Transocean Ltd.
Q2 2016 Earnings Call Transcript

Published: 4 Aug 2016

[Operator:]

Good day, everyone, and welcome to the Transocean Ltd. Q2 2016 earnings call. [audio skip] (0

[Bradley Alexander:]

Thank you, Felicia. Good day, and welcome to Transocean's second 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 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 of our participants an opportunity to speak on this call, please limit your questions to one initial question and one follow-up question. Thank you very much, and now I'll turn the call over to Jeremy Thigpen.

[Jeremy D. Thigpen:]

Thank you, Brad, and a warm welcome to our employees, customers, investors, and analysts participating in today's call. Following my prepared remarks, Mark Mey will recap the quarterly financial performance and provide a perspective for the second half of the year, and then Terry Bonno will provide an overview of the market. As reported in yesterday's earnings release, the company generated adjusted net income of $64 million in the second quarter, or $0.17 per diluted share, on $943 million in revenues. We are very pleased with our second quarter results, as they reflect the organization's unrelenting commitment to delivering incident-free operations, maximizing uptime and performance for our customers, and simultaneously streamlining and optimizing every facet of our business. For the quarter, revenue efficiency increased to 96.5% from 95% in the prior quarter. I would like to thank our crews and our shore-based support personnel for delivering another strong quarter. Through to the consistent delivery of 95% or better uptime, we continue to effectively monetize our backlog while further differentiating Transocean in the eyes of our customers. I am especially proud of this quarter's performance, as it included strong contributions from both our latest newbuild drillship, the Deepwater Proteus, which commenced its 10-year contract with Shell in the Gulf of Mexico, and the harsh environment semi-submersible Henry Goodrich, which commenced its two-year contract in Canada with Husky following a successful reactivation after being cold stacked. As such, I would like to recognize both our newbuild team for its effort to prepare the Deepwater Proteus for its inaugural campaign and our reactivation team, which successfully reactivated the Henry Goodrich within budget and in fewer than 90 days. While future rig reactivations will have different requirements, I have every confidence that we will continue to learn and improve with each project, ultimately resulting in lower cost and a more compressed shipyard schedule. Our quarterly results also included exemplary performance from our high-specification jackups in Thailand. These three rigs achieved average revenue efficiency of 99% while successfully drilling wells in fewer than five days. In addition to the strong uptime performance, our continued focus on organizational and operational efficiencies enabled us to maintain very strong margins in the quarter. As many of you know, Transocean has long been recognized throughout the industry for its technical leadership and its innovative approach to addressing industry challenges. Over the past 12 months, the organization has applied that same innovative approach to identify opportunities to improve efficiencies across the enterprise and drive cost out of the value chain. On past calls, we've talked about streamlining the organization, removing layers, and closing and consolidating offices. We've also talked about optimizing our maintenance processes, more closely collaborating with suppliers of critical and costly components, and reducing our daily stacking costs. This quarter, we recognized a step change in the number of days between the moment that one of our dynamically positioned rigs rolls off of contract and the moment that it's preserved in a cold-stacked position. This, as you might expect, has significantly reduced the overall costs associated with stacking. It's important to note that this compressed timeframe is primarily the result of improved planning and the application of lessons learned. Our approach to the preservation of critical components and control systems has not changed. Therefore, we remain supremely confident that these assets are being well-maintained for future operations and can be quickly and cost-effectively reactivated when market conditions improve. Because we continue to find innovative ways to drive costs out of our business, and because we continue to consistently deliver high levels of operating performance, we have better positioned Transocean to work with our customers on contracting solutions that are more aligned with their interests. In the second quarter, we secured a two-year contract for the Jack Bates with ONGC, enhancing our market position in India. The Bates (5

[Mark Mey:]

Thank you, Jeremy, and good day to all. During today's call, I'll recap the second quarter results, provide an update to our 2016 guidance. I will also expand on our recent senior unsecured notes offering and tender offer and Monday's announcement regarding the pending acquisition of Transocean Partners. I also plan to present our end-of-year 2018 liquidity forecast. For the second quarter 2016, we reported net income attributable to controlling interest of $77 million, or $0.21 per diluted share. These results included $13 million or $0.04 per diluted share in net favorable items that are detailed in our press release. Excluding these items, adjusted net income was $64 million or $0.17 per diluted share. Contract drilling revenue for the second quarter decreased by $193 million sequentially to $918 million, due primarily to reduced activity and lower day rates. The second quarter had 214 fewer operating days sequentially, largely attributable to limited recontracting opportunities. Partially (10

[Terry B. Bonno:]

Thanks, Mark, and good day to everyone. Transocean continues to be very busy on the marketing front, despite the most recent dip in commodity pricing. We executed several new contracts since the last earnings call, resulting in the addition of $117 million of contract backlog, bringing our 2016 total to $301 million. Year to date, we've announced 13 floater contracts thus far, representing 39% of the global fixtures contracted to date. As Jeremy stated, the ONGC's exploration tender was awarded to our Deepwater semi, the Jack Bates. This two-year contact will add approximately $93 million of backlog in India. The rig finished its job in Australia in May, and after a brief contract preparation period, the rig will mobilize to India and is expected to commence ONG's contract in early October 2016. Recently, we've increased our presence in India by returning two rigs to work for ONGC and two other rigs to work with the independents. We will continue to pursue opportunities to grow our market presence in this country. In the UK North Sea, we secured two contracts for the Transocean Spitsbergen. The first is a one-well contract with Hurricane Energy, where we and other service providers aligned with our customer to support the launch of the program in 2016 by providing a flexible commercial solution for their drilling program. This contract also includes additional performance incentives that reward us for achieving agreed metrics. This is consistent with our ongoing focus to align with our customer's goal of delivering wells ahead of their planned drilling curves. The second contract on the Spitsbergen is a one-well contract in the Norwegian North Sea with Repsol. This contract will begin in March of next year. We also added a one-well contract for the midwater floater Sedco 704 in the UK North Sea with Independent Oil & Gas, where we again facilitated a flexible commercial solution, providing our customer the ability to execute their program successfully. We are also happy to announce another UK program with an unnamed customer that will commence early 2017 for up to 18 months utilizing the Sedco 712. The backlog is not included in the reported number above. This was a very competitive tender with 16 rigs offered, demonstrating the availability in this market and our ability to successfully execute against our competition. Our Transocean teams are fighting for every opportunity in this challenged market as we are delivering consistent performance and creative flexible commercial solutions, resulting in a winning combination. As a result, our backlog as of July 21 is an industry-leading $13.7 billion. This continues to provide for solid future cash flow generation, with 78% of revenues contracted with the IOCs, 13% contracted with the independents, and 8% contracted with the NOCs. And, further, we do not have contracts in our current backlog that permit cancellation for convenience without some compensation. Although the market remains challenging, oil prices have increased to levels that have increased customer inquiries and inspired many in the industry to call the bottom, only to see oil retreat in the past few weeks. Nevertheless, we have experienced an increase in activity and more productive conversations than in the last few quarters. We are fast approaching our customers' 2017 budget season, which should provide further clarity on next year's opportunities. Our customers remain firmly committed to their deepwater assets, as they view these as a necessary source of future reserves. The pace with which operators will ultimately add rigs to replace both reserves and production is not clear, but our customers realize that the reduction in offshore drilling is not sustainable. A great example of the commitment to increase exposure to deepwater is the recently announced Statoil purchase of the 66% share of Petrobras's BMS-8 block in the Santos Basin in Brazil. This is a historical event and clearly demonstrates a positive shift to opening the basin to allow international oil companies' development of these important projects. While the increase in activity is not imminent, we know the potential of this significant play in the Golden Triangle. Longer-term continued price recovery with a stable outlook bodes very well for significant activity improvements in 2018. As the floater market stands today, marketed utilization is down to 73% with 59 rigs idle and 56 cold stacked. Year to date, 33 floater fixtures have been announced, mostly in Asia, India, and the UK/Norway, with the majority being short term work except for India. As the market challenges persist, we will see more stacking and retirements of the floater fleet. Under these conditions, we expect reactivations will become economically challenging and lengthy, meaning the real marketed supply, rigs ready to work, could be below 200 floaters. And, as we know, the demand over the past five years well exceeded 200 rigs. As in the past, access to the right hot rig may become challenging. We are encouraged by the upcoming development work requiring 1,500-meter DP rigs for almost three years per rig, commencing in 2017 in India. Additionally, we see other customers are taking advantage of the lower pricing environment to proceed with their projects. We are participating in multiple tenders in Nigeria, Mexico, Myanmar, Canada, Norway, and are in advanced discussion on direct-award opportunities where we are very excited to be able to announce in the future. In conclusion, we will continue to position Transocean to increase our market-leading position as we progress through the downturn. This concludes my overview of the market, so I will turn it over to you, Brad.

[Bradley Alexander:]

Thank you, Terry. Felicia, we're ready to take questions now. And as a reminder to all of our call participants, please limit your questions to one initial question and one follow-up question.

[Operator:]

Thank you. We'll go first to Gregory Lewis of Credit Suisse. Gregory Lewis - Credit Suisse Securities (USA) LLC (Broker) Yes. Thank you, and good morning.

[Jeremy D. Thigpen:]

Morning, Greg. Gregory Lewis - Credit Suisse Securities (USA) LLC (Broker) Jeremy, could you talk a little bit about the decision as to – why now does it make the decision to acquire RIG.P? And just if you could provide a little bit on how you backed into the value that was offered?

[Jeremy D. Thigpen:]

Well, I can talk a little bit on the why now, and then I'll turn it over to Mark to talk a little bit more about the value. The why now – essentially, we've talked for the last year, year and a half that Mark and I have been on board. We fully understood the intent of RIG.P, but as we look at the horizon, and it's so uncertain, we didn't have any real certainty around the recovery in the marketplace. And so it's not delivering the value that it was originally intended. And so we did see an immediate opportunity to reduce our costs, to streamline our organization, to eliminate complexity, to improve our liquidity position. And so when you have a good idea, right, and you know it's immediately actionable, why wait? And so that was the really the reason for the timing. And I'll turn it over to Mark for additional comments.

[Mark Mey:]

Thanks, Jeremy. Greg, as you know, we're filing our S-4 in about two weeks in mid-August, so until that's been filed, really can't speak about valuation very much, as you know. So let's pick it up after that, and we can talk about it in detail. Gregory Lewis - Credit Suisse Securities (USA) LLC (Broker) Okay, great. Thanks. And then just, Mark, congratulations on this rolling out of the debt and positioning the company the way you have. Just prior to this, there's been a lot of talk about potentially wanting to do secured financing. And with this, given the recent structuring of the balance sheet with the new debt, is secured financing still an objective in the near-medium term? Or is that something now that can be sort of pushed out longer term?

[Mark Mey:]

So, Greg, as you know, we're uniquely positioned to access the market of both secured and unsecured debt. So with those four Shell contracts of 10 years each and that contract with Chevron for five years, those give us the opportunity to go out and access the market and put secured debt on those. This new currency which we established – what is it, last month – by issuing the priority guaranteed notes, gives us more options. So with this flexibility we're going to be very diligent and disciplined in our approach with regard to adding additional debt to the balance sheet. So if secured debt is cost-effective, we'll absolutely put it on. If it's not, we'll look at other options that are available to us. Gregory Lewis - Credit Suisse Securities (USA) LLC (Broker) Okay, guys. Hey, thank you very much for the time.

[Jeremy D. Thigpen:]

Thanks, Greg.

[Operator:]

We'll go next to Sean Meakim of JPMorgan.

[Sean C. Meakim:]

Hey, good morning.

[Jeremy D. Thigpen:]

Morning, Sean.

[Sean C. Meakim:]

So you guys had a nice quarter on the cost side, certainly, and from Mark's guidance, sounds like there's more room to go in the third quarter. That seems to be in contrast to a lot of what your peers have been saying, as it's getting harder to keep up with the revenue declines. Just – can you help us maybe understand how much you would attribute to the better stacking costs that you're talking about versus how much is coming from additional same-rig savings?

[Mark Mey:]

Yes. Thanks, Sean. Those are very kind comments. I don't want to overlook the fantastic revenue efficiency as well. Getting a fleet of ours, which is heavily weighted towards the ultra-deepwater, more complicated assets, to be able to deliver 96.5%, that is a fantastic quarter. So putting that in the rearview mirror, our cost-out – I would say probably about half-half. Half's from the stacking. As Jeremy mentioned in his prepared comments, we're getting better at it. We've only been doing this now for about a year. So as we get better at doing this, we can shave a little more cost out of that. And then the other is around looking at doing things differently, given the fact that we're faced with a very challenging down cycle. So we're looking at different ways of performing our maintenance, different intervals, with the key point being we're not going to jeopardize any kind of safety or operational efficiency whatsoever. So I think we have a little more room to improve over time, and you have seen from my guidance that we've set some pretty tough targets out there.

[Sean C. Meakim:]

Okay. Thank you for that. That makes sense. And then just maybe for Terry. Congrats on the win in the UK. You noted that you don't have any contracts without some compensation for cancellation for convenience. And so just given how competitive the environment is, clearly as you indicated with that win, is it fair for us to assume there's just a broader trend towards a weakening of terms? Or how should we think about how customer demands are changing around contract terms at this point in the cycle?

[Terry B. Bonno:]

Yeah, Sean. I think we've seen this in every downturn, and certainly quite a few of us have been there since the early 1980s. So every time we have a significant downturn, the contractual terms and conditions do weaken for the contract driller. And then when we go back to the tightened markets, we are able to improve the contract terms and conditions. So it's happened every cycle, and it's certainly going to happen this cycle. So we'll do our best to keep our rigs working and work with our customers to get their projects launched. And we're going to have to give up a bit on the contract terms and conditions.

[Operator:]

We'll go next to Haithum Nokta of Clarksons Platou Securities.

[Haithum Nokta:]

Hey. Good morning. Congratulations again on the nice quarter, recent transactions, and the new win. You mentioned that part of the cost beat was kind of being able to crew down quickly and put rigs into cold stack. I was hoping you can flesh out that a little bit more. And I guess kind of in a similar vein, how could we be thinking about rigs that are maybe a little bit more warm stacked, like for instance the Spitsbergen that'll have a gap between contracts? How will your kind of OpEx levels fluctuate between working and nonworking for that?

[Jeremy D. Thigpen:]

Thanks, Haithum. This is Jeremy. I'll take the first part of that. With respect to our process to stack a rig, I don't want to disclose too much because we actually think it could be a competitive advantage for us. I will say that most of it is in the upfront planning. So we're taking a more proactive approach. We're looking at when rigs are coming off campaign, when they're rolling off contract, and we've got an approach where we get all the interested parties out there and involved early so that we know as soon as the rig rolls off contract what we're going to do with it. And I will leave it at that in terms of the planning piece. And then the rest, unfortunately, is just in lessons learned. As we do more of these, we get more efficient, and so we're identifying opportunities to streamline the process and drive cost out of it, and I think I'll leave it at that for now. And, Mark, do you have any comments on the Spitsbergen and the warm-stack costs?

[Mark Mey:]

With regard to how we're going to account for it, Haithum?

[Haithum Nokta:]

Oh, no, just curious about like, when you have kind of well to well (34

[Mark Mey:]

Well, one of the key benefits to a customer taking a hot rig is having a crew that's familiar with that rig. So what you can do is you can reduce some of the junior crew, but for the most part you're keeping the senior crew intact. You're able to provide the hot rig to the customer, which is the marketing appeal. So, as you are well aware, warm-stacking costs are not much lower than operating costs.

[Haithum Nokta:]

Right. Okay. And then if I could just ask a follow-up, I guess, on the marketing side. We've heard quite a bit about how operators want to keep – they only want to contract hot rigs and rigs that haven't been cold-stacked for too long. I'm curious if kind of in that vein if you see a strategic value for keeping your higher-end rigs contracted over your older rigs. And, to that point, are there any kind of rig-swapping opportunities, for instance like the Sedco 706 for the KG2 in Brazil or something like that? Is that something you've explored?

[Terry B. Bonno:]

Yeah, hi, Haithum. Yeah, we look at a lot of the opportunities certainly to get higher-spec rigs up and reactivated, but it's just not time for that right now. We need to get some clear visibility. We work on prioritizing those rigs that are going to come out of stack as we work through this down cycle. And we have a couple of ultra-deepwater rigs that are going roll off contract, so we're well-positioned to use those rigs for follow-on work. More specifically, you asked about the 706 and the KG2 in Brazil. Those are both on long-term contracts, so we – the KG2 is rolling off, I think, next year, but we're fully confident that'll have an opportunity to keep her in-country, so that's really not necessary at this point.

[Jeremy D. Thigpen:]

One thing I'd add to that is, you're right, I mean, customers will typically prefer a hot rig to a cold rig. But I will say, and as evidenced by the fact that we returned the Henry Goodrich -

[Terry B. Bonno:]

Right.

[Jeremy D. Thigpen:]

– to the fleet and to active duty from a cold-stack condition, our customers are actually visiting our cold-stack rigs, and they're unbelievably impressed with the preservation that's going on. And so those are still marketable rigs for us as well.

[Haithum Nokta:]

Got it. Thank you.

[Operator:]

We'll go next to Timna Tanners of Bank of America.

[Timna B. Tanners:]

Yeah, hey. Good morning.

[Mark Mey:]

Good morning.

[Timna B. Tanners:]

Wanted to just clarify a couple of comments. So one was when you talked about your liquidity and your progress there, you talked about some of the recent actions helping your strategic optionality. I just wondered if that – what you were hinting at there, if there was something more that you were alluding to.

[Jeremy D. Thigpen:]

Not alluding to anything imminent. Just – I mean, we've said on past calls, and we said on this call, we continue to high-grade our fleet. So to the extent an opportunity materializes out there where we can high-grade our fleet and still maintain our near-term liquidity, then we will certainly pursue it. Obviously that's a challenge for us in the current market, but we're keeping our ear to the ground, and we're in multiple conversations. And so if such an opportunity materializes, we'd hope to capitalize on it.

[Timna B. Tanners:]

Got it. Okay, and then along those same lines, with regard to liquidity guidance for year-end 2018, does that still assume the revolver stays at the same size, about $3 billion, and did you still have the same working capital guidance of $500 million released over the next two years? Thanks.

[Mark Mey:]

Well, as you know, the revolver does not mature until June of 2019. So whether we have a little more cash on the balance sheet and some drawn on the revolver or the revolver undrawn and the rest being cash on the balance sheet, it's really – I'd say it's a wash to us, because that's all considered liquidity from our perspective.

[Timna B. Tanners:]

Okay.

[Operator:]

And we'll go next to Ian Macpherson of Simmons.

[Ian Macpherson:]

Hey, thanks. Good morning, and again, good job with the quarter, with the costs, et cetera.

[Jeremy D. Thigpen:]

Thanks, Ian.

[Ian Macpherson:]

I also wanted to follow up on the working capital question, since it did move in the opposite direction in the second quarter. Mark, if you wouldn't mind, if you could provide some color on your working capital movements in Q2, and what your updated expectation is for the balance of the year.

[Mark Mey:]

Yes. Thanks, Ian. Obviously in the first quarter we had several rigs that had early termination payments, which gave us a big working capital boost.

[Ian Macpherson:]

Yeah.

[Mark Mey:]

In the second quarter, we had a few one-offs, really quarterly timing incidents associated with interest payments, payroll retentions, corporate tax payments, all of which ended up having a – you could put it as a negative working capital impact in that quarter. As we look out to the rest of the year, we see – obviously as we see revenues come down, AUR comes down. We'll see more working capital released, and that should continue through 2017 as well, but to much smaller amount. In 2018, once again, we start consuming our working capital. So I think if you look at it in the context of the liquidity forecast through the end of 2018, you'll see a more moderate impact on the liquidity from working capital.

[Ian Macpherson:]

Okay, okay. Thanks. The follow-up question, Terry, you mentioned with some of your recent North Sea contract successes that you've been able to innovate more flexible commercial solutions, I think you said. Could you describe that more? Are you talking about more innovative payment terms? Or is it all just sort of incentives on beating the drilling curve? Or are there other innovations with regard to how you're being paid by the customer, or what?

[Terry B. Bonno:]

Well, it's what you describe, but it's some innovations that we have come up with. And we think that it is a competitive advantage, and we really don't want to get into it too deeply. But the customers have been very pleased with the flexibility. And, in fact, it's helped launch some 2016 opportunities that may not have even hit the launch pad but certainly would've been delayed until 2017. And I think that we're making long-term relationships with these customers, and we wish them all the success. And I think we're certainly going to have some good opportunities there just because we were able to do the things that we're doing in the creative side of being able to help our customers and align with them.

[Jeremy D. Thigpen:]

And the positive of that is not only is it business near term, but rigs can be sticky, and especially high-performing rigs. And so as the market picks up, we feel confident that we're going to keep that customer and that business.

[Terry B. Bonno:]

Absolutely.

[Ian Macpherson:]

Yeah. Okay. Thank you.

[Operator:]

We'll go next to Robin Shoemaker of KeyBanc Capital Markets.

[Robin E. Shoemaker:]

Thank you. Good morning. I wanted to, Terry, ask you if you could comment about the blend-and-extend idea that everybody's working on, and have you seen any change in your customers overall – it's a broad statement – about their interest in doing that? Extending contract terms in return for a short-term reduction in rate? Or are we moving beyond that in terms of where the market is today?

[Terry B. Bonno:]

Robin, I think you're going to see a few more, but our customers – some of the most recent discussions have been around right now, they just are not able to either add the debt onto their balance sheet or they just can't get the programs approved. So I think we might see a pause in the activity. We have one that we're currently discussing, but I haven't seen a lot more opportunities there, and I haven't really seen a lot more in the market.

[Robin E. Shoemaker:]

Okay. Interesting. So I also wanted to ask about – in these situations that you described earlier, one had 16 bids for a particular contract. In those kind of situations, how often is it that the lowest bid wins the work? Are your customers – are they accepting bids that are below the cash costs of operations? Or are they – how would you describe the way they look at these situations in terms of the low bid versus the résumé of the contractor and so forth?

[Terry B. Bonno:]

Okay, Robin. Good question. So what we are seeing is where there's not a tendering protocol required to accept the lowest bidder, in some of the countries where our NOC tendering prohibits them to pick perhaps a more efficient solution. So outside of that environment, we're seeing our customers evaluating it a bit differently. So now they're taking a look at the efficiency of the rig and the financial wherewithal of the contract driller to stand up to their obligations and looking for the long-term financial situation. So we're seeing a bit different view. So in the last couple of tenders, I don't know what our competitors are doing as far as their bidding and their cash breakeven. You would assume some of it has happened, but we're not doing that. And, again, we believe that we're putting forth great opportunities. The performance – they know the performance is great, and they know that we have got a solid technical and engineering team to be able to quickly solve their problems should anything occur. And I think that gives the customer incredible confidence and comfort.

[Robin E. Shoemaker:]

Interesting. Thank you.

[Jeremy D. Thigpen:]

Thanks, Robin.

[Operator:]

We'll go next to Jacob Ng of Morgan Stanley.

[Jacob Ng:]

Morning. Congrats on the outstanding quarter. I was wondering if you could share more granularity as to what you see as necessary, cost-wise and timing-wise, in order to reactivate your stacked fifth generation assets. And perhaps tie that back into maybe if you're factoring for that in what seems like a rising maintenance CapEx guidance into 2017 and 2018?

[Jeremy D. Thigpen:]

Yeah, unfortunately, you can't take just one number and apply it to all of those rigs. I mean, we've taken a good, hard look at it. We have the same team that's going to reactivate the rig that is responsible for stacking it, so they're intimately familiar with all the equipment, all the preservation, and everything that needs to happen to bring that rig back into service. As we look at our ultra-deepwater fleet, we think at a minimum you're looking at about a 60-day reactivation, and the cost could range anywhere between $20 million and, say, $75 million if it extends beyond the 60 days, and maybe even a maximum of, say, 120 days. But we think somewhere in that 60- to 90-day range is probably appropriate for the reactivation, and somewhere in probably the $20 million to $40 million range is the investment required.

[Jacob Ng:]

Got it. Thank you. My follow-up question is for – yeah.

[Mark Mey:]

And Jacob, the second half of the question, as it relates to CapEx in 2017 and 2018, as I've mentioned before, it's directly related to the number of rigs that are coming in for their five-year surveys. So if you look at our fleet and you look at over time – I often get the question asked, Can you give us an average? And it's very hard to do an average when your fleet is a lot smaller. It's really around which rigs are coming in, what year survey – is it the five-year or the 25-year? And you've got to build it up by rig, because I don't think using an average is going to give you a good estimate going forward.

[Jacob Ng:]

Understood; thank you. My follow-up question is for Terry, just honing in on Brazil, where you've seen developments of late that you've alluded to. I was just wondering, in your conversations with customers, are you sensing perhaps a renewed interest in the clients like Statoil in returning to Brazil to fill this gap left by Petrobras? And if that's the case, what could timing look like on that sort of non-Petrobras activity ramp-up?

[Terry B. Bonno:]

Yeah, we are seeing increasing interest in activity. I think the interest has always been there, since it's such a prolific basin. So our customers are actively engaged with Petrobras, looking at their opportunities. We know there's a lot of interest from certainly the majors and the independents. We expect that there'll be more opportunities for them in the future. How quickly that will translate into more rig activity, it's difficult to say, because the independents and majors already have some form of portfolio there. So as soon as we see some significant stability – not significant, but some stability – in the oil price, I think that we'll start seeing some activity within the next 18 to 24 months.

[Jacob Ng:]

Thank you.

[Operator:]

We'll go next to Scott Gruber of Citi.

[Scott A. Gruber:]

Good morning.

[Jeremy D. Thigpen:]

Morning, Scott.

[Scott A. Gruber:]

Jeremy and Mark, I don't think a simple congrats on this quarter's cost beat is really sufficient to acknowledge the materiality of the efficiency improvements that you guys have achieved at Transocean. So a big kudos to all of you.

[Jeremy D. Thigpen:]

Thanks, Scott.

[Scott A. Gruber:]

Jeremy, if we go back to the mid-2000s, rig reactivations occur when a contract was secured to pay for that reactivation, which is fairly easy to obtain given the pace of the recovery. Given the deeper downturn currently and what could be a more modest recovery coming out, would you still demand full payback on the reactivation from that initial contract? Or are there other factors we should be thinking about, such as pulling some of these fifth gens out and seeing them utilized over what should be many years of remaining useful life? Or seeing better fixed-cost absorption in places like West Africa, securing the best crews, coming out first? I mean, are you going to still demand the same kind of economic threshold to pull rigs out?

[Jeremy D. Thigpen:]

Scott, it's difficult to say at this point in time. My guess is the answer's no, that we may not, at least for a couple, and it's going to be based on the customer. It's going to be based on the application and what we see as the future for that particular rig and with that particular customer. I will say that we're also currently exploring the possibility of looking at some of the rigs we've cold stacked, or at least one, and kind of seeing if there's a hybrid over time where maybe we can get that rig ready to go. But now's not the time. We're going to have to see some improvement in the marketplace first and then kind of pursue how can we get some of these cold-stacked rigs back and running even more quickly and more cost-effectively then we have historically. But, again, we need to see some light on the horizon before entering into such a process.

[Scott A. Gruber:]

Got it. I know it's down the road, but it sounds like there could be of couple of the best rigs that are stacked right now that may come out for something less than full payback.

[Jeremy D. Thigpen:]

Yeah, thanks.

[Scott A. Gruber:]

(50

[Mark Mey:]

There is not.

[Scott A. Gruber:]

Okay. Okay; thanks.

[Operator:]

And our final question comes from Praveen Narra of Raymond James.

[Praveen Narra:]

Hey. Good morning, guys, and I just want to echo the congratulations on the quarter.

[Jeremy D. Thigpen:]

Thank you.

[Praveen Narra:]

In terms of the new contract – commercial terms that you guys are offering, it's obviously working really well, with – Terry, you mentioned the 40% of contract wins. Can you give us a sense of kind of the magnitude of your revenue expectations that you're getting from the base day rate or the performance incentives? Understanding you're limited in what you can disclose.

[Mark Mey:]

Praveen, let me take a shot at that. I think the way to look at this is that we have to beat the competing rigs on a day rate basis to be able to win the work. But as Terry mentioned previously, we're not willing to bid rigs at below cash break even. So we look at making sure we cover our cash costs firstly. And then our upside, in some cases where it is beneficial to us and to the customer to drill the well in that time period, we will take our upside in the form of performance bonuses. Now, bear in mind, we have a database of wells which we've drilled around the world, which is extensive. It is by far the biggest in the industry – in fact, probably bigger than anybody else there put together. So we have this information available to us, which we can extrapolate in order make sure that we minimize our risk on taking these performance bonus opportunities.

[Praveen Narra:]

Okay. That's very helpful. And then, Mark, I think in the past we've talked about kind of a working capital to fund the fleet – working cash balance to fund the fleet, about $1 billion to $1.5 billion. I just wanted to make sure, on your clarification on liquidity at the end of 2018 of $500 million in cash, is that the new rate in which it's capable of funding the new fleet?

[Mark Mey:]

Yeah, bear in mind, Praveen, as you go back over time, that Transocean was involved in a significant event -

[Praveen Narra:]

Right.

[Mark Mey:]

– the Macondo event. So there's a lot of uncertainty and risk around that. So at that time too much cash was not a concept which you had at Transocean. You wanted as much as possible. So coming out of that, the company was focused on having a much bigger cash balance, obviously also operating a much bigger fleet. As you are well aware now, our number of operating rigs are coming down dramatically. So as a result, the amount of cash we need to support that comes down dramatically as well. So I'm very comfortable in saying that in a 2018 timeframe, even a 2017 timeframe, we'll be able to drop cash balances down into the mid, call it, $500 million area, and perhaps lower than that. So I would try to indicate that to hold $1.5 billion cash is no longer a goal of Transocean.

[Praveen Narra:]

Right, perfect. If I could ask one follow-up, just quick question on the Goodrich, how much cost carry-through from the reactivation was there in this quarter?

[Mark Mey:]

Oh, it's not much at all.

[Praveen Narra:]

Okay, perfect.

[Mark Mey:]

I can get you the exact number, but I don't think it's much at all. Certainly well less than $10 million.

[Praveen Narra:]

Okay, perfect. Thank you very much, guys. Great quarter.

[Jeremy D. Thigpen:]

Thank you.

[Operator:]

And I'll turn the conference back to management for any additional remarks.

[Bradley Alexander:]

Yes, I would like to thank everyone for your participation and questions today on our call. If you have any further questions, please feel free to contact me. We will look forward to talking to you again when we report our third quarter 2016 results. Have a good day.

[Operator:]

That does conclude today's event. Thank you for your participation. You may now disconnect.