter what the demand recovery is out there unless there is some more aggressive attrition and kind of on a more proactive basis, you never need anywhere close to the number of scrap rigs that are there across the industry. So you guys have done a phenomenal job on cost and it feels like a cheap option but at the end of the day are you creating an overhang such that you never actually realize that and does that figure into your thinking as you evaluate the fleet?

All of the above actually. I mean so we started down this process by taking a very sober view, a very data driven view of our fleet and so compared technical capabilities of each of our rigs vis-a-vis every other rig in the world. And so that kind of started the process. Then you look at, all right, what it is going to take to reactivate this rig depending on the duration that it is stacked and at what point in time do we think we can actually get a contract for that rig and put it back in the market? And so the technical capability doesn't really change over time but as you view the reactivation costs and the competitiveness of that particular rig and the state of the current market, we have those discussions on an ongoing basis.

So this is not stagnant by any means. We have this conversation probably once a month just where are we today, do we still feel comfortable with where we are and then we will make decisions accordingly.

And you talked about a big increase in maintenance CapEx I think it was in 2018 almost nothing this year especially -- or sorry next year considering the reactivation and the shipyard program. So is there some assumption there that you do see more meaningful reactivations and presumably that is factored into very low kind of real-time maintenance on these rigs?

No, Mike, we are not speculating on reactivations. What we are doing is just trying to give you some guidance as to the number of SPSs which will drive the CapEx number in the future years. So 2018, you could look at rigs that were delivered in 2013 and 2008 that are coming up to their five and 10 year SPSs that are going to require some work resulting in the increase in the maintenance CapEx.

(Operator Instructions). Vebs Vaishnav, Cowen.

Good morning and thanks for taking my question. Jeremy, your comment about a strong recovery in 2018 and the expectations around that seems somewhat different than earlier comments that the downturn would last through 2020 or that low (inaudible) would remain through that period. Is the renewed confidence more driven by higher oil price or is it more driven by the conversations you are having?

Yes, to be clear, I said start to see signs of more contracting activity in 2017 with a stronger recovery in 2018, not a strong recovery in 2018. So we expect this to be gradual, we expect to see again assuming oil prices tick above $50 a barrel and stay there next year, we certainly expect to see more contracting activity again driven by independents and NOCs to start. And then if we can continue to see oil prices move up as we move through 2017, that would obviously lead to more work in 2018. And so that is really where we stand today.

It is going to be a challenge to move pricing but if we can start to see activity pick up then hopefully in 2018 we start to see pricing move up and in 2019 even more. But again, we need oil prices to help us to drive demand from our customers.

Okay. And maybe a question for Mark. So the fourth-quarter OpEx guidance of $375 million to $385 million if I start with the $4 million to $5 million roughly speaking in 3Q, take out the $20 million from Transocean Winner, we start with a run rate of $380 million. And maybe then do you have some cost benefits from MG (inaudible) transition driller and (inaudible) for stacking? Can you help me? Like what am I missing? Why should it not be lower more in fourth quarter?

Bear in mind, Vebs, I also mentioned we do have additional cost of about $10 million on the Transocean Winner which we are going to be recognizing in the fourth quarter. And apart from that activity is fairly static for the quarter so we are also starting up the Conqueror so if you factor that into it you should get to what we are showing on a quarter-to-quarter basis. And bear in mind that we have had dramatic improvement in costs in Q2 and Q3 so you would expect Q4 to be more representative of Q3 than a dramatic reduction in another quarter in a row.

Robin Shoemaker, KeyBanc Capital Markets.

Thank you. So one more SPS question if I may. In terms of your stacked rigs, how many or roughly have a five- or 10-year special survey in front of them before they go back to work? And what is your kind of policy regarding the recovery of those costs with the first contract that they would have or where you have the visibility of some margin on the contract that would cover the cost of either the special survey or whatever you are spending to reactivate?

Thanks, Robin. Good question. So when Transocean approached cold stacking of ultra-deepwater DP rigs for the first time, we actually work together with the [Class Society's DNV] in particular to develop a methodology whereby we can cold stack these rigs and stop the clock on the SPS. So we will be able to successfully reactivate rigs without having to spend a significant amount of money on an SPS in addition to reactivation when the rig gets a contract.

That being said, we recognize that whenever you come out of a downturn your first contracts are rather short term as we are seeing and dayrates are rather low. So to expect to get full payback on your reactivation is highly unlikely which means you are going to push out that into the future.

So the way we look at that is until we can add to this is we look at a reactivation in the context of where and who so if this rig has the potential to be reactivated against a six- or 12-month contract with potential follow-on work for another two or three customers in that area, that will give us the comfort and the confidence to be able to reactivate this rig at a payback that is not full for that first contract.

Well said, Mark.

Yes, I appreciate the clarification. I was wondering if terry has some -- can share some thoughts on the jack-up market in general. You've got a lot of stacked jack-ups. We have been hearing that some companies believe some of your competitors believe that the jack-up market does have some prospective activity a little more than the floater market next year. And there again, what opportunities do you see for your idled rigs and your contracted rigs like the ones in Thailand that come up for renewal soon?

Robin, good question. We actually are seeing a couple of opportunities in Thailand for the rigs that are rolling off contract. There are some other players there that are we are in discussions with that look to be tendering here shortly. So we see a few opportunities there and we are already in country so I think that we would be a natural competitor to be able to capture some of that work. So we like that.

I think the reality is that it is the plug and play environment with the jack-up. As soon as you get movement in the commodity price and these tenders start to come out but there is a heck of a lot of jack-ups that are sitting on the beach and in the yards. I think it is going to take some time certainly to work that off but we are seeing a few more tenders than we have been seeing.

Sean Meakim, JPMorgan.

Good morning. Had a little more on the revenue efficiency theme, you noted that one of the drivers is performance based bonuses and that is a key theme that you have been driving towards. As we think about further out maybe in the intermediate term, how do we think that can shift the dynamic of that revenue efficiency compared to what we have seen historically?

It is a good question, I'm not sure that it is going to have a big material impact but we could see it help as we move forward and it just really depends on the customer and the application. So far we have had three to five contracts that we have signed this year that had these performance, the newer performance based metrics tied to them. But some of these are older contracts where we have negotiated performance incentives as well.

So it can move the needle a couple of percentage points maybe but it is not going to become a huge component we don't think of revenue efficiency.

On asset dollars, it is about $10 million so it is not a large component of liquidity either.

Thank you for that. It is helpful to size it. One more on your cash allocation strategy, you guys have been very proactive adjusting your maturity schedule. Just going forward here, do we think how do we think about trying to balance the prioritization of further debt repurchases versus maintaining that optionality for M&A as we get into this next phase of the cycle?

I think all of the above is a strategy. I mean we view the market on a daily basis and try to be opportunistic in the repurchase of our debt and we have done that over the course of the last year. We will continue to look at those opportunities, we will continue to look at the possibility of upgrading our fleet through the acquisition of distressed assets and so that is just something that is ongoing and we as a team discuss on a regular basis.

We would like to thank everyone for joining our call today. If you have any further questions, please feel free to contact me and we will look forward to talking to you again next year when we announce our fourth-quarter and full-year 2016 results. Have a good day.

Ladies and gentlemen, that does conclude today's conference. Thank you for your participation. You may now disconnect.