Transocean Ltd.
Q2 2013 Earnings Call Transcript

Published: 8 Aug 2013

[Operator:]

Good day everyone, and welcome to the Transocean second quarter 2013 earnings conference call. Today’s call is being recorded. And at this time, I would like to turn the conference over to Mr. Thad Vayda. Please go ahead.

[Thad Vayda:]

Thank you, operator. Good day and welcome to Transocean’s second quarter 2013 earnings conference call. A copy of the press release covering our financial results, along with supporting statements and schedules, are posted on the company’s website at deepwater.com. We have also posted supplemental materials that you may find helpful as you update your financial models. These materials can be found on the company’s website by selecting Quarterly Toolkit under the Investor Relations tab. Please note that we will no longer be posting three charts as part of our quarterly toolkit. These charts are entitled “Average Contracted Day Rate by Rate Type,” “Out of Service Rig Months,” and “O&M Cost Trends.” The information presented on these charts is still provided as part of our quarterly full fleet status report, or in the case of O&M cost trends, as part of the daily operating and maintenance cost schedule that is included in the toolkit. 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 would 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. Among others, these include future financial performance, operating results, estimated contingencies associated with the Macondo well incident, anticipated results of our cost savings initiatives, and the prospects for the contract drilling business generally. 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 or uncertainties materialize, or underlying assumptions prove incorrect, our 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 Regulation G. You will find the required supplemental financial disclosures 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 Reconciliations. Finally, to give more folks an opportunity to participate in this call, please limit your questions to one initial question and one follow-up. Thank you. I’ll now turn the call over to Steven Newman. Steven?

[Steven Newman:]

Thanks, Thad, and welcome to all of our employees, customers, investors, and analysts. I appreciate your participation on the call today. As this is our first quarterly call since the May annual general meeting, I want to thank all of you who participated in that process. As always, the opportunity to spend time with our shareholders is extremely valuable for us, and I look forward to a continuing dialogue on the key topics we discussed during those meetings. I would also like to reiterate that I am in complete agreement with our shareholders that Transocean’s market valuation is too low. I assure you that we are urgently working to address issues that are within our control, that are weighing on our valuation, including operating performance, profitably, and fleet composition, and we are committed to keeping you updated as we make progress on our various plans. As you saw in the press release, we reported adjusted earnings from continuing operations of $392 million, or $1.08 per diluted share. Including $85 million in net unfavorable items, we reported net income attributable to controlling interest of $307 million or $0.84 per diluted share. While we made very good progress in our operating performance during the second quarter compared to the first quarter, and I appreciate and commend the diligent efforts of the team that delivered this improvement, we are not where we need to be, either in absolute terms or in consistency. Our second quarter fleet-wide revenue efficiency of 93.1% was a significant improvement over the 88% delivered during the prior quarter. In fact, performance improved steadily during the second quarter, with June’s fleet-wide revenue efficiency at 95.6% and ultradeepwater revenue efficiency at 95%. June’s results were in line with what we achieved during the second half of 2012, and preliminary July revenue efficiency results are consistent with June’s level of performance, slightly offsetting this improved revenue performance during the quarter, or higher O&M costs, generally due to increases in planned maintenance and shipyard projects. As I have said before, I am confident that the initiatives we have undertaken will continue to yield improved operating results and financial performance. However, our challenge continues to be demonstrating the sustainability and consistency of the revenue efficiency improvements we have accomplished. Esa will take you through the numbers shortly. As I said before, we are diligently taking action on the issues most clearly within our control, including improving revenue efficiency, reducing shore-based costs, project execution, and more efficient offshore spending. These are the most important components for margin improvements, and the key catalysts for improving our market valuation. I am confident we can achieve our objectives through our continued efforts. We are committed to improving our shore-based cost structure by reducing annualized costs by $300 million, as compared with the cost structure in place before the Shelf Drilling transaction. As part of this initiative, we are rationalizing our global workforce and consolidating facilities to reflect the changes resulting from the Shelf Drilling transaction and the continuing divestiture of noncore assets, consistent with our asset strategy. The process of reducing our global shore-based headcount is ongoing. As you are aware, this is a complicated and sensitive process, and we are committed to ensuring that these workforce reductions take place in a responsible and respectful manner. This will take some time, and we have targeted completion by the end of 2014. In this regard, we have incurred separation costs of approximately $20 million as of June 30. We will continue to keep you informed regarding our progress in this effort. Rig operating costs are another key component of our profitability. These are driven mainly by headcount and maintenance expenditures, including major overhauls and periodic inspections. We are taking a thorough look at our offshore rig based headcount, focusing on the reduction of labor pools, the careful rationalization of training and development spending, and the optimization of offshore personnel deployment. Our objective is to enhance the overall operating efficiency of our rigs and the services we provide to our customers by even better leveraging the extremely talented operations teams and rig crews we have around the world. As with our shore-based initiative we are taking a very diligent and conscientious approach to the offshore aspects of our cost structure to ensure that we do not in any way compromise safety, operational integrity, or the company’s long term competitiveness. We will provide more specific information in the near future as our analysis progresses and implementation plans are further refined. Another key driver of our valuation is our rig portfolio, and we made further progress in executing on our asset strategy during the second quarter. Year to date, we have sold three standard jack-ups, and three of the four remaining standard jack-ups are already under contract to buyers. In connection with our efforts to dispose of certain low-spec commodity floaters, since the last earnings call, we sold one stacked fourth generation deepwater floater and entered into agreements to sell an additional deepwater and two midwater floaters, which were also stacked. Also during the quarter, we sold the [unintelligible] shares in Shelf Drilling, which we received as consideration in the transaction. The sale of the shares further reduces our exposure to this noncore asset class. The newbuild jack-up Transocean Andaman commenced operations on its three-year contract with Chevron in Thailand during the quarter. With about 100% revenue efficiency, both the Andaman and the Siam Driller are providing excellent service to Chevron, reflecting the close partnership we enjoy with them and the quality of Transocean’s projects and operations personnel. The successful performance of these rigs underpins Transocean’s ability to achieve attractive returns on these investments. I expect the same level of performance from the [Outside] when she commences her five-year contract with Chevron in Thailand later this year. The ultradeepwater new boat program remains on track, with the Asgard and the Invictus scheduled to go to work in the first and third quarters of 2014, respectively. The four newbuilds contracted to Shell, though very early in the construction process, also remain on track. In June, we paid the first installment of our $2.24 per share dividend, which represents one of the industry’s largest yields and highest implied payout ratios. As we discussed during the proxy campaign, the $2.24 per share dividend approved by our shareholders is a solid starting point. We understand the importance of a sustainable and growing distribution of capital to our shareholders, and I reiterate that it is our intent to increase the level of cash we distribute in the future, in the context of our balanced capital allocation strategy. Finally, I want to touch briefly on the Macondo litigation. During the second quarter, phase one of the trial concluded, and all parties have submitted their post-trial briefs and composed findings. I was encouraged that no new facts regarding Transocean emerged during this important phase of litigation. I think this reflects the quality of the investigation work our team did, and the level of cooperation demonstrated with the authorities. I remain confident in our position and the merits of our case, though I would remind you that litigation can be unpredictable. Phase two of the trial, focusing on source control and quantification, is currently scheduled to start at the end of September. With that, I will hand it over to Esa to take you through the numbers. Esa?

[Esa Ikaheimonen:]

Thank you, Steven. I add my thanks to all of you for joining us today. I will now add some more detail and color to Steven’s comments. We reported net income attributable to controlling interest of $307 million, or $0.84 per diluted share for the second quarter of 2013. Our results for the quarter included $85 million or $0.24 per diluted share in after-tax net unfavorable items as follows

[Terry Bonno:]

Thanks, Esa, and hello to everyone. Before we cover specific markets, I’d like to make a few general comments. The second quarter tendering activity was quite a busy one for the independents. The group contracted the majority of the work across the global floater fleet. In the second quarter, 20 new contracts on the global fleet of ultradeepwater rigs were announced, leaving a total of 14 ultradeepwater newbuild floaters and 28 existing ultradeepwater rigs uncommitted through 2014. Year to date, we added $5.2 billion of contract backlog, and we expect to report more positive news shortly. While the pace of tendering for ultradeepwater and deepwater rigs accelerated greatly in the second quarter, contract awards continue to take a long time to reach closure, mainly due to regulatory requirements and in some cases delays of projects due to economic viability. Additionally, during the second quarter the market experienced a decrease in contract duration and lead times. While the near term may be a little challenging, with the large number of rollovers of existing fleet and the influx of newbuilds into early 2015, we remain confident in the long term fundamentals and our customers’ willingness to continue to increase their activity levels. Now to specific markets. Our commentary on day rates for ultradeepwater rigs remains the same as detailed in our last earnings call. We see rates leveling off between $550,000 per day to $600,000 per day, depending upon area of operations, rig capability, availability, and contract duration. The lower specification ultradeepwater rigs are being offered around $520,000 a day to $570,000 per day. Ultradeepwater demand is being driven by the U.S. Gulf of Mexico, sub-Saharan Africa, and in certain emerging markets. We expect demand in Brazil to increase over the medium term, with the recent success of the licensing round and the interest in the October [unintelligible] for [Libra]. As a reflection of the strength of Transocean’s position in the marketplace, the quality of our customer relationships, and the competitiveness of our asset base, we are very pleased to announce the extension of the Discoverer Clear Leader at $590,000 per day for four years and the Discover Inspiration at $585,000 per day for five years, plus performance incentives for both rigs, adding contract backlog of almost $2 billion. Additionally, we finalized a one-year contract for the Transocean Barents at $615,000 per day for one year in Norway. We are also in final negotiations on several other existing ultradeepwater rigs. Our confidence in the long term future of the ultradeepwater market continues to be confirmed by the customer interest in the remaining fleet available in 2013 and into 2014. The tendering pace picked up in the deepwater market after a quiet first quarter, and we are currently in discussions with several customers for the available fleet. We were able to extend the Henry Goodrich in eastern Canada for nine months at $476,000 per day. Midwater and harsh environment activity, especially in the Norwegian north sea and U.K. remains steady compared to the previous quarter. The first availability in Norway is the Polar Pioneer in early 2014, and our first available existing rig in the U.K. north sea is in 2015. Although appearance in the end may provide an opportunity to reactivate one of our stacked north sea capable rigs, the Arctic 1 earlier than this, this demonstrates the strengths of both markets and may provide an opportunity for additional supply to be absorbed by the market. Outside of the U.K. and Norway, the market for midwater rigs is relatively quiet. However, we observed a slight increase in contracting in Asia. The Transocean Amirante is currently idle, awaiting an opportunity to return to work. We are pursuing opportunities for all of the rigs we have available in 2013 and 2014. Utilization and day rates for premium jack-ups remain strong, due to improving demand in almost all jack-up provinces. We expect all newbuilds to be absorbed by the market and demand will continue to outstrip supply in 2013. This is reflected in the conversion to drilling mode of the Galaxy 1 in the U.K. for three years at $215,000 per day at a leading edge day rate. The increased utilization has resulted in rates for high specification jack-ups increasing to over $180,000 per day in West Africa and well over $210,000 per day in the U.K. In summary, the ultradeepwater market remains healthy. While the pace of fixtures has moderated, we see ample market opportunities to absorb all of the available capacity over the next several years. While the deepwater market utilization remains over 90% today, we’re seeing some potential for incremental idle capacity in the near term. Midwater activity in the U.K. and Norway in the premium jack-up market remains robust. Longer term, we expect increased strength of the offshore markets due to the many exploration successes that continue to drive demand, providing ample opportunity for the existing fleet and for future growth. This concludes my overview of the markets, so I will turn it back to you, Steven.

[Steven Newman:]

Thanks, Terry. And with that, operator, we’re ready to open it up for Q&A.

[Operator:]

[Operator instructions.] And we’ll take our first question from Collin Gerry with Raymond James.

[Collin Gerry:]

Steven, I’ve heard you mention recently, as part of the operational execution strategy, maintaining a fleet of spare BOPs. I wondered if you could just give us a little bit more color in terms of how, in practicality, that could affect the ongoing operations. The way I understand it, if you have downtime on a BOP, you can send a new one out there, and while the other one’s getting fixed, you can improve the revenue efficiency of the rig. Is that the right way of thinking about that? And how progressive is that?

[Steven Newman:]

The focus on having an adequate inventory of spare capital equipment around the world is really designed to improve the utilization of the fleet, not necessarily the revenue efficiency. So if you think about a shipyard project, typically what happens is we will bring a rig into the yard, take the BOP off of that rig, and subject it to a process of inspection and identifying all the necessary repair work, and then carrying out that repair work, so that we can recertify the BOP and return that BOP to the rig, so that the rig can go back to work. Typically, historically, that process of BOP recertification has defined the critical path for returning the rig to service. What we’re trying to do with establishing an inventory of spare capital equipment around the world is taking that process of inspection and repair and recertification off the critical path. So when a rig comes into the yard, we take its BOP off and then we can go through a process of overhauling and recertifying that BOP according to the capability of the manufacturer and the OEM facility, but that doesn’t drive the critical path for returning the rig to service, because we have an existing inventory of ready to go BOP equipment that we can ship back to that rig in the yard, get them ready to go back to work more quickly and more efficiently. So the inventory of capital spares is really designed to improve our ability to execute shipyard projects in a timely fashion, which is a key driver of utilization.

[Collin Gerry:]

Okay, very interesting. So where are we in that program? Is that being implemented currently? Or is it still in kind of the testing phase, if you want to think about it that way? Or is that something we should see in the results maybe a year or two out?

[Steven Newman:]

We’re well into the implementation of this. We started placing orders in the latter part of 2010 and on into 2011, and we are, as Esa mentioned, a significant component of our 2013 capital program reflects the delivery of a large number of those components that we placed orders for a couple of years ago. As indicated in his comments, our capital expended as a result of building up this inventory of capital equipment should go down after 2013, because we’re well into the implementation and taking deliveries of this.

[Collin Gerry:]

And last one, just a follow up, sorry to hit this harder, but should we see continued improvements in the shipyard related? The capital program is well into the implementation side of things, but on the shipyard downtime, is that still progressively getting better as we implement the program once the equipment is delivered?

[Steven Newman:]

Yeah, that’s where you’ll see the actual effect of this inventory of capital spares, is improved execution of the shipyard projects, improved utilization in the fleet, reduced out of service time.

[Operator:]

We’ll take our next question from Angie Sedita with UBS.

[Angie Sedita:]

Steven, you obviously sold four floaters in the quarter, in midwater and both deepwater. Could the list of floaters grow that you have up for sale? And also, have you considered selling the midwater floaters as a package, similar to what you did with the Shelf jack-up rigs?

[Steven Newman:]

Our approach to the floater aspect of our asset strategy is similar to the approach we’ve taken on the jack-up side. We have a list of rigs that we consider to be divestiture candidates. They’re not part of our core long term strategic fleet. And so we’re looking for divestiture opportunities, and in the meantime, Terry and her team do an excellent job of keeping those rigs working. So we’ll look at single asset transactions, we’ll look at packages, we’ll consider either private party transactions, we’ll consider public market transactions. Over the course of the execution of the strategy, we’ll actually undertake a wide variety of those different components to ensure we execute the strategy.

[Angie Sedita:]

So could something become more formalized, as you did with the jack-ups?

[Steven Newman:]

I would say that over the last couple of years, 2011 and 2012, our focus was on dealing with the jack-up component of the asset strategy. Now that we’re largely through the jack-up component, we kind of shifted our focus and start ramping up our efforts to deal with the floater component of the asset strategy as well.

[Angie Sedita:]

And then Terry, you mentioned on the last call some potential concern about short term overcapacity in the ultradeepwater market. In context of what you said today, has that view changed, for the better or worse, or stable? And then also, in conjunction with that, with the ultradeepwater rigs coming into the market in 2013, 2014, do you think there’s near term risk for the standard midwater and deepwater rigs as you see with the [Amirante] still being idle?

[Terry Bonno:]

Those are really good questions. I think the last two quarters we have stated some concern about the sheer numbers. If you look at 2014 in particular, you end up with a number that we haven’t seen in the industry ever. So there’s 42 rigs. I think there’s about 12 newbuilds that need to be placed, and the rest is a rollover fleet. As we go back to 2008, I think we’ve averaged about 20 to 25 that have been absorbed by our customers. So I think the number’s just a little bit concerning. However, with all the successes, we feel comfortable that there’s plenty of opportunity for these rigs to go to work. I think as we look forward, it could be a timing issue, and I think that’s the concern. And that’s what why we say, near term, can our customers absorb just the sheer numbers. There’s plenty of capacity to drill, plenty of opportunities out there, and we see an increasing pool of that as these discoveries continue to mound up for 2013. But I think we have to be cautious about it, and be prepared for it, and get our rigs to work as quickly as we can.

[Angie Sedita:]

So do you think that the ultradeepwater newbuilds coming in, obviously they’re good rigs, people are going to want the rigs. Maybe there’s a little bit of a timing issue in putting those into contracts, but do you think the greater risk could be for the standard midwater and deepwater rigs and other places in the world outside of the North Sea?

[Terry Bonno:]

This has happened in the other type of niche markets that we’ve experienced. You know, the more capable assets are always going to compete down to the less capable assets, and we’ve seen it before, where the standard midwaters actually take a pause. And then when the market tightens up again, every rig, what goes back to its natural water depth capacity to execute in, and things repair themselves over time. So there’s a possibility of it. I think, again, we’ve said that we believe we will see some idle capacity in the near term. I think you’ve already seen some. Our competitors have also experienced a bit of it. But again, as soon as we can work through this capacity in ’14 and see how it plays out, I think we’re just going to have to work very hard to place our rigs.

[Operator:]

We’ll take our next question from Robin Shoemaker with Citi.

[Robin Shoemaker:]

Wanted to ask you about potential for further newbuilds in the sense that you have these four newbuilds with Shell. And are there other opportunities to build rigs against contracts now? I’m trying to infer whether your comments about the equilibrium in the market would argue against that kind of opportunity, or whether you see some of your major customers thinking about building rigs to their specification on multiyear contracts, which you might take advantage of.

[Terry Bonno:]

We have great opportunities to continue those discussions with our customers. And right now we are in discussions to do just what you suggest, of building to some specific specifications. And we do like that opportunity, because it gives us the ability to create something that doesn’t exist in the marketplace today. And I think that that is one of our strengths, and certainly the customers that we deal with agree with that too. So we have the depth to set down with a truly talented engineering and newbuild team and create something really great that the customer can apply to their business going forward.

[Robin Shoemaker:]

Then I wanted to ask Esa if he could, as you’ve done in the past, kind of update us on your thoughts about a limited partnership. You just told us about the contracts on the Clear Leader and Inspiration, so you’re clearly signing some long term deals. Just wondering if you could update us on your thoughts there.

[Esa Ikaheimonen:]

Thanks for the opportunity to update. We do have some great assets and some great contracts that would actually fit really nicely into the MLP world. We’ve continued our evaluation evaluating the pros and cons, and different structural alternatives, different ways to execute an MLP. I think our overriding conclusion is that an MLP would fit into our capital structure really well. It would provide us with additional source of capital, it would increase our financial flexibility and offer us a new currency as well, and potentially also attractive economics. We also believe that we would be able to structure it in such a way that it would overall be credit neutral and allow us to continue as an investment grade rate company, which is obviously very important to us, as you know. But we’ve also, on the downside, stated several times that it would come at a cost, and a complexity that should not be underestimated. The tax complexity is significant, and so is the complexity of actually operating a separate entity side by side with the seaport. Also, the cyclical nature of our business, the long term valuation risk associated with the asset class, combined with the drilling volatility, is a key concern. So all in all, we’re positive, but cautious about the MLP as a source of capital for Transocean. As I said, it would fit into our capital structure and provide support for our capital allocation strategy as well, funds for potential growth and fleet highgrading, as well as cash needed to distribute to our shareholders. So we’re still continuing our process, and continuing to have our internal discussions about the applicability and potential timing for such a thing. So not the right time to conclude as yet, but we’re clearly making a lot of progress in the area.

[Operator:]

And we’ll go now to Ian MacPherson with Simmons.

[Ian MacPherson:]

Terry, I wanted to ask you about the extensions. I assume when you mentioned the Inspiration, the Clear Leader, those are extensions from Chevron in the Gulf of Mexico? And can you provide some background on why we’re seeing very good rates, but also longer duration on the first renewals of these sixth generation assets and how they compare with the very prototypical two to three year term that new rigs are getting as they come out of the yard. Is there a premium that’s placed on these broken in sixth generation rigs that gives them better marketing leverage? Is that the explanation? Or is there something more situational here?

[Terry Bonno:]

I think this is a good example of what I was trying to allude to, the building a rig to customers’ specifications and working really really hard in developing these long term relationships and delivering operational excellence, that you get these opportunities to renew your fleet a little bit longer term, because the customer wants to keep the rig. They’re very happy with what they’ve accomplished together, and they feel comfortable and very excited to be able to give more long term to continue their programs. And they’ve got a lot of work to do in the Gulf of Mexico, and it certainly makes sense for both of us. So Chevron has been a fantastic relationship for Transocean, and we’re just very proud to be able to work with them in the Gulf of Mexico with these two rigs.

[Ian MacPherson:]

You’ve seen the rates for the lower end ultradeepwater class between $520,000 and $570,000. Is that how we should think about the market rates for most of your fifth generation rigs? Obviously the GSF Explorer going to [ONGC] or more of a down market contract seems like it was an outlier. And I think it would be informative for us to know whether there are other outliers or if the bulk of your fifth generation fleet pertains to that $520,000 to $570,000 market range that you alluded to.

[Terry Bonno:]

Well, you know, I think that’s a tough question. I think that your assessment of the Explorer is accurate, as an outlier. This was a less capable rig and certainly wasn’t capable of drilling these tougher, deeper wells in the [pre-salt]. So that was one of the things that we also found ourselves at a moment where there was not a lot of opportunity out there, and this rig is perfectly capable to deliver these ONGC wells. Again, she’s a lot older than the current fifth and sixth generation rigs that are doing these tough wells. So that was one of the outliers, as you described. I would tell you that we can’t really give you a clear answer on the second question, because we’re in final negotiations on our available 2013 fleet. So I wouldn’t give our competitors any opportunity to step in and steal these from us, because I don’t like that happening. So we better just tell you that we’re very positive on where we are in the negotiations, and I think you’ll see some positive results here shortly.

[Operator:]

We’ll go next to Kurt Hallead of RBC Capital Markets.

[Kurt Hallead:]

Just had a follow up. Esa, in your commentary about the MLP, at least the way I would interpret it, came away as more positive than negative. Within that context, not putting any particular words in your mouth, but just trying to get a sense as to whether or not, at this juncture, when you think about that MLP, there’s something that could be more likely, and if so, is there something that you think could transpire within the next 12 months or so?

[Esa Ikaheimonen:]

Very smart question. Puts me in an interesting place, of course, but the reality is that we haven’t taken a decision on an MLP yet, and that’s the only right way to answer your question. We just haven’t made a decision on that. We continue our discussions. There’s always continued engagement with our board, and over the next couple of months, I would believe that we would have clarity on this issue as well as some other issues that we are currently in discussions on. So you’ll just have to bear with us a little bit, and be patient with us, but currently no decisions, and no reason to read between the lines based on what I just said. We haven’t taken a position, and everything else would be a bit speculative at this moment in time. Theoretically, I think I said earlier that if one would decide to do an MLP, it’s probably a nine to 12 month journey, recognizing the carve out requirements and audited financials and other things that would be required for the IPO. So that’s the sort of timeframe you would be looking at. But again, that’s speculative, in the absence of a board decision.

[Kurt Hallead:]

And then Terry, maybe for you on the market. Most people on this call, and most investors, are probably uncomfortable with the prospect of a flat day rate environment. At least that’s the feedback that I get in the context of either the rates are going up, or they’re going down. And if they’re not going up or down, then they’re about to go up or down. So in the context of what you’ve already indicated vis-à-vis the market dynamics, it seems like a little bit more of a situation of maybe… I’m not going to put words in your mouth. In your mind, is it excess, or is it just [unintelligible] finally balanced, that we could see a flat ultradeepwater day rate environment extend out well into 2014? What’s your best guess on that right now?

[Terry Bonno:]

You know, I like the word that you used, Kurt. You said balance. And I think that’s where we find ourselves today, is there’s a balance, and the recent tendering activity was certainly up over the first quarter, and it was very encouraging to see these rigs attain contracts. I think that was a positive. But I think what it shows you is that they were all about in the range. So I think we are balanced, and I think if we are able to continue to be able to continue in that same mode, then it’s where it’s headed. I don’t see it modulating until we hit a place in time where our customers can’t simply move forward and contract the rigs. But I think balance is the right answer.

[Operator:]

We’ll go next to Scott Gruber of Bernstein.

[Scott Gruber:]

I want to come back to the MLP issue just for a second. Esa, it perplexes me a bit when I think about the MLP in the context of Transocean. Could you just provide some more color and thoughts around why you’d need another source of equity financing if you’re going to maintain a more conservative investment approach and only build rigs against firm contracts?

[Esa Ikaheimonen:]

Well, I’m not sure I said we needed one. I said it would fit in and provide additional flexibility and an additional source of capital. A lot of that depends on the asset strategy execution and the direction it takes. Obviously a lot of that depends on the pace with which we will aim to increase the dividend distribution and so on. All I was saying is it would fit into our capital structure. It would provide an additional source, an additional currency, and provide us with additional flexibility. So I wouldn’t suggest that that’s a must have for us. It’s something that looks attractive and provides us with something that we might benefit from. But it comes at a cost and complexity, and that’s a really important part of it. So if I gave you the impression that we would in any shape or form be in a spot where we would actually need one, I don’t think that is right.

[Steven Newman:]

If I could just supplement what Esa is saying, reinforce what Esa is saying, we’ve done a tremendous amount of analytical work. Esa has led a team that’s been focused on this for the last several months. So we’ve gotten to the point where, as Esa has said, it could be a component of our capital strategy. But you’ve got to put that capital strategy alongside our operating strategy and our asset strategy, and these are all ongoing discussions with our board. We are not going to do an MLP for the sake of doing an MLP. If we find that, as an element of our capital strategy, it supports our asset strategy or our operating strategy, then it’s a possibility. But that’s kind of where the discussions are right now.

[Scott Gruber:]

If I could follow up on the cost savings initiatives, if memory serves, you guys were originally talking about realizing the $300 million in early ’14. Now it seems like it’s going to take a little bit longer than that. Can you just talk about the timing around realizing the $300 million and any delays that you see today?

[Esa Ikaheimonen:]

No, I think you misunderstood some of our communications. Actually our story hasn’t changed at all. If anything, we’ve accelerated a little bit. So from the moment we announced the $300 million program, we said that we will be able to deliver the full impact in 2015. We said our best estimate at the early stages was that two-thirds of those benefits equaling about $200 million would be achievable already in 2014. You have to keep in mind that it takes a little while to actually first do the definition, reorganize the company, redesign processes. That is important, because what you want to do is you want to do this well, and you want to make sure that your benefits are sustainable, and as a result you don’t actually generate any unintended consequences. So consistently we’ve said $300 million in 2015. And I repeat what I said earlier, about 2014. Two-thirds of the benefits achievable, already next year, and that is exactly what I just said also during my commentary.

[Scott Gruber:]

Steven, if I could sneak in one additional one. When you were at our conference this past spring, you mentioned your belief that you would be able to close the EBITDA margin gap with peers in another two planning cycles, which would mean about late 2015. Do you still hold that view?

[Steven Newman:]

Yeah, I think based on the work we’ve done already, I think the timeline we’ve laid out for ourselves meshes nicely with the expectations I’ve set publicly.

[Operator:]

And we’ll take our next question from David Smith with Johnson & Rice.

[David Smith:]

Just a housekeeping question. Going back to the sale of assets to Shelf Drilling for $1.05 billion, if I’m reading the 10-Q correctly, in addition to the $195 million in preferenced shares you sold, you also received $568 million in cash. And since the original press release described $855 million of cash, how should we think about modeling the timing for Transocean to receive the remaining $287 million? Is that something that happens just as the management of the assets is fully transitioned?

[Esa Ikaheimonen:]

You are right, it actually grows over time, so in addition to the initial cash that we received, I think we’ve consistently also said that it will take up to 15, 16 months to generate the rest through a transition that will see us collecting working capital and inventory related payments from Shelf Drilling. And the current estimate is that during the first half of next year, all that would be completed. Give or take a few million dollars, but it will be the vast majority of the cash expected to come in to Transocean generated within that timeframe.

[David Smith:]

And the follow up question is for Terry. When you mentioned some potential for incremental idle capacity in the near term, on the deepwater fleet, do you mean some temporary gaps between contracts? Is this something you’re thinking for one of your rigs? Just wondering if you could give a little more color around the comment.

[Terry Bonno:]

Yeah, I think you’re seeing it not only in our fleet, but you’re seeing it also in several instances in the global fleet. But I think there will be, if we have this loosening or inter-term softness, just because of the sheer numbers, I think you’ll see some idle time between being able to move to the next contract. I can’t predict what that looks like right now, but I just think that we’ll see some of that, because we’re going to be rolling these rigs over now on a little bit of a shorter term project. So it’s a natural phenomenon that’s happened historically, in the past, when we work these on shorter term contracts. It’s just moving to the next location and these type of things.

[Operator:]

And we’ll take our final question from J.B. Lowe with Cowen & Company.

[J.B. Lowe:]

Just a quick follow up on that last question, Terry, about the delays between contracts. So you do see some of the rigs that are rolling over are going to be moving between regions? And which regions do you think we can see rigs leave from and go to?

[Terry Bonno:]

If you look at the open opportunities, specifically talking about the deepwater fleet, we’re bidding several opportunities in Africa. We’re bidding several opportunities in Asia and Australia. So it just depends on where the fleet’s located. We happen to have the luxury of having fleet in all these areas, so it’s not like we’re relocating from one continent to another. So we just see that we will be rolling over and over some of these vessels, and it just may be some time between contracts. But we’re trying to ensure that we’re in direct continuation at all times. But I just see that there may be some instances where that won’t occur.

[J.B. Lowe:]

And I guess my next question is, could you see some of these rigs leave the Gulf? And if that’s so, then when you talk about the $520,000 to $570,000 range, are you talking about the $520,000 would be more of a Gulf of Mexico day rate and the $570,000 would be if you move these rigs elsewhere to higher cost areas?

[Terry Bonno:]

You know, when we say dependent up on area location, and dependent upon duration, those certainly play a factor in the pricing. But again, we’re just going to have to wait and see how this plays out. But if you’re specifically talking to the deepwater fleet, then those ranges were given for the ultradeepwater fleet.

[Thad Vayda:]

All right, thank you all very much for your participation in today’s call. Look forward to speaking with you when we report our third quarter results. To the extent that there are any additional questions that you have, feel free to give me or Diane a call this afternoon and tomorrow. Have a good day.