Transocean Ltd.
Q3 2012 Earnings Call Transcript

Published: 5 Nov 2012

[Operator:]

Good day, and welcome to the Transocean Third Quarter 2012 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Thad Vayda. Please go ahead, sir.

[R. Thaddeus Vayda:]

Thank you, Shannon. Good day, and welcome to Transocean's Third Quarter 2012 Earnings Conference Call. A copy of the press release covering our financial results, along with supporting statements and schedules, is posted on the company's website at deepwater.com. We've also posted a file containing 4 charts that may be referenced during today's call. The file can be found on the company's website by selecting Investor Relations, Quarterly Toolkit and then PowerPoint Charts. Charts include average contract day rates by rig type, out-of-service rig months, operating and maintenance cost trends and a new chart illustrating historic and forecasted out-of-service rig month by asset class for the years 2008 to 2013. The quarterly toolkit includes 4 additional financial tables for your convenience covering revenue efficiency, other revenue details, daily operating and maintenance costs by rig type and contract intangible revenues. Joining me on this morning's call are Steven Newman, Chief Executive Officer; Greg Cauthen, Executive Vice President and Chief Financial Officer; and Terry Bonno, Senior Vice President of Marketing. Before I turn the call over to Steven, I'd like to point out that during the course of the call, participants may make certain forward-looking statements regarding various matters related to our business and company that are not historical facts, including future financial performance, operating results, estimated loss contingencies associated with the Macondo well incident, matters associated with the pending divestiture of our shallow water drilling assets and, in general, the prospects for the contract drilling business. Such statements are based on the current expectations and certain assumptions of management and are, therefore, subject to certain risks and uncertainties. As you know, it's inherently difficult to make projections or other forward-looking statements in a cyclical industry since the risks, assumptions and uncertainties involved in these forward-looking statements include the level of crude oil and natural gas prices, rig demand, the effects and results of litigation, assessments and contingencies and operational and other risks, which are described in the company's most recent Form 10-K and other filings with the U.S. Securities and Exchange Commission. Should one or more of these risks and uncertainties materialize or underlying assumptions prove incorrect, actual results may vary materially from those indicated. Transocean neither intends to, nor assumes any obligation to, update or revise these forward-looking statements in light of developments which differ from those anticipated. Also note that we may use various numerical measures on the call today that are or may be considered non-GAAP financial measures under Reg G. As I indicated earlier, you'll find the required supplemental financial disclosure for these measures, including the most directly comparable GAAP measure and an associated reconciliation, on our website at deepwater.com under Investor Relations, Quarterly Toolkit and non-GAAP Financial Measures and Reconciliation. Finally, to give more people an opportunity to participate in this call, please limit your questions to 1 initial question and 1 follow-up. Thanks for your attention, and I'll now turn the call over to Steven Newman. Steven?

[Steven L. Newman:]

Thanks, Thad, and welcome to all of our employees, customers, investors and analysts. Thank you for joining us on the call today. We had a very eventful quarter, during which we made notable progress against a number of key initiatives. As you saw from the press release, we reported adjusted earnings from continuing operations of $499 million, or $1.37 per diluted share, including $880 million in net unfavorable noncash items, mostly related to the impairment of assets and goodwill associated with our pending divestiture of the standard jackup fleet. We reported a net loss of attributable to controlling interest of $381 million or $1.06 per diluted share. Our adjusted results clearly demonstrate the progress we have made in improving our execution in the field. At 94.3%, third quarter revenue efficiency from continuing operations was the best in 3 years, and an increase from about 92% in the second quarter of 2012. I am particularly pleased with the performance of our high-specification floater fleet, which achieved revenue efficiency of 95.4%. Ihab Toma, Alan Quintero and the entire Operations team around the world deserve a ton of credit for their tireless efforts in delivering these results. While I am by no means satisfied with where we are and there is work to be done to achieve even better operating performance as well as to ensure its sustainability at these improved levels, I am happy with our progress and optimistic about the future. Another noteworthy item, since our July 18th Fleet Status Report, we've added an incremental $10.2 billion in backlog, bringing year-to-date contract additions associated with continuing operations to $15.4 billion. This is a direct result of the strength of our marketing team, the deep customer relationships that they have nurtured over the years and, I believe, also reflects the confidence and trust that our customers place in Transocean. I want to thank them for allowing us to be a part of their business and to contribute to their success. As you have likely noted, over the past quarter, we have announced a number of changes in the senior management team. On October 1, John Stobart joined us as Chief Operating Officer. John brings with him a demonstrated passion for operational excellence and a career of delivering exceptional results. I've known John a long time, and I am confident he is the right person to build on Ihab Toma's notable success over the last several quarters and take our operational execution to the next level. Concurrent with John's arrival, Ihab agreed to become our Chief of Staff, where he continues to oversee our marketing efforts, and has assumed responsibility for our human resources, information technology, supply chain and asset divestiture functions. I'm certain Ihab will provide exceptional leadership and strategic direction to these key functional areas and continued support for the implementation of our vision and strategy across the organization. On November 15, Esa Ikäheimonen will take over from Greg Cauthen as Chief Financial Officer. Like John, Esa brings a passion for excellence and has a career track record of delivering shareholder value. I am very pleased to have John and Esa join our team. Finally, Nick Deeming, our former General Counsel, recently resigned from Transocean. I want to thank Nick for his service during his tenure at the company. We have a considerable depth of knowledge and experience on our legal bench, and as such, Mike Munro, Vice President, Deputy General Counsel and Chief Compliance Officer, and David Schwab, Senior Associate General Counsel, Global Head of Dispute Resolution, have stepped up to seamlessly assume management of our internal and external legal affairs. Over the past several quarters, I have focused my comments on 3 critical issues

[Gregory L. Cauthen:]

Thank you, Steve, and good morning, everyone. As Steven mentioned, we reported a net loss attributable to controlling interest of $381 million, or $1.06 per diluted share, for the third quarter 2012. Excluding $880 million in certain net unfavorable items mainly related to the impairment of the assets associated with our pending divestiture of the standard jackups fleet, our adjusted earnings from continuing operations were $499 million or $1.37 per diluted share. This compares with similarly adjusted restated earnings of $0.88 per diluted share in the second quarter of 2012. In September 2012, the company committed to exit the standard jackup and swamp barge markets. As a result of this decision, we have classified these rigs as held for sale, discontinued depreciation expense and reclassified operations and related gains or losses and impairments and discontinued operations. For consistency and comparison, the standard jackup operations for all prior periods presented have also been reclassified as discontinued operations. Consequently, as I make my comments, I will specify whether they relate to the whole company, continuing operations or discontinued operations. In our third quarter results, net unfavorable items included an $878 million loss on impairment of assets included in discontinued operations associated primarily with exiting the standard jackup market. This impairment includes fixed assets, goodwill and other assets related to our Standard Jackups and swamp barge and reflects the excess of the carrying value of such assets over their fair market value. The fair market value is net of approximately $80 million in taxes, advisor fees, legal fees, employee-related and other costs associated with the sale of these assets. We have recorded the loss on impairments in the third quarter and anticipate no additional significant valuation adjustments when the transaction closes currently expected in the fourth quarter. The remaining net unfavorable items are as follows

[Terry B. Bonno:]

Thanks, Greg, and we will miss you. Hello, everyone. Before we cover specific markets, I would like to make a few general comments. As Steven mentioned, we had a stellar quarter from many perspectives. We added $10.2 billion of contract backlogs since our last earnings call, totaling $15.4 billion from continuing operations year-to-date. We collaborated with an important customer, Shell, to design an industry-leading drillship that will be capable of meeting the highest standard of safety, environmental and operating efficiency. The newbuilds are also provisioned to accommodate technical capabilities that are not available today. The commercial terms associated with the rigs are also industry-leading, $7.6 billion of contract backlog for 4 rigs, totaling 40 rig years of term. Year-to-date, industry Ultra-Deepwater contract executions totaled 46 fixtures, or 160 rig years, which is the highest level of fixtures executed since 2008. This demonstrates the urgent need of our customer and highlights the positive demand outlook for our available fleet as we move into 2013. Reflecting this demand, we contracted the Deepwater Invictus for 3 years with another long-term customer, BHP, leaving only 1 newbuild, the Deepwater Asgard, available at the end of 2013. Some additional market highlights include utilization and dayrates for the Ultra-Deepwater fleet remain at historic highs, and our customers continues to secure rig capacity at near record levels over the past 3 quarters. We continue to see positive momentum for the available units in 2013 and strong interest in the rigs that are available in 2014. With the high utilization of the Ultra-Deepwater market, we're seeing increasing opportunities for our Deepwater fleet. Tendering and contracting activity in the Deepwater market continued to improve, and we are in discussions with several customers to contract the fleet for their 2013 program. We expect to report more positive news for the rest of our Deepwater fleet with prompt availability. Midwater activity, especially in the U.K. and the Norwegian North Sea, is approaching an all-time high, pushing rates over $400,000 per day as evidenced by a multi-well program at $408,000 per day for the Transocean Prospect in the U.K. Multiple tenders in the U.K., Norway and Eastern Canada for long-term exploration and development programs are providing opportunities to extend the existing fleet and bring additional Harsh-Environment capacity into the market. Utilization and dayrates for premium and Standard Jackups remain strong due to steady demand. This is reflected by solid contracts announced in the key demand areas of the U.K., Southeast Asia, West Africa and the Middle East. We therefore currently expect the newbuilds arriving in the market in 2012 and 2013 to be absorbed without significant impact on the market dynamics. Beginning with Ultra-Deepwater, let's take a closer look at the various markets. The Thai Ultra-Deepwater market has the result in favorable pricing opportunities from the high $500,000 per day to well over $600,000 per day per rig with prompt availability. Ultra-Deepwater demand is primarily being driven by exploration programs in the U.S. Gulf of Mexico, West Africa, East Africa and in other emerging markets. Asset-intensive development programs resulting from exploration successes and a need to combat declining production from mature fields has compounded the demand for these Ultra-Deepwater assets. We think that operators' recent exploration successes will result in incremental demand for Ultra-Deepwater rigs over the next several years as field development is more rig intensive than exploration drilling. As a result, we expect existing and incremental Ultra-Deepwater capacity to be fully absorbed. Since our last earnings call, we have been able to secure multiple Ultra-Deepwater contracts totaling approximately 46 rig years worth over $9 billion. The Deepwater Invictus is one of our most recently contracted fixtures at a clean rate of $595,000 per day, exclusive of mobilization, for 3 years in the U.S. Gulf of Mexico, as previously mentioned, and demonstrating our engineering and operational depth of expertise to deliver rigs that will meet Shell's highs expectations. We were awarded contracts to build 4 drillships with industry-leading capacities, which will commence work in late 2015. And then later, the others will follow on in 2016. Highlighting the strengths as a market and our customers' urgency to continue to contract rigs and this tight market, we recently announced the fixture of $600,000 per day for a fifth-generation rig, the Sedco Express, built in 2001. Additionally, we recently received a letter of award for the Discoverer Americas also at $600,000 per day for 2 years, which is not included in the announced contract backlog. We are also in advanced discussions on our existing Ultra-Deepwater units available in late 2013 and beyond at very attractive rates. Our confidence in the long-term future of the Ultra-Deepwater market continues to be confirmed by the strong customer interest in the Deepwater Asgard and the remaining fleet available in '13. Turning to Deepwater. Due to the previously mentioned tightness in the Ultra-Deepwater market, we expect the tendering and contracting activity to continue to improve over the next several quarters. Recent Deepwater fixtures of over $500,000 per day of our competitors and the open demand, particularly in West Africa and Asia, we remain confident that we will benefit from these opportunities. In the Midwater and Harsh-Environment floater market, we continue to see strong demand in Norway and the U.K., where we're close to being sold out for 2013 and are evaluating opportunities to selectively reactivate some of our idle capacity. Based on inquiries received from our customers, we believe that the market will continue to be undersupplied for 2013 and possibly well into 2014, providing ample growth opportunity with a few customers requiring Harsh-Environment newbuilds for their programs. Since our last earnings call, we executed several Midwater contracts totaling over $750 million of contract backlog with approximately 6 years of term. We secured a leading-edge contract at $365,000 per day for a 2-year term on a GSF Rig 135 in the Congo and $408,000 per day in the U.K. for a 2-well program on the Transocean Prospect. We just signed a contract for $410,000 per day, plus bonus, for a 32-month term on the GSF Grand Banks in Eastern Canada that is also not included in the announced contract backlog. Outside of the North Sea, the trajectory of demand for Midwater rigs is somewhat less certain, and we are actively looking for opportunities for our rigs becoming available in late 2012 and 2013. Moving to the jackup market, demand for premium and Standard Jackups remained strong. Since our last earnings call, we've been able to secure multiple contracts across our entire jackup fleet, totaling approximately 9.5 rig years. Increased utilization has resulted in rates for High-Specification Jackups moving over $150,000 per day, as evidenced by long-term fixtures in West Africa, and over $200,000 per day in the U.K. Non-Harsh-Environment premium units are commanding rates in the $160,000 per day. Dayrates for Standard Jackups range from $97,000 per day for lower-capacity rigs to about $130,000 per day for higher-specification Standard Jackups. In summary, the tight market in all asset categories, coupled with the continuing exploration successes, maturation of some large development programs and emerging plays, continue to support our view of ample opportunity to contract the existing fleet or for future growth of our customers. This concludes my overview on the market, so I'll turn it back to you, Steven.

[Steven L. Newman:]

Thank you. Shannon. With that, we're ready to open up the line for questions.

[Operator:]

[Operator Instructions] And we will take our first question from Angie Sedita with UBS.

[Angeline M. Sedita:]

The first question for you, Steven, is congratulations on signing the 4 newbuilds for the construction. Do you see today additional opportunities for -- over the near term to build additional Ultra-Deepwater rigs? Or do you believe that 4 is manageable and you're not actually seeking additional opportunities at this time?

[Steven L. Newman:]

Well, I think there's question on the marketplace there, and I'll let Terry comment on that in a minute. We remain focused on achieving some well-articulated balance sheet objectives that we think are fundamental to allow us to continue to execute our business plan going forward. Greg talked about those in his comments, our gross debt target of $7 billion to $9 billion and our liquidity target. So we would want to make sure that any opportunities we pursue are seen in that context. We've got to continue to focus on ensuring that our balance sheet is supportive of the strong investment-grade credit rating we're looking for. I'll let Terry talk about what opportunities might be out there in the marketplace.

[Terry B. Bonno:]

We're in solid discussions with quite a few of the customer base, and we are encouraged that looking beyond certainly 2014 and '15, that they are still talking about future development programs, so they're going to need -- simply need more rigs. And we find that to be very encouraging and certainly supports all the comments that we've made about how we believe in the strength and long-term view of the the Ultra-Deepwater market. So yes, I think there's more to come. And if you look at open demand today, that's not just what's public. That's not open demand that us and our competitors are in private conversations with our customers. But today, you see 17 to 20 opportunities that are on the books. So I think that it's strong and the conversations are still very fruitful.

[Angeline M. Sedita:]

Okay, great. That's very helpful. And then as an related follow-up, answer as you can, are you today, Steven, in active conversation with the Department of Justice today? And have you had any conversations at all with the Plaintiff's Steering Committee recently?

[Steven L. Newman:]

On those 2 specific points, Angie, I'm probably not going to say anything more than what's already in our disclosures regarding the investigations with the DOJ, the PSC and BP and all the other parties that are involved in the Macondo litigation.

[Operator:]

Our next question is from Gregory Lewis with Credit Suisse.

[Gregory Lewis:]

I just have a couple more fleet questions. So when we think about the Sedco 706 in Brazil, what's sort of the outlook for that rig over the next sort of couple months?

[Terry B. Bonno:]

The Sedco 706 doesn't become available in 2013. She's under contract still with Chevron at this time.

[Gregory Lewis:]

But isn't that the rig...

[Terry B. Bonno:]

They've just -- yes, it's the rig that was involved in Frade. But we're -- Chevron is in discussions at the moment trying to assign the rig to Petrobras so that it can remain active in Brazil.

[Gregory Lewis:]

Okay, great. And then just sort of switching gears to the Midwater rigs that you have coming on. Are you able to provide any sort of outlook guidance on the Grand Banks and the Arctic I?

[Terry B. Bonno:]

Yes, well, on the Grand Banks, I just mentioned in the commentary that we just signed a 32-month contract. So that will certainly keep her occupied for the next 3 years. So we're excited about that. We just signed that this last week. The Arctic I, we are looking for opportunities. There are some short-term opportunities in Brazil with other customers. So we are in discussions, but we don't have anything, planned stuff, right now. But keep in mind that this is a U.K.-capable rig that -- there is also that opportunity, should that present itself, to be able to relocate it to another market.

[Gregory Lewis:]

And would there be any sort of upgrade and maintenance required to get it back into the U.K.?

[Terry B. Bonno:]

Yes, there would be.

[Gregory Lewis:]

And can you give sort of any guidance on how -- the timing of that and the cost?

[Terry B. Bonno:]

We haven't really looked at that because we tried to do -- so we tried to match those opportunities with the long-term program to make it economically feasible to do so, and we just haven't looked into that type of upgrade as of this time.

[Operator:]

Our next question is from Ian Macpherson with Simmons.

[Ian Macpherson:]

Steven, you -- well, we've -- it's become perfunctory this quarter for everyone to ask the MLP question to the management teams of the offshore drillers. But you are in the unique position of having an incoming CFO who was -- who did all of the heavy lifting on that for Seadrill over the past year. So I wonder if you have any different comments to provide on the applicability of that structure to a part of your business. Particularly a part of your business that looks like your Shell contracts with that 10-year term tenor, et cetera, is it something being kicked around or not?

[Steven L. Newman:]

I'll tell you, Ian, I'm going to let our outgoing balance sheet and capital structure expert, Greg, give you our perspective on that.

[Gregory L. Cauthen:]

Ian, we've actually looked at this, talked to the various banks, watched as Seadrill did their transaction. And we're going to continue to look at it and continue to monitor how MLP in the contract drilling space actually performs over time. Does it makes it sense long term for drilling contractors such as transactions -- Transocean? So it's certainly interesting. It's something we have and will continue to look at. But we've not come to any conclusion at this time.

[Ian Macpherson:]

All right, pretty political. Follow-up question. Did you -- Greg, did you quantify or describe the amount of shipyard deferrals that benefited the third quarter from revenue and/or the cost prospectives?

[Gregory L. Cauthen:]

I didn't quantify them. There was one shipyard that was deferred that benefited cost and revenues. And so that's now expected to occur in the fourth quarter. There were also several very significant extraordinary maintenance projects where the parts came in a little late, so they didn't get performed in the third quarter and had been or will be performed in the fourth quarter. So both those timing differences had shifted some costs to the fourth quarter. In addition, we have some contract prep shipyards and shipyards that we reported in the October Fleet Status Report that -- so the overall level of shipyard activity is increasing significantly in the fourth quarter versus the third quarter. And so that's kind of hurt revenues relative to the third quarter and increased costs relative to the third quarter.

[Operator:]

Our next question is from Ole Slorer with Morgan Stanley.

[Ole H. Slorer:]

On the 93% guidance for next year, could you talk a little bit to what you have left to deal with as far as upgrade of the legacy systems with control systems or via piece [ph] versus what is just a regular-shaped -- scheduled maintenance?

[Steven L. Newman:]

In terms of the upgrades, we have been including in our Fleet Status Report the number of systems that have been recertified and the outlook for continuing projects in the future that have an element of recertification to them. So that information is pretty readily available in the Fleet Status Report. When we talk about the guidance for next year, because that is the -- a measure of the rig's performance on location, what we're talking about is just the continued implementation of this simple recipe we've been focusing on for the last year, 1.5 years now. And that's rigorous inspections, a standardized maintenance and thorough pre-deployment testing and including that and implementing that across the entirety of the fleet. And when we talk about that, there's a lot of underlying material that has to be put in place, particularly when -- in the context of these standardized maintenance tasks and pre-deployment testing. Significant element of focus internally with respect to putting in place the checklists and the standard preventive maintenance tasks, that's what our corporate group is focused on. And then those are rolled out across the fleet and implemented across the fleet. So it's just the continued focus on the implementation of that recipe is going to -- and that has allowed us so far to demonstrate improvement, and that's going to continue to allow us to demonstrate improvement going forward.

[Ole H. Slorer:]

So where you stand a moment is this improvement, the way you had your performance here in the last quarter? Would you say that this is a function now of a company-wide system that's up and running and that's working? Or was there something that helped to really boost it this quarter?

[Steven L. Newman:]

I wouldn't say there was anything unique and different this quarter other than you're starting to see the meaningful and material results of what we have been focused on for the past year or 18 months now. So I give our corporate team a lot of credit for talking relentlessly about the model, about the recipe, and for putting in place all of the underlying documentation and the infrastructure that needs to be in place for our rig teams around the world. And I give the guys offshore a lot of credit for embracing the model and utilizing the tools and systems and applying those rigorously to deliver these kind of results.

[Ole H. Slorer:]

Okay, good to see the results that's coming to you now. And Greg, just one question for you. I might have misheard you. But I think there was a reference to this $3 billion CapEx number for 2013. Did you mean 2013? Or did you refer to the remaining newbuilding CapEx from 2013 onwards?

[Gregory L. Cauthen:]

No, the $3 billion was for -- just for 2013. So we've got the final installments on the 2 Aker newbuilds. So those are very significant right before they get delivered in late '13, early '14. And then we have the installments on the 4 Shell newbuilds that kick in at various milestone payments during the year, as well as we've got final installments on our newbuild jackups coming out. And then capital expenditures on our ongoing shipyard rework programs and everything, as well as some increasing capital expenditures related to -- as we continue to build up our capital spares related to the -- all the various subsea efforts Steven has described. So all that together aggregates to roughly $3 billion. I would caution, though, we're still finalizing our budget, so that's still a rough estimate.

[Martin Huseby Karlsen:]

Sure. Sure, sure. I mean, you might have mentioned it, but of the $3 billion, what was the -- what were the maintenance CapEx?

[Gregory L. Cauthen:]

We haven't -- we'll defer until February once we've completed our budgets. And then Esa can give you all the details of the final budgeted CapEx for 2013.

[Operator:]

Our next question is from Collin Gerry with Raymond James.

[Collin Gerry:]

It seems that the revenue efficiency was a big driver here. And from the prepared comments, I take it that there's almost 2 components to that. There's the game plan or the recipe, as you call it, but also the new -- the enhanced terms on the contracts. I'm wondering if you could break that apart and maybe describe the relative impact. What was more impactful this quarter? And what do you see more -- a bigger driver to the 93% guidance for next year?

[Steven L. Newman:]

Look, in terms of where we have been, Collin, and the results we've been able to report so far, I would say that the vast majority of that is due to this simple recipe of the guys offshore executing the systems and tools and processes to improve the performance of the equipment. We haven't really seen in a meaningful way any of the new contract terms and conditions that Terry and her team around the world have been able to negotiate with our customers. We haven't really seen any of those kick in yet. So the vast majority of what we've been able to accomplish has been due to the operating folks across the fleet. Going forward, as the contracts start to come into play, as rigs start to roll through these improved terms and conditions, you'll see an impact due to the -- due to those improved terms and conditions. But we haven't seen that yet.

[Collin Gerry:]

Okay, that's interesting. So essentially, it's fair to say that by and large, with -- even if we haven't had new contract terms coming forth in the marketplace, the revenue efficiency would have been what you actually reported this quarter?

[Steven L. Newman:]

Yes. Yes, I think that's the right way to characterize it.

[Collin Gerry:]

Excellent. And just to follow up on the cost guidance, a lot of moving parts with discontinued and continued. The 5% to 7% for 2013, just so we're all doing the same math, what is the denominator we should be using for that?

[Gregory L. Cauthen:]

So probably use the midpoint of our 2012 continuing operating and maintenance cost guidance. So use that midpoint. And that 5% to 7% then produces a range for next year.

[Collin Gerry:]

And just in case -- if I missed it, but the -- that range for 2012, was that the $5.4 billion to $5.5 billion.

[Gregory L. Cauthen:]

That's exactly correct.

[Operator:]

[Operator Instructions] We will go next to Joe Hill with Tudor Pickering.

[Joe Hill:]

Guys, I'm trying to understand a couple of things. And just to tag on Collin's question again, Greg, I think the guidance you gave implies a very slight uptick in the cost guidance for 2013.

[Gregory L. Cauthen:]

Yes, that's correct. Now part of that is a function of the Shelf transaction because when we strip out Shelf, we have a smaller base that we're working with. And we had actually expected our Shelf operating and maintenance costs to decline a little bit next year because they had lower shipyard activities that we expected for the Standard Jackups. So you pull that up -- out and just mathematically, it would cause that percentage increase to be higher. And that's -- So that probably accounts for half of the increase over our previous guidance. But -- and the rest is as we've worked through our detailed budget, we're seeing all the cost pressures that Steven talked about in his opening comments. And so they're starting to impact our labor costs, our maintenance costs. And so that's accounts for the rest of that uptick in the guidance.

[Joe Hill:]

Okay. And then I hate to pin anybody down on politics, Greg, but are you writing contracts to date to be MLP-able? And are those Shell contracts for the newbuilds MLP-able?

[Gregory L. Cauthen:]

We studied the -- and we worked on various MLP-type transactions, but we're not necessarily writing anything to be MLP-able. But that doesn't mean it's not MLP-able. We have a lot of flexibility in our contracts. So that -- I can't say we specifically focused on that.

[Joe Hill:]

So in your estimation, you wouldn't have to go back to the customer in order to drop some of these into a structure?

[Gregory L. Cauthen:]

We've not done that analysis, so I'll pass. But I wouldn't see that as a big issue.

[Operator:]

Our next question comes from Doug Becker with Bank of America Merrill Lynch.

[Douglas L. Becker:]

Given some of the debt parameters, the cash balance parameters and just the liquidity, is it fair to say that a dividend proposal to the shareholders is unlikely in 2013?

[Steven L. Newman:]

Doug, we will continue to dialogue with the Board about the deployment of capital. But I'll tell you, if you just do the simple math on what we expect our operating results to be next year and what that might translate into in terms of available cash flow and our ability to use that available cash flow to make progress towards the balance sheet objectives, I wouldn't completely rule it out. But I'll tell you we're really focused on the balance sheet objectives right now. We want to enhance the company's investment-grade rating.

[Douglas L. Becker:]

Okay, that makes sense. And then one just on Brazil. Do you think Transocean's sized appropriately for Brazil? I guess I'm -- it's kind of scary just how close holding up operations actually took place. Is that a market that you're looking to have less exposure to going forward? And just the latest thoughts on a potential tender to bridge the gap to the newbuilds that Petrobras is ordering.

[Steven L. Newman:]

I'll tell you, Doug, we like our position in Brazil. We've been in Brazil for 40 years and over the course of that 40 years, we've seen really good times and we've seen some not-so-good times. We've got an excellent relationship with Petrobras. And I -- particularly in the context of the recent situation we've just gone through, you mentioned how close we came to that injunction taking effect. I want to tell you how pleased I am with the support we got from Petrobras in that situation. They continue to be a very supportive customer in helping us work through the litigation and the Frade situation. We're focused on helping Petrobras, just like we are with any other customer, to execute their plans. And if that means we get an opportunity to add to our position down there under the right the right circumstances, we would embrace that opportunity.

[Douglas L. Becker:]

And any potential tenders? You kind of think that you've been pushed off for that a bit, but just potential tenders down there?

[Terry B. Bonno:]

This is Terry. I just returned from Brazil. And what we're seeing now is we're seeing that they're trying to focus their efforts now on the pre-salt. Basically, you're going to see a lot of the rigs switching over to certainly development drilling so that they can improve their balance sheet. And I think they may take a pause here for a little while just so they can reorganize and get focused on their pre-salt drilling.

[Operator:]

Our next question is from Judd Bailey with ISI Group.

[Judson E. Bailey:]

First question. And I apologize on this, but did you guys give the or give any payment terms on the Shell drillships on what -- how that breaks out over the next couple of years?

[Steven L. Newman:]

We haven't talked specifically about the contracts themselves and the payment terms associated with those contracts. But if you look in our 10-Q, you can see the remaining commitments that are associated not only with the Shell newbuilds but the Aker newbuilds and the 3 remaining -- couple of floaters, jackups as well. So that's all detailed in the 10-Q.

[Judson E. Bailey:]

Okay. I'll take a look. My second question is regarding operating cost going forward. I mean, you gave pretty decent guidance. But my question, if you guys sell some of your older assets, if you sell some more floating rigs or the remaining jackups, there's obviously going to be an impact on direct operating costs. But can you help us think about where costs could be reduced further in terms of maybe older rigs had a lot of maintenance, maybe marketing was more cost intensive, things of that nature. How should we think about it? As your older, lower-spec portion of your fleet gets smaller, how can we think about, from a big picture standpoint, you lowering your operating costs maybe more so than what we're all modeling?

[Steven L. Newman:]

I think the real question there, Judd, is as the fleet size adjusts over time in response to the execution of our asset strategy, we've got to continue to focus on the cost structure of the company. And by that, I mean primarily the overhead. The elimination of a rig here or a rig there, and in the case of the Shelf Drilling transaction, 38 drilling rigs, those obviously take away the direct operating costs of the company. But we've got to focus on ensuring that the overhead structure responds the same way the fleet does to the execution of the asset strategy.

[Judson E. Bailey:]

And where would you say you are in that process in terms of evaluating your overhead? I mean, are you far along in that? Or is that something that's going to be more a process for 2013?

[Steven L. Newman:]

That's just really taking on a little bit of momentum now. The focus up until now and really for the next couple of months is on closing the Shelf Drilling transaction. And then we'll shift all of that energy and passion within the company from getting the Shelf Drilling transaction done to reevaluating our overhead and making sure that the overhead responds to the reduction in the fleet size.

[Operator:]

Our next question is from Robert Jensen [ph] with Plateau [ph] Markets.

[Unknown Analyst:]

Following the disposal of the standard jackups, you're left with a relatively low presence in the jackup market. I'm just thinking where -- are you -- do you see appetite for increasing the jackup fleet? And how should we think about some secondhand transaction versus newbuilds?

[Steven L. Newman:]

The answer to the first part of your question, Robert, is absolutely. When I talk about the asset strategy and increasing our focus on high-spec assets, I am conscientious when I talk about it being High-Spec Jackups and High-Spec Floaters. So we will look for opportunities to build on the company's presence in the high-spec jackup market. Whether that's through secondhand transactions or the opportunity to build to contracts, like we were successful in securing with Chevron, I'm a little bit less specific about that right now. I want to increase our presence in the jackup market because that's an important component of the business for us. But it's at the high end of that jackup market. I want to add to the company's high-spec position in jackups.

[Unknown Analyst:]

Sure. But is there any specific number of jackups that we should think about as a sort of a decent size of the fleet?

[Steven L. Newman:]

No, I wouldn't attach a specific number to it at this point.

[Unknown Analyst:]

Okay. And then secondly, on the floater side, you mentioned again reactivation of floaters. Can you handicap a bit for us? So which rigs are you looking to reactivate and which ones that we could look at as disposal candidates?

[Terry B. Bonno:]

Well, we've looked at over last several months reactivating some units in the North Sea. There's a significant demand there. And again, when we do this, we look at the amount of program needed to reactivate and also to provide the right economic return for us. So we've looked at -- lately, we have looked at 2 units. And one is in the North Sea, which was the Sedco 712; and then also, the other was the Transocean Richardson. So we're still in evaluation process. I can't handicap that for you right now, but other than we'll continue to have those discussions and see if it makes sense.

[Unknown Analyst:]

And if I might squeeze in one more. What's happening with the GSF Explorer? Can you update how long that will that be in the yard and where you would likely put that to work?

[Terry B. Bonno:]

Right now, she's having her BOP recertified in the shipyard. And we are in an active tender right now, which is very promising, and we hope to have some good results here in the next 3 weeks.

[Operator:]

And we will take our last question from Matt Conlan from Wells Fargo.

[Matt Conlan:]

Just wanted to follow up on Brazil a little bit quickly. With the rapid cost inflation there and the government issues, are you able to change your contract terms, specifically with Petrobras, to give you some more protection against those issues?

[Terry B. Bonno:]

Matt, when we were negotiating some of the higher-spec jackups earlier in the cycle, we were able to use a modified contract with Petrobras, and that was the Cajun Express. All of our other contracts had been under the standard Petrobras contract, which there's not a lot of negotiation in that because in a standard tender, if you take exceptions, you're disqualified. So you're pretty much there. If you're going to participate there, you're going to use their contract. Having said that, they do have some indices [ph] that do protect against some costs but not all the costs. So it's the way that we do business in Brazil.

[Matthew D. Conlan:]

Okay, so your protection will have to come from some premium rates? Is that a fair assessment?

[Terry B. Bonno:]

That's how you protect -- that's a fair statement. And, I mean, also, it would be just not the premium rates. You have to look at it as a strategic market. I mean, you're getting a lot of long-term opportunities there. So it's a -- it would be a portfolio effect, right? So we've been there for 40 years. And over those years, it's been a protected market for us. When we go into these cycles, the ups-and-downs cycles, it's been very good to us, and we've been able to work there for a very long time.

[Matthew D. Conlan:]

Okay, great. And again, congratulations on the operational performance this quarter.

[Steven L. Newman:]

Thanks, Matt. We've been working hard, and we're going to continue to work hard.

[Matthew D. Conlan:]

Good to hear.

[Operator:]

And that does conclude today's question-and-answer session. I will turn the conference over to Mr. Thad Vayda for closing remarks.

[R. Thaddeus Vayda:]

Thanks very much for your participation today. Diane [ph] and I'll be available over the course of the day to respond to any additional questions you have, and we'll talk to you again and report the fourth quarter in early 2013. Thank you.

[Operator:]

That does conclude today's conference. We do thank you for your participation.