Transocean Ltd (RIG) 2016 Q4 法說會逐字稿

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

Thank you, Dana. Good morning, and welcome to Transocean's fourth-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 of 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 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 during the question-and-answer session, please limit your questions to one initial question and one follow-up question. 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. Our performance in the fourth quarter, as for all of 2016, was exceptional, with adjusted net income of $239 million or $0.63 per diluted share, on $974 million in revenue. For the full year, adjusted net income was $655 million or $1.75 per diluted share, on $4.2 billion in revenue.

During the quarter, our strong revenue efficiency of 100.3%, along with the benefits we continue to see from our streamlined cost structure and reduced operational and maintenance expenses, resulted in an adjusted normalized EBITDA margin of approximately 56%. For the full year, the comparable margin was 46%, which, when considering the sharp year-over-year revenue decline, is quite an accomplishment, and stands as a testament to the excellence and dedication our people have demonstrated throughout the year.

In addition to these strong financial results, we are pleased that our customers continue to recognize us for our strong operating performance. For the second year in a row, Shell recognized one of our rigs as its global floating rig of the year. The newbuild ultra-deepwater drillship, the Deepwater Proteus, which just entered the market in May of 2016, received this year's honor based on its [HSC] and operational performance.

We take great pride in this distinction, especially with this being the rig's first year of operation. As you well know, historically the industry has encountered teething pains when introducing a new rig to the fleet, but through the close collaboration with our customers, and the expert planning and execution of our new build project teams, our crews and our shore-based support, I am pleased to say the three newbuilds, the Deepwater Thalassa, the Deepwater Proteus, and the Deepwater Conqueror are all performing at extremely high levels.

For Transocean, the foundation for delivering strong operating performance is delivering strong safety performance. As such, I am pleased to report that for the full year of 2016, we delivered the lowest total recordable incident rate in the Company's long history, and we achieved this milestone while simultaneously delivering our highest annual average revenue efficiency of 98%, further demonstrating the direct correlation between safety, efficiency and shareholder value.

Last year, I discussed our efforts to further improve safety and operational performance in 2016. This included investing time and resources into enhancing our tools, procedures, and training programs. I am proud to say that the global rollout was well executed, and as a result, we have driven more procedural discipline and consistency of performance across the entire fleet. In 2017, we will continue to upgrade our tools, procedures, and training, as we move closer to our goal of zero incidents and 100% up time.

Before moving on, I would like to take this moment to recognize and thank our offshore and shore-based operations teams for their continued commitment and outstanding performance, as well as our HR and IT teams, for providing the tools required to facilitate the training. I would also like to thank our marketing contracts team, which in 2016, despite intense competition, won roughly a third of the contracted global floater fixtures.

The combination of our long standing and deep customer relationships, our global footprint, our excellent operational performance, and our internal confidence to offer innovative commercial models, helped us to capture market share in this challenging market without bidding below cash break-even dayrates. Of note, we were also able to secure contracts for two cold stacked rigs, when our competitors had hot rigs that were available.

Our supply chain and technical sourcing teams also did some great work in 2016. As many of you know, we recently executed long-term maintenance contracts with two large suppliers. These agreements support our prior goals of reducing operating costs, and more importantly, continuing to improve up time performance for our customers.

Through these new care agreements we are more closely collaborating with our supply partners, and leveraging our respective strengths to further enhance our riser inspection and maintenance program, and proven optimized BOP performance, further improved reliability, and reduce the total cost of ownership over the lives of the assets. We will accomplish these joint objectives by migrating our service model to reflect actual use, in lieu of a more traditional calendar-based approach to service and maintenance. This reliability-centered approach has been approved by D&V, and is being embraced by the respective OEMs.

Ultimately through closer collaboration and coordination, and the aligning of incentives, we are confident that we can further improve rig uptime while reducing our operating costs. We look forward to expanding this effort to include more suppliers and more critical components and systems, as we progress through 2017.

Finally, I would like to recognize and thank our finance and legal teams for their Herculean efforts last year. During 2016, we successfully executed on several initiatives that improved the flexibility of the Company's balance sheet.

These included accessing the debt capital markets, deferring delivery of seven newbuilds into 2020, and acquiring Transocean Partners. These actions as a whole have both solidified our liquidity position through the decade, and provided with us strategic optionality in a market that we believe could soon be ripe with opportunities.

Turning to the macro environment, OPEC's actions last fall appear, at least at this time, to have set a floor on oil prices above $50 per barrel. This is certainly more encouraging than the $26 per barrel that we experienced in February of last year, and as previously predicted, has resulted in an uptick in inquiries from national oil companies and independent operators, who have offshore projects that deliver acceptable returns at $50 per barrel.

Unfortunately, without renewed interest from the IOCs, this recent uptick is unlikely to significantly impact the near-term outlook for the active global offshore rig fleet. While we and the rest of the offshore drilling industry have done an admirable job of reducing costs through this downturn, the IOCs are unlikely to sanction new projects until we see a sustainable price per barrel in excess of $60.

For 2017, we currently expect the IOCs to continue to preserve liquidity, while the NOCs and independents take advantage of the favorable drilling economics currently available in the market, and move forward with some of their programs. As we look toward 2018, we are increasingly encouraged.

The IOCs, which represent the majority of the offshore and specifically the deepwater market, recognize that their future is ultimately dependent on reserve replacement and production growth, yet 2017 will represent the third consecutive year of reduced capital spending, and underinvestment in core high-return assets. As such, we expect the natural course of accelerating depletion to narrow the gap between the supply and demand of oil, and place upward pressure on its price, ultimately encourage and promote activity.

Additionally by 2018, we as an industry will have further streamlined our organizations and our processes, realizing additional performance improvements and cost savings that will result in even lower break evens for our customers. Lastly, assuming oil prices continue to increase as expected, by 2018, our customers will have materially improved their balance sheet, providing them the liquidity that they require to sanction new projects.

While we await those better days, we will continue to position ourselves for the upturn. This includes frequently reevaluating the global rig fleet, and taking the necessary actions to high-grade our already industry-leading fleet.

As discussed on past calls, we remain objective in assessing the marketability of our assets by force ranking them versus all other rigs in the industry. This process has resulted in us recycling seven floaters in 2016, bringing our total to 31 floaters over the past three years. Offsetting these retirements, we have added 17 newbuild drillships and semi-submersibles to our fleet since 2008, with two more contracted drillships scheduled to join our fleet later this year.

Our continuous evaluation has also prompted us to recently approve a strategic upgrade to the ultra-deepwater drillship, the Discoverer India. As part of the upgrade, we will be adding passive compensation, adding a 10K annular and acoustic controls to the BOP, and enhancing her capability to perform managed-pressure drilling. According to our rig ranking methodology, this would make the Discoverer India one of the top tier ultra-deepwater rigs in the world, which will make her more marketable as demand ticks up.

Still with approximately 315 floaters in the current market, which include those under construction, we as an industry remain oversupplied, even when considering the more optimistic estimates of recovery. Although we cannot accurately predict what others will do as the market unfolds, we will continue to be very pragmatic in evaluating both our rigs rolling off contract and our assets that are currently stacked.

As we identify a rig that no longer fulfills our fleet strategy, and/or does not best address what we believe to be our customer-specific demand, we will continue to quickly make the decision to recycle it. In addition to retiring less marketable assets, there are a significant number of high specification rigs, either in the possession of distressed market participants or shipyards, that could enhance our overall fleet and competitive position. We will continue to evaluate these assets and remain ready to act under the right circumstances.

Before I hand the call over to Mark, who will provide you with additional comments on the Company's financial performance, I will take a moment to stress that even though the industry is showing early signs of recovery, the active deepwater floater count is now at levels few envisioned. To mitigate this ongoing challenge, we at Transocean will continue with the approach of managing those things within our control. These include continuing to improve upon our safety and operational performance, keeping the Company lean but responsive, and high-grading our fleet and crews.

Customers expect superior execution, and our ability to distinguish Transocean in these areas will keep our rigs working, and allow us to build on our reputation as the industry's preferred contract driller. With our $11.3 billion backlog, which far exceeds all other competitors in the industry in both size and duration, and our $6.1 billion of liquidity, we have the platform that we need to emerge from this downturn in a much stronger leadership position, and I have every confidence that we will. With that, let me hand it over to Mark.

Thank you, Jeremy, and good day to all. During today's call, I will recap the fourth-quarter results and provide an update to our 2017 guidance. I also plan to update our liquidity forecast through 2018.

For the fourth quarter of 2016, we reported net income attributable to controlling interest of $226 million, or $0.60 per diluted share. These results included royalties disclosed in other income of $39 million, associated with a settlement reached during the quarter related to our patented dual-activity drilling technology.

As detailed in our press release, fourth-quarter results included $13 million or $0.03 per diluted share in net unfavorable items. Excluding these items, adjusted net income was $239 million, or $0.63 per diluted share. Contract drilling revenue decreased $93 million sequentially to $793 million, due largely to reduced activity and lower dayrates. The fourth quarter had 255 fewer operating days than the prior quarter, due to less frequent tracking opportunities.

As Jeremy mentioned, we achieved another impressive quarter of revenue efficiency at 100.3% with full-year 2016 averaging 98%. This was primarily attributable to outstanding execution by operational and technical teams worldwide, but also included a favorable settlement associated with previously-disputed revenue. Other revenue increased $161 million sequentially to $181 million, due to the previously-announced redetermination of the Discoverer India.

Fourth-quarter operating and maintenance expense decreased $93 million sequentially to $314 million. Fourth-quarter's O&M expense benefited from the four items: Recoveries associated with litigation matters, lower costs during the quarter related to the Transocean Winner incident, certain expense credits that we do not expect to recur in the first quarter 2017, and the timing of certain maintenance projects.

G&A expense for the quarter increased sequentially $4 million to $47 million, due primarily to acquisition costs related to Transocean Partners merger and restructuring costs. Our adjusted normalized EBITDA margin, which includes the aforementioned royalty income was 56% in the fourth quarter. This compares to 52% in the third quarter of 2016.

The fourth-quarter effective tax rate, excluding discrete items was 11.6%, compared with 18.2% in the previous quarter. The decrease was due to changes in adjusted pretax income, and a mix of operating results from certain jurisdictions. For the full year, we have paid approximately $110 million in cash income taxes.

Cash flow from operations increased $193 million sequentially to $633 million. The increase was due to a collection of previously invoiced payments with the Company's contracted and delivered newbuild drillships.

Capital expenditures in the fourth quarter was $272 million, and were largely related to scheduled shipyard [mass line] payment associated with the Deepwater Poseidon. We ended the fourth quarter with cash and cash equivalents of $3.1 billion.

I will now provide our financial expectations for the first quarter and then the full year 2017. Other revenue for the first quarter of 2017 is expected to be approximately $45 million, which includes customer reimbursables and approximately 50% of the revenue associated with the early termination of the Deepwater Asgard. The remaining portion will be recognized mainly in the second quarter.

We expect first-quarter 2017 O&M expense to range between $360 million and $375 million. The increase over the fourth quarter, when excluding litigation matters, is largely associated with a full quarter of costs on our latest newbuild drillship, the Deepwater Conqueror, and contract preparation costs associated with the Transocean Barents.

We expect first-quarter G&A expense to be approximately $35 million to $40 million, as we should receive the full benefit of our internal restructuring. Capital expenditures, including capitalized interest for the first quarter of 2017, are expected to be approximately $130 million, mainly associated with contracted new builds. For the full year, we reiterate our 2017 revenue efficiency guidance of 95%. Other revenue for 2017 is expected to be approximately $110 million, which includes customer reimbursables and the revenue associated with the early termination of the Deepwater Asgard.

Operating and maintenance costs for 2017 are expected to be between $1.4 billion and $1.5 billion, a decrease of approximately 23% year on year, and about 5% lower than my preliminary guidance. We expect the overall reduced operating activity in 2017 to be partially offset by the full-year effect of our three newbuild ultra-deepwater drillships. Currently, we are committed to one reactivation in 2017, and for the contract preparation and mobilization of the Transocean Barents.

Also related to our long-term European riser agreements, we expect to deliver lower maintenance costs over the 10 to 12-year contract's duration. The majority of these cost reductions, however, are associated with periodic recertification expenses, which occur at five-year intervals.

We expect G&A expense in 2017 to decline to range of $145 million to $155 million, a reduction of approximately 12% year on year. Full-year 2017 net interest expense is expected to be between $445 million and $455 million. Net interest expense includes capitalized interest of $135 million, and interest income of approximately $15 million.

For our tax guidance for 2017, we believe it's more meaningful to focus on cash taxes paid than effective tax rate. We expect to pay between $85 million and $100 million in 2017. Remember, as pretax income decreases during the down cycle, the effective tax rate increases significantly, and therefore becomes less useful.

Full-year 2017 depreciation expense is expected to be approximately $930 million. Capital expenditures in 2017 are anticipated to be approximately $500 million. This includes $430 million in newbuild CapEx, largely associated with the ship direct payments on the Deepwater Pontus and Deepwater Poseidon. Maintenance and other CapEx are forecast to be approximately $70 million, which includes the expected costs of upgrading the Discoverer India.

Turning now to our financial position. We accessed the debt capital markets in the fourth quarter, successfully placing in two separate transactions $1.25 billion of senior secured notes with 2024 maturities. These funds were used to partially finance the ultra-deepwater newbuild drillships, the Deepwater Thalassa and Deepwater Proteus. Both ships are working on 10-year contracts with Shell in the US Gulf of Mexico.

The aggregate 2016 financing transactions lengthened our liquidity runway, and strengthened our balance sheet. In total, we issued approximately $2.5 billion of debt maturing in 2023 and 2024, while removing $2.3 billion from maturing between 2016 and 2022. As Jeremy indicated, we will continue to evaluate opportunities that would enhance the quality of our fleet. We are in excellent financial position to be proactive should the right situations present themselves.

Regarding M&A, we reacquired the outstanding interest in Transocean Partners, eliminating both administrative costs and our quarterly cash distribution approaching between $35 million and $40 million annually. To complete the all-equity merger, we issued 23.8 million Transocean Ltd shares.

Turning now to projected liquidity. Considering our recent capital market transactions, we now expect liquidity at December 31, 2018 in the range of $4.2 billion to $4.6 billion, including the impact of the senior secured notes we issued in the fourth quarter. Our operating assumptions remain revenue efficiency of 95%, a limited number of new contracts with dayrates assumed to be at or near cash break even costs throughout 2017, with marginal dayrate improvement in 2018, and no speculative reactivations.

In 2018, we expect CapEx of approximately $325 million. This includes approximately $100 million in newbuild CapEx and $225 million from maintenance and other CapEx. This strong liquidity position, combined with our industry leading contract backlog of $11.3 billion positions us very well for the future.

This concludes my prepared comments. I will now turn the call over to Terry, who is suffering with a cold, and has trouble talking. Please bear with her during her prepared comments.

Thanks, Mark, and good day to everyone. Here we go again.

Another cycle trough, and we are beginning to see positive indicators of customers picking up their pencils and putting them to paper. Conversations are becoming more genuine and actionable. We are engaged in multiple discussions regarding consortium, our rig sharing clubs, to facilitate one-off programs with smaller players.

During our recent travels, we became aware of a few surprise tendering opportunities that were about to hit the market. While IOCs are funding dividends, repairing balance sheets, and are investing in easy barrels, we're beginning to see some investors suggest reserve replacement, and production growth should become a priority. And these large reserves are only available offshore where the big companies participate.

Finally, customers are now asking what the real rig supply is, and how many of the rigs are ready to go. We believe customer strategy will soon return to locking in contracts, to take advantage of the low pricing environment, and rebuild their reserve base. All of this, as you know, will take time, and 2017 will be a bit limited in providing meaningful opportunities for the global deepwater floater fleet.

The ramp-up will be gradual but steady, as energy demand continues to improve. Looking back at 2016, even when opportunities were scarce, Transocean's worldwide teams developed multiple contracts totaling over $0.5 billion of contract backlog. As Jeremy mentioned, our extensive customer relationships, proven operational performance and flexile commercial models helped us capture approximately one-third of the 2016 market share.

Our backlog continues to be an industry-leading $11.3 billion. Looking at a few of the successful opportunities, the KG2 commenced operations last week on the three appraisal wells that were ordered by Woodside in the fourth quarter. The program duration could be approximately one year if the options are exercised.

We are excited about the opportunity of placing another rig in the Asia-Pacific region, to gain future potential market share. In the UK North Sea, Hurricane Energy recently exercised another option on the harsh environment semi-submersible Transocean Spitsbergen.

The rig is now scheduled to work in the UK North Sea through May 2017, and will then mobilize to the Norwegian North Sea for Repsol. This activity has proven mutually beneficial as our operating performance has allowed us to earn multiple bonuses while delivering our customers' wells ahead of schedule. We have also extended the Paul B Loyd with BP in the UK North Sea by one month, with the potential to continue drilling for several additional months via options.

Additionally, we just extended the Andaman contract with Chevron by approximately two months in Thailand. We are also in advanced discussions and expect to announce a few more contracts shortly, as we wrap up ongoing negotiations.

As announced in our most recent fleet status report, the Deepwater Asgard was early terminated last month. While disappointed by the cancellation, the Asgard is a highly capable drillship that completed its planned drilling program ahead of schedule, and delivered stellar performance, routinely beating drilling curves for Chevron and its partners.

Per the contract, we were compensated through a lump sum payout. The extremely efficient high specification design positions her very well for upcoming tenders.

As discussed, market continues remain challenged as we enter 2017, but with OPEC's recent production cuts, our outlook has improved. Oil prices has remained above the mid-$50s for almost three consecutive months. Longer term, the macro indicators still point to improved pricing, as the overall supply among both OPEC and non-OPEC production flattens, and demand continues to trend upward.

Additionally, the cheap unconventional on shore barrel break-even price is increasing, with service price inflation trending upwards of 30%. As with on shore, offshore cash break even is not a sustainable business with any player in the food chain.

Efficiency gains and performance improvement are sustainable and differentiating for Transocean, as we continue to compete against the onshore barrel. Our customers continue to view their deepwater assets as important to their future production, as offshore is necessary to replace large-scale reserve depletion. With oil and gas discoveries at a 60-year low in 2016, production shortfalls may become a reality sooner than later.

With budgets set for 2017, we expect the IOCs will represent the majority of the offshore, and specifically the deepwater market, to continue to preserve liquidity in the near term. Assuming oil prices will continue to trend higher during the year, we expect conversations with IOCs to continue to improve.

As we discussed on the last call, new legislation in Brazil is expected to pave the way for international investment by the IOCs. Statoil, Chevron, Shell, and Total are already looking at their portfolio of drilling opportunities there, and we will see wells being drilled in 2018, as evidenced by recent tendering offerings. There is more exciting news from Brazil, with the upcoming three offshore bidding grounds.

Round one, which is the second of the pre-salt, is expected to take place in June, and will cover four unitization areas extending from existing discoveries in Sapinhoa, Carcara, Gato do Mato, and Tartaruga Verde. Known reserves in adjacent blocks will allow players to bring these opportunities to market earlier.

Round two, which is the 14th post-salt is expected in September, and will be comprised of 111 offshore blocks in areas of Santos, Sergipe, Campos, and Espirito Santo. Round three, the third of the pre-salt, originally planned only for 2018, is now anticipated for November, with blocks in the pre-salt area. Additionally, last night, regulators approved to reduce local content by 50%, resulting in an 18% local content requirement for exploration and a 25% requirement for development programs. This greatly improves Brazil's ability to attract new investment offshore, and ultimately improves the overall opportunities for offshore drilling.

India will soon announce their three-rig course for multiple years. We understand a few companies have been disqualified, and we are looking forward to successful results. We expect to see more deepwater tendering by both O&G and others for future development work in 2018.

India is also revising their offshore licensing policies, that will include deepwater blocks. Much the same as Brazil, the objective is to enhance domestic production, increase investment, while growing employment. They are also moving to open acreage licensing, which will allow customers to license at any time, eliminating the need for official bidding rounds.

Turning to Mexico, they had a very encouraging turnout for round 1.4, and we are encouraged for the possibility for our 2018 drilling campaign, particularly with BHP, with their 60% ownership of the producing Trion block. We believe they will quickly pursue this opportunity, and begin drilling in 2018.

In the US Gulf of Mexico, we are seeing interest from independents for their workovers, interventions, and plug and abandonment wells. Traditionally, these opportunities were met by [Fortune, Lord], and lower-spec lower DP rigs.

However, our Development Driller III has a unique offering for this niche market, and the customers are interested. She has the ability to utilize her active heave compensating crane to pull subsea production trees from the sea bed and place them on the deck of the rig, without engaging other vessels in the field to do this work. She is also dual activity, and can be moored or dynamically positioned in shallower water, eliminating competition from drillships.

We expect to see more opportunities in the UK and Norway in the coming months. We certainly see a bit more activity and interest in our fleet, and are actively engaged on several opportunities for 2017 and 2018.

In conclusion, we will continue to position Transocean to win more than our share of projects, and deliver at levels that exceed our customers' expectations. Together, Transocean's team is service focused, operations oriented, and data driven, providing a differentiation strategy that will successfully position us for the inevitable upturn. This concludes my overview of the market, so I will turn it back over to Brad.

Thank you, Terry. Dana, we're ready now to take questions.

(Operator Instructions)

We will go first to Blake Hancock with Howard Weil.

Terry, this one is going to go to you, but I will let Jeremy answer to save your voice here. You discussed some tendering activities that were surprising that are out there, and then you talked about some that you are in negotiations with, that you hopefully announce sooner than later. Can we maybe talk about both of those categories, and what regions of the world and duration? And obviously they're competitive, but are we still above cash break even? Any color you can provide on that commentary?

Blake, yes, we actually have been spending, as you would guess, a lot of time with our customers, and we did come up with a few surprising opportunities that are coming to market. I really don't want to talk about some of the specific opportunities, because we don't believe others are aware of it, which should give us a little bit of an advantage. Sorry that I can't share those particular ones with you.

But the ones that have just come out recently, and I think it speaks to the fact that Brazil has become so interesting, is that in the last couple of weeks, we've received three opportunities, tendering opportunities, and that has been Chevron, it has been Statoil, and it's also been Total, and Total's came in yesterday. So again, we know that Total was interested in awarding the north blocks of Brazil, but now this is a new RFI, for another opportunity in Brazil. So that's very encouraging to see, that we're seeing some back-to-back opportunities from the customers hitting the market.

We think that we are also going to see more opportunities in Trinidad. It's become very interesting to our customers, and right now there's interest from Shell and BHP in that area. We already talked about Mexico, we are going to see the first well drilled here by Talos in Mexico. And then we also believe, with the rounds that have just been awarded that we, as I said, we are going to see the 2018 opportunities there.

We are waiting on -- certainly India has become very active. We are waiting on announcements from the Reliance tender, which is currently being negotiated with a few of the remaining people that are in that tender.

So from our perspective, the conversations have become more real. Our teams are working on tenders around the clock. They're very hooked up. So that's what's changed for me in the last month, I would say, is the fact that everything has become a bit more crystallized, and the conversations have been very enriching.

That's great. Thanks. And then, Jeremy, one for you. You talked about acquisitions, and you talked about the bottom is nearing here. When you are thinking about timing and funding, are you indifferent between cash to a shipyard or equity for what would be some public player, or how are you thinking about what's the best plan of attack here as we approach the bottom?

I think all options are on the table. I don't think hat to be an either/or. As I said in my prepared remarks, and Mark did as well, we're pursuing all opportunities out there, that we think could enhance the quality of our fleet.

Obviously, we are looking at the rigs that have been stranded at shipyards, but we are also looking at possibly using equity for complete company transactions as well. I think everything is on board at this point in time. It's a function of timing, getting the ask together, and getting the right deal.

And we will go next to Greg Lewis with Credit Suisse.

Mark, in your prepared remarks, you laid out the guidance around liquidity. Clearly the mid $4.2 billion to $4.6 billion in liquidity looks good. You had a busy end of back half of 2016.

As you look ahead to 2017 and how are you thinking about maybe bolstering liquidity? How are you thinking about maybe potentially secured financings? I know you have a revolver that still has a little bit of time left on it. If you could just talk a little bit about how you are thinking about Transocean's current liquidity position, and maybe how you are thinking about it, what you want to do this year for it?

Yes, thanks, Greg. Appreciate the question. You have to realize, we are certainly awash in cash right now. We have over $3 billion of cash.

I would like to take you back 12 months to last year at this time, when oil was trading at $26 a barrel. Capital markets were firmly shut for offshore drillers. That has all changed, so we have a full capital market option available to us, whether it's secured, unsecured, or any other type of instrument we want to put on the balance sheet.

So I don't feel that we're under pressure at the moment to enhance liquidity. We will take opportunities as they provide themselves to us. We believe oil prices are going to be constructive, but as we know, they don't go up in a straight line.

As there are dips, there will be opportunities for us to go back out and do some liability management, and we will do that. That we will opportunistically raise additional funds as the opportunities are out there.

As it relates to the revolver, that is something we do intend to address in the first half of 2017. So you can expect us getting into negotiations with our banks, and working through an extension on that revolver. As you know, it's unsecured, it's $3 billion, and to date it's still unused.

Okay. Great. And then my next question is regarding the Discoverer India. The decision to upgrade that, it seems like that's where the bulk of the maintenance CapEx, or upgrade CapEx, that you alluded to.

I'm just wondering, is it something specific about that rig? You have a couple other -- or is it timing? You have a couple other that vintage drillship that you haven't made the decision to upgrade, and what I'm wondering is, as we think about that capital outlay in this market, is there a line of sight on that specific type of upgrade that is driving the decision to spend that additional capital at this point in the cycle?

Yes, thanks for the question. First of all, the India contract came up not too long ago, and we have several near-term opportunities of customers who are interested in her, so that's one element of it. The other element of it, as you rightly said, as we go through our forced ranking of our rigs and we evaluate our assets vis-a-vis our competitors' assets, we have a few assets where, with somewhat minor upgrades, we can move them toward the top tier of all the ultra-deepwater assets in the industry.

The India is one of those. You are right in saying there are a few others that have similar characteristics, that we think could be upgraded similarly. Just to put it in perspective, we're talking a $25 million to $30 million investment here.

It's not the bulk of the maintenance CapEx. It's less than half. And so we think there's great opportunity to upgrade several assets in our fleet, to make them more competitive as the market turns around.

We will go next to Haithum Nokta with Clarksons Platou Securities.

Congrats on a nice quarter of solid operations. I wanted to ask, you mentioned firmer inquiries, and sounding more genuine, and things like that, but you also mentioned how there's more noise about reserve replacement from the investor base for the IOCs. I'm curious if you think, if it takes longer to get to $60 oil than maybe the market expects, could you see more sanctioning of projects, based on the IOCs looking at their internal production outlooks, and noticing this rather significant drop off that could happen by 2020, 2021?

I think you absolutely could. If you could find a way to get both, that would even spur demand even more. I think it's the first time it's been here just over the last month or two, where you have seen sell-side analysts, you have seen investors actively questioning the lack of investment by some of the IOCs, in terms of reserve replacement.

In think that will continue as the year unfolds. My guess is that it is actually -- we're actually going to see an increase in oil prices as well, but even if we don't, I think that as you get into 2018 and certainly as you get into 2019, the pressure to replace reserves is going to heighten.

Very good. Maybe on the jackup market, you haven't been as a enthusiastic as some of your peers there, and obviously it's a smaller slice of your overall business. But can you maybe just talk about your position in that market and how you feel about it going forward?

Well, Terry announced we did get one extension on one of our jackups with Chevron in Thailand, so we were certainly pleased with that. There's no doubt there's a lot of interest in jackups at this point in time. Activity is starting to pick up.

And we knew that. That we knew jackup activity would pick up before ultra-deepwater. The challenge that the entire jackup market faces is just sheer supply and demand.

There's just an overwhelming supply out there, and although demand is picking up, there are more than enough assets out there to fulfill that demand. So the challenge really is moving pricing forward. So I think it is going to be a little while before we're able to get meaningful pricing increases across the industry, until we start to see that supply/demand gap narrow.

We will go next to Ian Macpherson with Simmons.

I had a question about the pricing dynamic. It is, you made the comment that you haven't necessarily had to bid below cash break even. There have been sporadic instances where others have, not dramatically lower, but we're also seeing so many dayrates that aren't published.

Your margins and the industry's margins today are still so high, surprisingly high and you have done so much with insulating your margins with cost improvements. But these dynamics, when you put them all together, tell us that pricing and margins are just troughing at a much more benign level than we all would have guessed?

Or should we be girding ourselves for lower dayrates from here, and maybe even lower for longer, given how much more economic trend there is to give, and the fact that the market is still going to be loose probably for another couple years? Or maybe it won't be loose for another couple of years, if you have a different thinking on that.

I will try to answer that. I think to try to back into what margins are going to do, you really need to look at the overall backlog. We're very fortunate in that we have the four 10-year contracts with Shell that were well above market rates today, and of course, the five-year contract with Chevron.

So we have the good fortune of having that higher margin business already baked into our backlog. And you couple that with the fact that we've been able to drive so much cost out of the business, that bodes well from a margin story. Having said that, then you have to look at all the new contracts being added and assume they're somewhere around cash break even.

For us so far we've been above cash break even. But then you just got to factor the two together. The good news for us again is the bulk of our backlog, long-term contracts, high margin, and what we're bringing in today are relatively short duration, even though they're much lower margin, they're short duration, and don't have as big an impact on our total financial results as they may on others.

For us, if you think about it, we probably peaked, margin-wise, in 2016. As Jeremy indicated, and as Terry suspects, we're going to be seeing lot more activity in 2017 and 2018 that's going to be at much lower EBITDA margins. So I would expect that the trend is going to be down for the next couple of years in margin until we start seeing the rate improvement, which in our time frame is sometime in 2018.

I think that's really helpful. I appreciate both of your answers there. I think the kernel of my question is, there's cash break even dayrates, and then there's stacking avoidance dayrates, which are presumably much lower, right? And the latter has not been commonplace, at least we haven't observed it as being commonplace, but is that a realistic risk as we go through the late innings of the trough, that rates aren't at $150,000 they're at $75,000 a day for good rigs? That type of thing?

It's always a risk. As you know, to date we've had fairly decent discipline around dayrates, because as everybody knows, operating a rig safely and efficiently takes some money. So there has to be a certain amount of dayrate to support that level of performance.

But I also think that some of the more distressed drillers are being faulted out, because customers recognize the potential of using a rig where it may be cash starved, so they are being very careful around that fact. We've heard this directly from many of our customers to date. I'm not saying we won't see contracts below cash break even, but as you mentioned, over the last 18 months, I could think of a small handful where that's actually occurred.

Just to add one more thing, Ian, there's obviously not all of the fixtures have been announced. We do know of opportunities that others have won, and as Mark suggested, we're being very disciplined. We don't want to lock in a five-year contract at a really, really low rate.

It doesn't make any sense for us, and we see the dynamics improving. We can't, obviously -- we are following our strategy and our competitors will follow their strategies. But us locking in long for anything, when we see improving upside, is just not what we're going to do.

We will go next to Colin Davies with Bernstein.

I would like to delve a little bit more into the scrapping decisions. You have a lot of rigs still on stack, and some rigs coming off contract. You made a few remarks in the prepared remarks. I would just like to get a little bit more color, if I can, as you look at the fleet, how many more candidates are out there, because Transocean has been one of the leaders in terms of the scrapping pace so far.

Yes, I would just correct you a little bit. We've been by far the leader, unfortunately, in scrapping. We have taken what we believe to be a very pragmatic approach to this, and we've described it before in terms of force ranking our rigs, based on technical capabilities, vis-a-vis the rest of the worldwide fleet.

Then we have taken a position in terms of any more normalized environment, whatever normalized is in this industry, in a more normalized environment, how many floaters, in the near to midterm, do we think the industry may actually need. So we slotted our rigs in accordingly, drew the line.

Anything that fell below the line for us, we then asked ourselves, is there a customer specific or regionally specific application for this particular asset, where we think we've got a real near-term future as the market picks up? Of course you maintain those rigs and you stack them.

Those that didn't meet that test, or you couldn't answer yes to those questions, we immediately scrapped them. That's our mind-set behind that.

Now, that changes. As factors around us change, as customer sentiment changes, as market sentiment changes, as the rig is stacked for a longer period of time and it looks like the reactivation may cost more than we had initially assessed, that all factors into the calculus. Just because a rig is stacked today, we think that it is going to be marketable. We made the decision to invest in the preservation of that rig.

But every month we constantly revisit, as we get new data points. So there could potentially be some rigs that are stacked today that, three months from now, six months from now, nine months from now, we say the parameters have changed, and now we think it is time to recycle that rig.

So how many are there? I couldn't give that you answer today. It is constant evolving.

Okay. That's very helpful. Thank you.

And just one follow-up, which is somewhat related. As you start to look at transaction opportunities to further enhance the portfolio, it's a difficult question to answer, but how confident do you have to be at that market trajectory that you have been describing today, to be comfortable taking on assets that may be technically attractive, but are still effectively without work, and could be without work for an extended period?

It's a delicate balance, isn't it? Because if you wait too long, and everybody feels secure in the recovery of the market, then the ask starts to get a little bit higher. So certainly, we would like to have more certainty than less.

But as I said, we're actively looking now. We're feeling as though we're at the trough or soon approaching the trough, but, who knows, this market is unpredictable. Mark, I don't know if you want to add anything to that?

I was going to say the same thing. You cannot wait too long, because the opportunity may not be there for you, so you have to strike. Transocean, given our marketing presence and market intelligence, we probably have the best information out there, and probably get a look before most people do. So I think when we do decide to go out and strike, you can read that as a sign that we think the market has certainly troughed and improving from there.

We will go next to David Smith with Heikkinen Energy Advisors.

Just following up on the upgrade question, regarding the $25 million to $30 million level upgrades, does that benefit from cost deflation at the yard, or the OEMs, and then maybe wondering if you have a sense of how much the India upgrade would have cost in 2014?

That's a great question, David. We haven't run that analysis, but you can assume, just looking at margins from some of the OEMs that have come down quite dramatically that we have taken advantage of that. That certainly was not the motivation to go out and do this. We've had opportunities which we have looked at for our rig fleet, that the few upgrades we're making to the India would position that rig very well for those opportunities. So recognize the point, but that wasn't the motivation.

Can I ask if you expect to earn a payback on the upgrade, in a two to three-year time frame, or how you think about the return on that?

Two to three years, absolutely, yes.

We will go next to Vebs Vaishnav with Cowen.

My question to Mark, you spoke about few factors driving lower than guided OpEx for fourth quarter. Can you help us quantify the bigger buckets that drove OpEx from almost $405 million to $345 million?

As I mentioned there was really four areas. We had some recoveries with litigation, that was in that $30 million area. We had some lower costs on the Transocean Winner incident, and that's in the mid-teens. We had some one-off credits in the quarter, also in the low teens. And the rest of it is associated with timing of maintenance projects, which you know happens every quarter.

Okay. That's very helpful. And as we speak about the $360 million to $375 million OpEx for the first quarter, did you say you have Barents reactivation costs included in there, and if so, how much?

The Barents reactivation costs are not that much. I would say that it's probably in the $20 million area. They will be capitalized, and about $40 million that will be expensed.

And we will take our final question today from Sean Meakim with JPMorgan.

Just thinking about the upgrades to the Discoverer India, managed pressure drilling seems like a pretty nice way to differentiate a deepwater rig. Can you give us an update on your broader MPD exposure, and how you think about optionality from the fleet to maybe add more, if demand warrants it?

Sean, this is Terry. I think you nailed it. We are seeing a lot of opportunities out there, certainly in Brazil and West Africa and in Asia, where the customer wants that capability on the rigs, and it is something that we have the opportunity to do now on the India, and we will certainly take a look at doing that on some of our other fleet, because again, the market is going to support that upgrade and it is going to be a requirement. So that is another reason to do it.

It's pretty inexpensive on a relative scale, I imagine, right?

It's not terribly expensive, no.

Thank you. One other thing. In Jeremy's prepared remarks, he talked about conditions based monitoring, and adding incremental critical suppliers and components this year. Maybe you don't want to call anyone out, I can understand that. But just thinking about what are some of the areas that you focus on next as we go through the year?

Well so far, we've addressed pressure control equipment with two large suppliers. There's certainly another out there that we would like to negotiate similar agreements with. But also as you look across the drilling equipment package, especially the critical components where down time is just absolutely devastating and cost to maintain is high, and so you are talking top drives and iron roughnecks and racking systems and draw works.

Across the spectrum we would like to engage in partnerships with our suppliers whereby we're aligned around the same objectives, which is reducing the total cost to maintain the asset for the life of the asset, and improving uptime for our customers. I feel confident we will get there, and look forward to the ultimate results there.

And at this time I would like to turn the call back over to Mr. Alexander for any additional or closing remarks.

Thank you to everyone for your participation and questions today. If you have further questions, please feel free to contact me. We will look forward to talking with you again when we report our first-quarter 2017 results. Have a good day.

Again that does conclude today's presentation. We thank you for your participation.