Transocean Ltd.
Q4 2012 Earnings Call Transcript

Published: 4 Mar 2013

[Operator:]

Good day and welcome to the Transocean Q4 and Full Year 2012 Earnings Conference Call. (Operator Instructions). And at this time I would like to turn the conference over to Thad Vayda. Please go ahead sir.

[Thad Vayda:]

Thank you, Tom. Good day and welcome to Transocean's fourth quarter and full year 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 four 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. The charts include average contracted day rate by rig type, out-of-service rig months, operating and maintenance cost trends, and a chart illustrating historic and forecasted out-of-service rig days by asset class for the years 2008 through 2013. The Quarterly Toolkit includes four additional financial tables for your convenience covering revenue efficiency, and 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; Esa Ikaheimonen, 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 this 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, the board’s recommendation for the return of capital to shareholders including the timing and amount of the proposed dividend, projected outcome of shareholder voting on any matters to be present at our annual general meeting and 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 most 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 proved 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 recently comparable GAAP measure and an associated reconciliation on our website at deepwater.com under Investor Relations, Quarterly Toolkit, and Non-GAAP Financial Measures and Reconciliations. Finally, and importantly to give more people an opportunity to participate in this call, please limit your questions to one initial question and one follow-up. Thanks very much. Now I’ll turn the call over to Steven Newman. Steven?

[Steven Newman:]

Thanks Thad and welcome to all of our employees, customers, investors and analyst. Thank you for joining us on the call today. There is a lot to talk about today, so let me get started with the numbers, as you saw from our earnings press release we reported adjusted earnings from continuing operations of $330 million or $0.91 per diluted share, including a $126 million in net favorable discreet tax items and income from discontinued operations we reported net income attributable to controlling interest for $456 million or a $1.26 per diluted share. Esa will take you through the numbers including our updated guidance for 2013 in a moment. Our adjusted results underscore the continued progress we have made in improving our execution in the field. At 94.7% fourth quarter revenue efficiency from continuing operations compares favorably with the 94.9% in the third quarter. Supporting this quarter-on-quarter trend was our ultra-deepwater fleet which delivered the second consecutive quarter of revenue efficiency in excess of 95% as our operating results have continued to improve our main challenge is shifting from step change improvement to long term sustainability. Although we do not expect it to have a significant effect on our business in 2013 the recent industry wide problem associated with the need to replace original equipment manufacturer defected bolts in our subsea connectors is a reminder of the potential variability in our revenue efficiency. However I’m confident in the technical changes we have implemented to improve the performance and the liability of our equipment. In addition, to the condition progress in our operating results during the quarter we also made strides in the two other key strategic issues facing the company. The execution of our asset strategy and the resolution of Macondo liabilities. At the end of November we closed the sale of 38 shallow water rigs to shelf drilling, this large scale transaction combined with continued success in single asset sales of non-core floaters and jackups substantially reduces the company’s exposure to low specification rigs. Divesting these rigs improves our long term competitiveness and furthers the strategic imperative of focusing on ultra-deep water and high specification floaters and jackups. Continuing to invest in our fleet is critical to enhancing our long term competitive position and in this regard our new built program continues on schedule. We recently named two of our three new jackups, the Transocean Siam Driller and the Transocean Andaman and we expect these premium rigs to commence their long term contracts with Chevron in Thailand on time in the coming months. We’re also close to finalizing a contract for the ultra-deep water new build Deepwater Asgard, the only rig we have currently under construction without a contract. Also we’re in advance discussions with a major integrated international oil company for the construction one dual activity dynamically-positioned ultra-deepwater drillship with an anticipated delivery in late 2015. Consistent with the shell newbuilds this rig is expected to be equipped with industry leading hoisting capacity a second blow-out preventer system and be outfitted to accommodate a future upgrade to a 20,000 PSI blowout preventer. In January we filled settlements with the civil and criminal divisions of the U.S. Department Justice on Macondo. Both of those settlements have now being accepted and entered by the courts. It is important to note that the settlement with the civil division does not include the resolution of Natural Resource Damages or NRDA nor these settlements address potential liabilities with the Gulf Coast states or Plaintiff Steering Committee. Phase I of the multi-district litigation civil trial regarding these remaining potential liabilities commence last week and we’re well prepared to argue our case on strong and compelling merits. As you may have seen on Friday the Fifth Circuit Court of Appeals issued in opinion holding that under the terms of our lending insurance layer BP has coverage as an additional insured for pollution claims. We’re disappointed in the decision and our council will be considering our options going forward. Even if the decision stands however we continue to be a full insured under our policies and we will push through our clients for insurance payment and reimbursement in the district court where we will seek our fair share of the policy proceeds under contractual and equitable principals. Regarding the project field incident in Brazil you may have recently seen the favorable court decision that the judge denied the criminal charges against Transocean and our employees. We recently learned that the prosecutor has filed an appeal but we remain confident in our position and we’ll rigorously pursue final and comprehensive resolution of the underlying litigation. We also continue to defend the company against alleged claims in conjunction with the unfounded and merit list allegations of tax fraud dating back more than a decade in Norway. The Criminal Tax trial started in December and decisions are not anticipated until early 2014. However on Friday, the Oslo District Court announced a favorable ruling on the Arcade civil tax assessment case. The court completely overturned the tax assessment issued by the Norwegian authorities and dismissed its claim. While appealable we believe that this ruling should have positive implications for other outstanding tax litigation in Norway. In summary I believe we’re making good progress in improving our operating results, executing our asset strategy and resolving the uncurtaining associated with major litigation in the U.S., Brazil and Norway. That said there is still much work to be done. We’re focused on creating value for our stakeholders through the disciplined capital allocation strategy, which includes maintaining a strong flexible balance sheet and remaining an investment grade issuer of debt, profitably reinvesting in our business through value enhancing growth opportunities and distributing excess cash through our shareholders. Through this latter point as you have probably already seen, we announced several key proposals that our board is recommending to our shareholders for the upcoming annual general meeting scheduled for May 17th. This includes the distribution of the dividend out of additional patent capital of $2.24 per share or approximately $800 million in the aggregate. We recognize that a key component of the dividend is its sustainability and the potential for growth in the future as business conditions warrant. We believe that this distribution creates value while providing us with the adequate flexibility to capitalize on profitable investment opportunities such as contract (inaudible) and to continue to reduce our debt to targeted levels. Esa will talk more about this in a few minutes. Following the shelf drilling transaction we commenced an organizational efficiency initiative to ensure that the company responds to the changes in the size and composition of our fleet with a more efficient and focused overhead structure. The 2013 cost guidance that Esa will provide is for a steady state Transocean with no impact from the initiative. Even though the project will take shape this year I do not expect that it will have a significant impact on 2013’s cost since any reduction in cost due to organizational changes will likely be offset by onetime expenses in restructuring charges. I do expect that the initiative will have a meaningful effect on cost structure in 2014 and onwards and I intend to share more about this as the project progresses and plans mature. With that Esa let’s go through the numbers.

[Esa Ikaheimonen:]

Thank you Steven and good morning and good afternoon everyone. It is a great pleasure to be able to talk to you about our business and results. In March 2012 we announced our intent to discontinue the operations of our drilling management services in the shallow waters of the U.S. Gulf of Mexico after completion of our remaining contracts. In December 2012 we completed the final contract and discontinued offering these services in this region. As such during the fourth quarter we reclassified the related operating results to discontinued operations and all prior piers (ph) have been reclassified. These reduced 2012 revenues and cost by approximately $100 million each. All of my comments including relevant comparisons to prior periods reflect only continuing operations. As Steven mentioned we reported net income attributable to controlling interest of $456 million or $1.26 per diluted share for the fourth quarter of 2012. Our fourth quarter results included $126 million in net favorable items as follows; $111 million associated with favorable discreet tax items in certain jurisdictions and $25 million of net income from discontinued operations as we had anticipated. Excluding these items our adjusted earnings from continuing operations were $330 million or $91 per diluted share. This compares with similarly adjusted earnings of $1.40 for diluted share in the third quarter of 2012. For the fourth quarter of 2012 our consolidated revenues from audio gap 1

[Terry Bonno:]

Thanks Esa and hello to everyone. Before we cover specific market I would like to make a few general comments. We closed out at great year for 2012 with 16.9 billion of contract backlog including contract for one existing newbuild the Deepwater Invictus and the additional four shale newbuild drill ship. Tendering for 2012 exceeded level not being since 2008 and the tight market provided numerous opportunities to improve our day rates of our previous contracts for all asset classes. While the tendering pace remains high for ultra-deepwater floaters, contract awards have taken an extended period of time to execute mainly because of regulatory tendering requirements. Additionally the combination of some customers not extending their existing ultra-deepwater fleet together with Petrobras release upon contract exploration of deepwater and mid-water unit are causing a somewhat slower absorption of available floater capacity in the near term. However long term fundamentals remain positive and numerous customers are demonstrating their willingness to continue grow their fleet. Some additional market highlights, the ultra-deepwater market remains tight with customers paying 600,000 per day plus for high cost environment and mid to high 500s per day for lower cost areas. We continue to see opportunities for the available units in 2013 and strong interest in the rigs that are available in 2014; also deepwater demand continues to be driven by exploration programs in the U.S. Gulf of Mexico West Africa, East Africa and in other emerging market. With a continued success in customers drive to replace reserves we believe that incremental ultra-deepwater demand in Africa and U.S. Gulf of Mexico alone over the next three years could absorb the incremental supply coming to the market. We continue our marketing efforts for the recently GSF Explorer and have been in discussions with several customers regarding her near term availability. Also as Steven mentioned we’re in advance discussions with a major integrated, international oil company for the construction on one drilling activity dynamically positioned ultra-deepwater drill ship with an anticipated ex-shipyard delivery in the fourth quarter 2015. This direct negotiation opportunity didn’t strike the trust that our customers are placing in Transocean and the operational excellence they had tend to expect. We’re also in the final stages of the recent tendering exercise for the deepwater Asgard in Indonesia and believe we’re in position to conclude on these negotiations in the near future. Our confidence in the long term future of the ultra-deepwater market continues to be confirmed by the customer interest and the remaining fleet available in 2013. Although the tendering pace of the deepwater market has been relatively quiet in January and February, we’re currently in discussions with several customers for contracting opportunities for the 2013 program and expect to report more positive news for the rest of our deepwater fleet with prompt availability. Mid-water and harsh environment activity especially in the UK and Norwegian North Sea is very high with only four rigs available for the end of 2014 in the UK. Considering this tightness in the market we’re reactivating the SEDCO 712 in the UK North Sea at $380,000 per day for three years. Most of the tenders in the UK and upcoming tenders in Norway for long term exploration and development programs are providing opportunities to expand the existing fleet and bring additional harsh environment capacity into the market. Outside of the UK in Norwegian markets we extended the SEDCO 701 for one year at $311,000 per day in Nigeria. However, the market for midwater rigs and somewhat less certain with the impact at Petrobras’s releasing some of their mid-water fleet upon contract completion. We’re actively pursuing opportunities for our rigs becoming available in 2013. Utilization and day rates for premium jackups remain strong due to improving demand and almost all jackup provinces. This is reflected in the opportunities and discussions we’re currently having with our customers for our available fleet in 2013. Increased utilization has resulted in rates for high specification jackups moving over a $160,000 per day as evidenced by long term fixtures in West Africa and over $200,000 per day in the UK. In summary while the near term ultra-deepwater and deepwater market may experience a pause in the level of contracting activity we believe that the continuing exploration success increase in development programs and emerging play support our view of ample opportunity for the existing fleet and for future growth with our customers. This concludes my overview of the market so I will turn it back to you Steven.

[Steven Newman:]

Thanks Terry. Tom with that we’re ready to open it up for questions.

[Operator:]

(Operator Instructions). We do have a question from Angeline Sedita with UBS.

[Angeline Sedita:]

Steven could you give us the first number one your initial thoughts on the potential pros, the pursuing an MLP structure and the two how long would it to form one from a legal and accounting perspective could it actually be done in 2013 or would this be a 2014 event and then finally how many rigs or have you considered how many rigs maybe suitable candidates for an MLP.

[Steven Newman:]

I’m going to let Esa answer that question because he has got a lot more experience with MLPs than I do.

[Esa Ikaheimonen:]

It's very difficult to say how long it will take to pull one off, I think I would start by just saying that we have been evaluating different financing solutions, MLP being one of them in terms of the potential value adding elements of an MLP structure clearly be opportunity to monetize future cash flows comes to mind, it does have financial flexibility, it could offer a yield and that could feed into overall capital allocation strategy. So generally speaking it's interesting, and as we have said already in our press release we’re quite seriously looking into it but with a cool and analytical approach rather than a mad rush I should say. In terms of timing as I said I’m a little bit uncomfortable to say when we will be in a position to conclude but our analysis is ongoing we’re evaluating the pros and cons of it, also recognizing that this is a cyclical industry at the thermal we’re talking about relatively short contracts, multi-layered and complicated tax structure, the conflict of interest is just and so forth, so there is a lot to cover and it is important to us as we do it prudently and we do it well and we know exactly what we’re doing and we know exactly why we’re doing it and perhaps not doing as it may be. It will take some time I think sidereal experience was that from initiation to IPO took about a year or so, of course we can learn from sidereal experience and perhaps accelerate but I think it will be stretched IPO anything this year quite possible. In terms of assets I think you’re asking for assets as well is suitable for this, we clearly have got an attractive and sizeable ultra-deepwater fleet which would fit into an MLP but it will come with a lot of caveats such as complexities around U.S. tax, many of those rigs are Gulf of Mexico operating. So it's a good portfolio of assets that could fit in, the market size is limited so I think up to three ultra-deepwater rigs could potentially be an IPO scope and nothing much more than that. So, yeah you will have to wait and see and we will keep you up-to-date as soon as we make progress.

[Angeline Sedita:]

That’s very good color and then as an unrelated follow-up on the dividend is it fair to assume that a shareholder could propose a larger dividend at the shareholder meeting or do you believe the current dividend is an acceptable compromised all parties?

[Steven Newman:]

Well we proposed our dividend on the basis of the company’s well-articulated philosophy around capital allocation and so in that context the board has endorsed the proposal and is recommending it to the shareholders.

[Operator:]

And we’ll take our next question from Doug Becker with Bank of America Merrill Lynch.

[Doug Becker:]

Steven there has been clear strides made from the operations, we can see the revenue efficiency metrics, but today you’re announcing organizational efficiency initiative. What does this new initiative entail that previous efforts haven’t and do you think there is a significant opportunity here to narrow the EBITDA margin gap you see versus the peers or something more structural in nature that would keep that gap in place.

[Steven Newman:]

I don’t think there is anything structural that should perpetuate the gap the difference between what we have historically been focused on in the context of rig specific operating improvements and what we’re embarking on now this is focused on our cost structure on our overheads primarily and is really just a recognition that with the shelf transaction the fleet has changed and as a consequence the overheard structure needs to respond to that change and we need to come out of this exercise a more efficient and focused overhead to reflect the changing nature of the fleet. So I think that will certainly help to improve the company’s financial results going forward but you know as we said as I said during our prepared remarks I don’t expect it to materialize significantly in 2013 it will benefit 2014 going forward.

[Doug Becker:]

Understood and then Terry maybe a quick update on the GSF Explorer and should we be thinking about some ideal time between contracts in the millennium and discovery as those rigs have mobility later in the year.

[Terry Bonno:]

Let’s take the four of it so we have had a couple of good runs that we thought we actually had contracted and then I will need to be surprised by some availability issues with other rigs that actually had a better timing than the explorer did, so we missed the few opportunities but we still are in the few discussions right now that we’re hoping will materialize soon but I think that you know it's hard to say if it's going to be two weeks or a month before we get her back to work. Now talking about the millennium and the DWD (ph) those are certainly a different animal than the Explorer, Explorer is an older rig, 7800 foot, the DWD and the millennium are 10,000 foot, newer generation rigs and we do have a lot of interest in those rigs and we’re in some advance discussions with certainly with millennium. She is currently working offshore East Africa and then also we had the DWD is now in Brazil. So we’re very positive on being able to put those types of work in direct continuation.

[Operator:]

And we will take our next question from Robin Shoemaker with Citi.

[Robin Shoemaker:]

I wanted to make sure I understood Terry what you were saying about the Brazil’s the impact of Brazil releasing midwater rigs, we have heard some contractors say that their belief is Petrobras wants to maintain nearly all of the midwater rigs or older generation rigs in that market. So what are you seeing prospectively in terms rig releasing rigs or potentially upgrading those rigs to higher?

[Terry Bonno:]

Yes well we have seen, I mean we are in our own discussions and we have actually one of the rigs, the Arctic I has recently left Brazil, and but she wasn’t actually contracted with Petrobras, she was contracted with one of the independents there, but she is left. And then also understand that Petrobras has kept one rig, so far the Borgny Dolphin. I can’t speak to what our competitors are doing in conversations. I can only speak to our conversations with Petrobras, and we certainly believe that the Falcon 100 at end of her contract will be vigorously pursuing opportunities with her outside of Brazil, but we’ve all heard the same rumors that they are going to be reducing some of their mid-water fleet and then also perhaps some of the deepwater fleet.

[Robin Shoemaker:]

Okay. Just on a related question then, I have heard another contractor say that Brazil is now the highest offshore operating cost environment in the world with possible exception in Norway, and that on contract renewals in Brazil, Petrobras may be facing some sticker shock in terms of especially signing long-term contracts on deepwater rigs. How is – what is your experience with operating costs in Brazil and how confident are you on renewing rigs that you get significant compensation for that?

[Terry Bonno:]

I think that we have certainly high environment cost in Brazil. I think it’s been a bit of a challenge, because of the bit of increase in labor cost, but we also have high cost environments in West Africa. So, I wouldn’t necessarily say that one is extraordinarily higher than the other I just think that there are high operating cost environments. And if when they can start to do their fleet renewal, I think it’s going to be a faster – the fleet renewal with the LTD part of fleet, they currently have under contract the newer rigs. I think that there is going to be some good discussion. Petrobras is always fantastic at negotiating contracts. So, I think there will be. I think it’s also going to be a picture of, if don’t stay in Brazil where are they going to relocate. And that’s always the question. It costs money to relocate rigs.

[Robin Shoemaker:]

Okay, thank you.

[Operator:]

And we will take our next question from Robert MacKenzie with FBR Capital Markets.

[Robert MacKenzie:]

Thank you very much. Question for you guys, following the disposal of some of your older standard jack-ups, you are left with a relatively small presence in the shallow water market, is any appetite there for increasing the jack-up fleet, specifically in some of the modern high-end units?

[Steven Newman:]

Yeah, I have talked regularly Robert about remaining competitive in the jack-up space. And so the company over the last – course of the last couple of years has taken delivery of one new build that’s currently working in Angola, the Transocean Honor. We’ve got three additional rigs under construction that have destined for operations in Thailand with Chevrolet. And we continue to look for opportunities to increase our presence in the premium and high specification components of the jack-up market. I want the company to continue to pursue leadership positions in both high-spec floaters and high-spec jack-ups.

[Robert MacKenzie:]

Okay. How would you characterize your view of either acquiring that secondhand or commissioning additional new builds?

[Steven Newman:]

We are really indifferent as long as the economics are compelling and allow us to add to our position. So, we have shown in the past the ability to do both build and buy. And so we will continue to look for opportunities to do either one of those.

[Robert MacKenzie:]

Okay, thanks. And I guess, my final question would be along the lines of ultra deepwater new builds, has anything changed in terms of your willingness to build those on spec versus on contract and what’s your appetite for additional deepwater new builds?

[Steven Newman:]

Well, as we indicated in our prepared remarks, we are in advanced discussions with the customer to build the rig for them. And I think that reflects our strong preference for contract at new builds.

[Robert MacKenzie:]

So, nothing has changed in terms of spec new builds?

[Steven Newman:]

We still have a strong preference for contract back to new builds.

[Robert MacKenzie:]

Fair enough. Thank you. I will turn it back.

[Operator:]

And we will go next to Ian Macpherson with Simmons.

[Ian Macpherson:]

Hi, thanks. With your last week status in February, you showed 1534 days of scheduled downtime for the high-spec fleet, and I just wanted to confirm how we should interpret that if we look at your exclude your stack rate, that looks like it’s about 34 days on average per rig, is that the correct denominator to apply when thinking about your uptime for the high-spec rigs next year?

[Steven Newman:]

Ian, well I am not sure I follow your calculus there. In terms of providing guidance, preliminary guidance for 2014, what we were trying to do was as Esa said in the context of our regular budgeting and forecasting process was provide a first look at 2014 out-of-service time. And as projects materialize and contracts are signed up that firm up those projects, then we are in a better position to allocate specific out-of-service segments through particular rigs. So, trying to make sense of a broad-based asset class out-of-service forecast and derive an average of days per rig, I think at this point is a bit premature.

[Ian Macpherson:]

Okay. Well, I guess, really what I was going for is the key distinction would be whether any of those days are allocated to rigs which are currently out-of-service or if those days are all allocated to rigs, which are currently in service, so that I am not clipping rigs for which I was previously expecting revenues?

[Steven Newman:]

Yeah. So, the only out-of-service rig for which we have provided out-of-service time would be 712, the reactivation of 712 in the North Sea.

[Ian Macpherson:]

Yeah. So, that’s in the order of high spec.

[Steven Newman:]

Yeah, everything else in our 2014 preliminary forecast is based on currently active rigs.

[Ian Macpherson:]

Okay, that’s helpful. Thanks. And my follow-up question is really just a follow-up on what I was asking before about your EBITDA margin gap. And I guess really just a little bit more specifically the market we are and I think most analysts are projecting Transocean at a low 40s EBITDA margin for the next couple of years, pretty much all that here is our at least the 45% to 50% projected margins, some higher, but then when we look historically, there have been various explanations for Transocean’s cost structure being a little bit richer and if it’s related to organizational graphs or the complexion of your fleet or what have you, I just want to – I don’t want to pin you down too much, but 500 to 1000 basis points of margin improvement based on overhead re-organization sounds like a big bridge to cross. So, can you provide anything in the way of what order of magnitude you are targeting here in terms of your margin improvement over the long haul, over the next two or three years?

[Steven Newman:]

I think we are early enough in the process, Ian that I am uncomfortable giving you any crisp guidance on that point recognizing the fact that we see the same things you guys do that there is a difference in our cost structure relative to our peer group. And we have a clear objective to reduce that differential.

[Ian Macpherson:]

Okay. Well, we’ll stay tuned. Thank you.

[Operator:]

And we will take our next question from Brad Handler with Jefferies & Company.

[Steven Newman:]

Hi Brad. You might be on mute.

[Operator:]

Mr. Handler, check your mute button please. Hearing no response, we will move on to David Smith with Johnson Rice.

[David Smith:]

Hi. Good morning.

[Steven Newman:]

Hi David.

[David Smith:]

Can you remind me please what level of reactivation expense is embedded in your ‘13 cost guidance?

[Steven Newman:]

The only reactivation expense that’s embedded in the 2013 cost guidance is $50 million associated with the Sedco 712.

[David Smith:]

Okay, perfect. Thank you. And can you talk to the prospects for any other reactivations this year?

[Terry Bonno:]

Well, we are currently – again we talked about the Artic I, which has now gone idle. And we are currently bidding her into the UK, so that would be a sort of reactivation and that we have to upgrade her for UK standards. Again, we are hopeful we are actively pursuing it and that could be one.

[David Smith:]

Okay, I appreciate it. And just kind of a housekeeping follow-up I am wondering if you could provide any color around the fourth quarter out-of-service cost for the high spec jack-ups, was this higher than usual? And I was curious if there was anything that really stood out to drive that in the quarter?

[Steven Newman:]

Nothing that springs immediately to mind, David, but I will tell you what, we’ll get that circled back up with us. And if there is anything meaningful, we can provide in response to that question, we’ll back to you.

[David Smith:]

Perfect. Thank you.

[Operator:]

And we do have a question from Harry Mateer with Barclays.

[Harry Mateer:]

Hi, good morning. Two questions. I guess, first just with respect to the dividend announcement and the accelerated $1 billion, I guess first just with respect to the dividend announcement and the accelerated $1 billion debt reduction by the end of ‘14, are those items you ran past the rating agencies before announcing them this morning?

[Esa Ikaheimonen:]

Yeah, it’s Esa Ikaheimonen here again. We do have ongoing dialogue with the rating agencies and you know it wouldn’t surprise you to know that we have had some discussions about some of these plans as well. Part of the whole story is that we want to continue consistent with our existing strategy regarding capital allocation and part of that has been to continuously run a tight ship from the balance sheet perspective and continuously reduce our debts. So the whole package of proposals and plans, have been put together with that partially in mind as well. So, it is our clear expectation that the rating agencies would see that consistency and would see us actually being continuously committed to a strong balance sheet and therefore would find that a positive proposal and a positive plan. And indications are positive, I should say.

[Harry Mateer:]

Okay. And then with respect to accomplishing all these goals the debt reduction and the dividend and as well as your capital spending program, are you incorporating any assumptions as to asset sales between now and 2014?

[Esa Ikaheimonen:]

Yeah when we do our modeling, we obviously include significant number of different variables there. And one of the key items of our cash flow scenario play is obviously the divestment proposals or the divestment opportunities. We have actually not included much at all in terms of the base case scenario that I spoke about earlier when I said that with the capital expenditure, the dividend distribution, and the debt pay down we stay within our liquidity target, we stay within our liquidity target range with very moderate divestment proceeds, but there is opportunity to more, of course, as and when the economics allow.

[Harry Mateer:]

Okay. And then just a final question and I don’t know if there is something you want to comment on or not, but can you share with us whether or not you’ve discussed the dividend proposal you’ve made it with Carl Icahn with respect to his request for a $4 per share dividend?

[Steven Newman:]

Our dividend announcement was only made last night. And so this is really the first opportunity we have had publicly to talk about.

[Harry Mateer:]

Okay, thank you.

[Operator:]

And we will go next to Waqar Syed with Goldman Sachs.

[Waqar Syed:]

Thank you very much. My question relates to some of the rigs that were built and delivered in 2009, now as they go into their first five-year service around 2014, should we assume that since these are relatively new rigs that the downtime for the five-year service would be relatively short or do you think that you may take an opportunity and maybe make some changes in some of the rigs and they may be down for longer period of time?

[Steven Newman:]

Waqar, if the work scope is limited to simply complying with the five-year SPS, I think that’s relatively manageable. Now, I am not sure what you mean by relatively short and you probably don’t know what I mean by relatively manageable, I would say 30 to 60 days if it’s limited for the five-year SPS work scope. If we take a decision to make a modification like adding a second BOP or if the customer that follow-on customer wants us to do something, that could expand and have an impact on the timeline. So, broad-based rule of thumb, I am uncomfortable, because it just depends on what we decide to do or what the customers ask us to do.

[Waqar Syed:]

So, for a standard five-year service would still be somewhere between 30 to 60 days downtime both for the drill shape or even if it’s a semi?

[Steven Newman:]

Yeah, not a big difference between a ship and the semi in terms of the five-year SPS.

[Waqar Syed:]

Okay. No, I was just thinking in one case you made, because it’s mobile, it may take shorter or maybe at least cost less. And in terms of costs for a standard five-year survey, how much would it cost for a new build rig of all nine deliveries?

[Steven Newman:]

Yeah, Waqar, I’d probably don’t have a very good number on that right now. So, let us do a little bit of work and we can probably come up with something that is reflective of a simple straightforward five-year SPS work scope.

[Waqar Syed:]

Okay, great. Thank you very much.

[Operator:]

And we have a question from Robert Jensen with Platou Markets.

[Robert Jensen:]

Thanks guys. So, if I get you right as of the OpEx guidance, you provide of $5.7 billion to $5.9 billion, that does not include any cost associated with the shelf drilling operations, only the reactivation costs for the Sedco 712, is that right?

[Esa Ikaheimonen:]

That’s correct.

[Robert Jensen:]

Okay, so it’s only $50 million that’s a bit of – call it one-off item in that guidance?

[Esa Ikaheimonen:]

Yeah, again, that’s correct. So, $50 million is included into those numbers, well in that range.

[Robert Jensen:]

Okay. A follow-up is more sort of a strategic for you Steven, your mid-water fleet and the mid-water fleet in general is getting fairly old, but there is still a fair chunk of drilling to be done in that market. Just wondering how you think about the mid-water segment in general, and could we see mid-water rigs being built sort of new builds in that segment or smaller deepwater vessels?

[Steven Newman:]

Yes, absolutely. I understand there are some customers who have already expressed an interest in renewing their North Sea mid-water floater fleet. And so we are interested in being a part of those conversations that as you rightly pointed out there is a lot of drilling yet to be done in mid-water areas around the world, particularly areas like North Sea and Norway. And so we would want to be part of those conversations and part of those replacement plans going forward.

[Robert Jensen:]

So, there are no firm plans for the moment that you can disclose I guess?

[Steven Newman:]

No, we don’t disclose anything until it becomes a firm plan.

[Robert Jensen:]

Alright, thanks for that.

[Operator:]

And we will go next to Justin Sander with RBC Capital Markets.

[Justin Sander:]

Hi, thanks for taking my question. My question is around the $7 billion to $9 billion gross debt target. Just wondering if we can maybe get a sense of a timeline as to when you would expect to reach the top end of that range? And then maybe strategically how would you prioritize that specific balance sheet build versus say growing the dividend or reinvesting for further growth of the fleet?

[Esa Ikaheimonen:]

Yeah, it’s Esa Ikaheimonen here. We are over that debt target as you know very well. And one of the reasons for us to accelerate some of the repayment is to also accelerate reaching that target range. We’ll be getting into that target range around 2015 with the current pace also including indeed the acceleration of $1 billion of repayments across ‘13 and ‘14. In terms of the priority, we really actually see this as the package. It’s not something where we very clearly distinguish our priorities. We tried to balance it out and we tried to make sure that we actually achieved all of those objectives in not too distant future. One of them being that the level of overall debts that we have got on our balance sheet, another being our ability actually to renew the fleet and grow our business, and the third one being returning cash to our shareholders, and it really is the balanced approach, which we believe is the most shareholder value enhancing longer term.

[Justin Sander:]

Okay. And then just a follow-up there is there what – is there any specific consideration that would drive you towards either end of the range there whether it’s $7 billion by certain point in time and $9 billion by a certain point in time. Is it a function of what the new build opportunities are going forward or I guess what would decide – what would make you decide to go ahead and pay down an additional $2 billion to reach the lower end?

[Steven Newman:]

Yeah, it’s not – it’s obviously not an exceedingly tight range, but it’s a tight enough range that makes us feel quite comfortable. So, I think it is mostly about, because a lot of the investments in this industry tend to be a little bit opportunistic. So, that range gives us level of flexibility to utilize opportunities as they come along whether they are new build type of opportunities or more acquisition type opportunities either way, but it gives us some flexibility and that is really important, because of the nature of investments in this industry.

[Justin Sander:]

Okay, understood. Thanks very much.

[Operator:]

We will take our next question from Charles Olson with (indiscernible) Securities.

[Unidentified Analyst:]

Hi, and thank you. Just circling back on to your 2013 guidance for O&M cost, just looking at and just sort of (decisive) comparison to the preliminary guidance given after your third quarter call. And you had the $5.4 billion to $5.5 billion with a 5% increase, and then you said that the discontinued use of Mexico operating reduces 2012 revenues and OpEx of around about $100 million each, is that correct?

[Esa Ikaheimonen:]

Yeah, you got that correct, Charles. There is a rebase lining sort of situation here, because when Steven and Greg were speaking to you in November and gave you the preliminary guidance that change was not implemented yet. And therefore it was in the base, so you kind of have $100 million disappearing of the pace of the base and that’s got an impact. And then the Sedco 712 is the other kind of big ticket item that has got an impact on that comparison. And as I said in my initial piece, it’s like almost spot on in line with the November preliminary guidance, if you just normalize it for those items.

[Unidentified Analyst:]

Okay, okay, excellent. And then Terry on your new venture towards a new build, what kind of term duration are you looking at on such a new build? Is it sort of similar to the Shell data 10 years or?

[Terry Bonno:]

It’s really that I really can’t talk about the duration at the moment. We are still working on that, and as soon as we had some positive feedback we will be certainly happy to share it. Sorry, I couldn’t help you there.

[Unidentified Analyst:]

Alright. How many other similar opportunities are you currently pursuing or are there many out there?

[Terry Bonno:]

Charles, we are out there arm wrestling all of our peer groups. So, let’s see what we all come up with.

[Unidentified Analyst:]

When you hear all these, I mean there is always a bit of rumors here and there right, so okay. Excellent, thank you.

[Steven Newman:]

Alright, thank you all very much for your time and attention today. We look forward to speaking with you when we report our first quarter 2013 results later this spring. Don’t hesitate to give Diane or me a call over the course of the next couple of days if you have any follow-on question. Thanks so much. Operator, we can disconnect now.

[Operator:]

Thank you, sir. And ladies and gentlemen, we do appreciate your participation. You may disconnect at this time.