Transocean LTD. Q1 2009 Earnings Call Transcript

May. 6.09 | About: Transocean Ltd. (RIG)

Transocean LTD. (NYSE:RIG)

Q1 2009 Earnings Call Transcript

May 6, 2009 10:00 am ET

Executives

Gregory Panagos – VP, IR and Communications

Bob Long – CEO

Greg Cauthen – SVP and CFO

Terry Bonno – VP, Marketing

Analysts

Angie Sedita – Macquarie

Tom Curran – Wachovia

Ian Macpherson – Simmons & Company

Andreas Stubsrud – Pareto

Jas Patel [ph] – Natexis Bleichroeder

Dan Pickering – Tudor Pickering Holt

Brian Uhlmer – Pritchard Capital

Mike Urban – Deutsche Bank

Dan Boyd – Goldman Sachs

Lee Cooperman – Omega Advisors

Operator

Please stand by, we are about to begin. Good day, everyone. Welcome to the first quarter 2009 results conference call for Transocean Limited. Today's conference is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Mr. Gregory Panagos. Please go ahead, sir.

Gregory Panagos

Thank you, Tom. Good morning, ladies and gentlemen, and welcome to Transocean's first quarter 2009 earnings conference call.

A copy of the first quarter press release covering our financial results along with supporting statements and schedules is posted on the company's website at deepwater.com. We have also posted a file containing five charts that will be discussed during this morning's call. That file can be found on the company's website by selecting Investor Relations, followed by Quarterly Toolkit. The Quarterly Toolkit also has six additional financial tables and our non-GAAP financial measures and reconcilliations to assist you in evaluating our results.

Joining me on this morning's call are Geneva are Bob Long, our Chief Executive Officer; Steven Newman, Chief Operating Officer; Greg Cauthen, Senior Vice President and Chief Financial Officer; and Terry Bonno, Vice President of Marketing.

Before I turn the call over to Bob, I would like to point out that during the course of this conference 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, and the prospects for the contract drilling business.

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, 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.

Also note that we will use various numerical measures on the call today that are or maybe considered non-GAAP financial measures under Regulation G. 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 www.deepwater.com under Investor Relations, Non-GAAP Financial Measures and Reconciliations. And for your convenience, non-GAAP financial measures and reconciliation tables are included with today's press release.

Our website also includes schedules detailing our operating and maintenance costs, other revenue, deferred revenue, and revenue efficiency. Finally, under News and Events and Webcasts & Presentations, we posted slides detailing average contracted day rate by rig type, out-of-service rig months, operating and maintenance costs, trends and contract backlog. Finally, in order to give more people and opportunity to ask questions, please limit your questions to one initial question and one follow-up.

Thank you. That concludes the preliminary details, and now I'll turn the call over to Bob.

Bob Long

Thanks, Greg, and good morning, everyone.

We had another good quarter despite the difficult market conditions earning $2.93 per share or after adjusting for the write down of the Arctic II to Arctic IV and some other things, mostly discrete tax items, $3.75 per share. Greg will go into the financials in detail in a few minutes after which Terry will try to give you some color on the market.

Before we do that I would like to give you my sense of what is happening in the business. First, I continue to be optimistic about the deepwater market. We've only done a few fixtures so far this year but all three have been in the mid-500,000 to low 600,000 daily range and for terms ranging from 3 to 8 years. We are also still seeing continued interest on the part of operators both for additional capacity and renewal of existing capacity. As most of you know, we're well positioned in the deepwater market and expect to see a substantial contribution from new rigs going forward. In Q2, we expect the benefit from the start up of the 706, a deepwater semi which has completed its upgrade and arrived in Brazil for a multiyear contract with Chevron, and also from the commencement of the operations as a clear leader.

In Q3, we expect a benefit from the KG1 and the Development Driller III both commencing operations. And in Q4, the Discover America should commence operations. Looking forward to 2010, all five of those new builds should contribute significantly to earnings and cash flow with another five new builds expected to start at various times in 2010. There is some farm out interest developing in the deepwater business but not at discounted prices. During the first quarter, one of the deepwater rigs was farmed out from the original operator for a short-term program but it was at the existing rate in excess of $600,000 a day.

The jackup market has been much weaker than the deepwater market and it appears that the jackup market is weakening at an a accelerating pace, particularly in West Africa. We now have nine jackups stacked versus three stacked at the time of our last call. I expect you'll see us stacking more jackups before the year is out. Although we have not seen jackup day rates drop dramatically, there has been some significant pull back in rates, though rates remain reasonably good by historic standards.

The midwater floater market also experienced some softness particularly in the North Sea. The worldwide midwater market does not appear to be as soft as the jackup market. We do have three midwater rigs now stacked and some possibility of a fourth going out in the next few months and I will let Terry expand on that market.

As we go through this difficult period in the market, we continue to focus on execution, safety and cost control. We're continuing to pay down our debt, positioning ourselves to take advantage of the opportunities that might present themselves, while maximizing our ability to take advantage of the upturn when it comes. We remain confident that our contracts are secure and that our customers will honor those contracts. Our current backlog of just under $36 billion coupled with a significant exposure to deepwater market which is clearly the strongest market at the present time puts us in good position relative to the rest of the companies in our business.

With that, I'll turn to Greg for the numbers.

Greg Cauthen

Thanks Bob and good morning to everyone.

In the first quarter of 2009, we had net income of $942 million or $2.93 per diluted share. This compares to net income of $754 million or $2.35 per diluted share in the fourth quarter of 2008 as adjusted for revised accounting for interest expense on our converts which I will discuss in a few minutes.

First-quarter net income was adversely impacted by on a net basis by certain items totaling $264 million or $0. 82 per share. After adjusting for these items, first-quarter net income was $1.206 billion or $3.75 per share as compared to fourth quarter 2008 net income adjusted for similar items of $1.139 billion or $3.54 per share. Items adversely affecting first quarter net income included $221 million for impairment of the Arctic II and the Arctic IV, $36 million of discrete tax items, and $7 million for GSF merger-related severance cost and losses on retirement of debt.

Fourth quarter 2008 net income was adversely affected by similar items totaling $385 million or $1.19 per share. Contract drilling revenues for the first quarter were $2.834 billion essentially flat with the fourth quarter of 2008. During the first quarter, we benefited from a previously anticipated reduction in shipyard projects and the commencement of higher day rate contracts, but these increases were mostly offset by the impact of additional out of service time due to rig stacking and mobilization. Other revenues decreased in the first quarter to $180 million from $307 million in the fourth quarter. This decrease was primarily related to a reduction in drill maintenance services activity and lower commodity prices for our non- contract drilling segment.

Contract drilling intangible revenues in the first quarter decreased $104 million from $133 million in the fourth quarter. You can find a schedule detailing contract drilling intangible revenues by quarter on our website. Total revenues were $3.180 billion for the first quarter compared to $3.270 billion for the fourth quarter due to decreases in contract intangibles and other revenues. Contract drilling revenues for the full year 2009 are expected to benefit from the commencement of higher day rate contracts as shown in chart 1 as well as the commencement of operations at five of our ultra deepwater New builds and the upgraded Sedco 706. Contract drilling revenues in 2009 are also expected to benefit from a decrease in lost revenues due to fewer net out of service days from shipyard projects and mobilization as shown on chart 2. These expected increases in contract drilling revenues in 2009 may be partially offset by decrease in rates from some jackups and midwater floaters as they roll to new contracts in 2009. We also expect the midwater floaters and jackups to experience significant idle and stacking time during 2009. We currently have nine jackups and three midwater floaters that are stacked. We expect to see more rigs stacked by the end of the year if the current economic environment continues.

Contract drilling intangible revenues are expected to decline to $281 million in 2009 from $690 million in 2008 and to decline further to $98 million in 2010. The anticipated decline in non-cash contract intangible revenues has no impact on our future cash flows. We continue to expect our other revenues to decline from $1.228 billion in 2008 to a range of $725 million to $775 million in 2009 with approximately $400 million related to the non drilling segment, approximately $200 million related to integrated services, and approximately $150 million related to recharge revenue. The expected decline in other revenues is primarily due to anticipated decrease in activity in our non-contract drilling segment caused by lower commodity prices and weak capital markets. The low margin nature of this business, we expect any decrease in non-contract drilling revenues to be largely offset by a reduction in related costs.

Operating and maintenance expenses in the first quarter were $1. 71 billion versus $1.408 billion in the fourth quarter as shown on chart 3. The quarter to quarter reduction in operating maintenance costs was primarily attributable to $92 million reduction in non-drilling costs consistent with the decrease in revenues, a $77 million decrease in maintenance and shipyard project cost, with the remainder due to a variety of items, including reduction in bad debt expense and reduced normal operating costs due to the reduced rig activity.

We currently expect our 2009 operating and maintenance expenses to range between $4.9 billion and $.2 billion which includes roughly $675 million of expected costs related to our low margin other revenue items. We expect operating maintenance cost in the second and third quarters to be higher in the first quarter due to increases in shipyard and maintenance activities. Our actual operating maintenance costs for 2009 remains uncertain given current economic and market uncertainty and could be significantly impacted by the actual level of activity, stacking of rigs, exchange rate, the levels of inflation and other factors. Rigs that are stacked continue to incur costs and operating levels for a period of time until crew and support costs are mostly limited. Roughly 40% of any change in cost due to changes in exchange rates are expected to be offset by a corresponding change in revenues due to the portion of costs that are denominated in local currencies. We continue to monitor and manage our operating maintenance costs closely in the current uncertain environment.

General and administrative expenses were $56 million in the first quarter compared to $59 million in the fourth quarter. This decrease was primarily attributable to $4 million in one-time costs incurred in the fourth quarter related to our re-domestication to Switzerland. We continue to expect general and administrative expenses for the full year 2009 to be between $200 million and $210 million which includes the ongoing impact of the re-domestication.

Depreciation expense was $355 million in the first quarter compared to $396 million in the fourth quarter. The decrease is primarily due to fourth-quarter purchase accounting adjustments and oil and gas property write-downs with no comparable items in the first quarter. We currently expect depreciation expense to be roughly $1.5 billion in 2009, with the decrease of 2008 primarily related to the expected commencement of operations at five of our new builds in the upgraded Sedco 706 during 2009.

Capital expenditures in the first quarter of 2009 were $708 million versus $505 million in the fourth quarter with the change primarily related to the timing of shipyard payment on new builds and upgrades. We expect capital expenditures for the full-year 2009 to be roughly $3.9 billion. Of this total, approximately $2.16 billion relates to cash construction costs on our new build rigs, 750 million is the non-cash capital expenditure related to the Petrobras capital lease, and the remainder primarily relates to sustaining capital expenditures, contractually required updates, new build mobilizations and other capital expenditures. For 2010, we expect to incur another $880 million in new build related capital expenditures.

Interest expense net of amounts capitalized and interest income decreased $135 million in the first quarter versus $165 million in the fourth quarter. The decrease was primarily related to increase in capitalized interest and decreases in outstanding debt. US GAAP rules have recently changed to require the accounting for convertible notes to be split between their equity and debt components. This change was effected beginning in 2009 and required retroactive restatements of our prior year financials. Our press release as well as of our form 10-Q to be filed later today more fully describes this change and the related effect on interest expense, property and equipment, debt and equity. We expect our interest expense net of amounts capitalized and interest income to be roughly $520 million for the full year 2009. This is net of an estimated $180 million of expected capitalized interest. This estimate assumes short-term interest rates remain at current levels, continued repayment of debt, no share repurchases and no additional new build commitment. For the first quarter of 2009, our annual effective tax rate was 15.2%. We expect our annual effective tax rate for the full year 2009 to be between 14% and 16%. The increase in range of our estimate is due to the impact of reduced net income from stacking rigs that were expected to operate in low tax jurisdictions.

Finally, I would like to briefly comment on our liquidity position. At March 31, 2009, we had $1.3 billion of cash. In addition, we have a $2 billion revolving credit facility with roughly 4 years remaining and $1.08 billion of commercial paper backstop facility that was put in place in November 2008. Today, we have almost $200 million of revolvers supporting letters of credit and we have approximately $790 million in commercial paper outstanding. Consequently, we have over $2.2 billion of unused committed bank capacity. We also have generated more than 1.4 billion of operating cash flow in the first quarter of 2009 and we expect quarterly operating cash flow to increase during 2009.

We continue to generate significant cash flows supported by our 35.8 billion dollars of revenue backlog as shown on chart 4. Our backlog has a very high credit quality with 60% attributable to A rated customers and 95% attributable to customers with investment grade or better ratings. Since our last call, we have lost roughly another $150 million of backlog due to credit related issues for a cumulative total of roughly $450 million of lost backlog since the credit crisis began. However, we appear to have only a small percentage of our remaining backlog with customers who may be in similar credit situations. This backlog represents roughly $17.4 billion of free cash flow backlog versus almost $13.4 billion of face value of our debt. As you can see on chart five, the expected time timing of our free cash flow from our backlog matches well with our debt maturities.

Our revenue and free cash flow backlog have declined since the last call with current market conditions slowing the pace of new rig contract signings. However, our level of debt has also continued to fall as we use our free cash flow to repay outstanding debt. Thus we still have a $4 billion excess of free cash flow backlog over gross debt. We are carefully monitoring this relationship as we continue to target a level of total debt which is approximately $5 billion less than our free cash flow backlog. Given current economic conditions, it is unclear when or whether we will actually meet our target during 2009.

If the $3 billion share repurchase program is approved by our shareholders next week, our Board will considered when or whether we should begin using some of our free cash flow for sharing purchases or whether we should continue to repay debt, with the decision based on a variety of factors, including their relationship between our contractual backlog and debt, our ongoing capital requirements, cash flow generation, general market conditions, regulatory and tax considerations, the price of our shares and other factors. For our past practice, we will not provide this time any advance guidance regarding the anticipated timing or size of any future share repurchases but we will report any repurchases that have occurred in a subsequent earnings call and periodic SEC reports.

With that, I'll turn it over to Terry.

Terry Bonno

Thanks Greg and good morning to everyone.

I will move straight to the various markets beginning with the deepwater market. While we did not contract any deepwater fixtures since our last earnings call, we are in discussions with clients about the existing fleet and participating in tendering opportunities in India, Brazil, West Africa and Israel. Nevertheless, the uncertainty of near term commodity price stability, budget constraints for some clients, and competition from sublets may result in pricing pressure and challenge contracting opportunities in the near term. We do however believe the long-term fundamentals of client demand for deepwater rigs remain strong.

The execution of three long-term deepwater contracts in March 2009 and the tendering of two deepwater units in India, one deepwater unit in West Africa, and several deepwater units in Brazil further supports this long-term view. We're also seeing a few more discoveries in frontier provinces such as Israel, Ghana and Morocco, while remaining optimistic that the emerging deepwater areas such as Mexico, Indonesia, Black Sea and Libya, will provide incremental demand over the long-term. Our significant exposure to the deepwater market particularly in India, Brazil and West Africa positions us well to take advantage of the upcoming deepwater opportunities.

Turning now to the harsh environment market, we are continuing our focus on the Arctic design drill ship and are in discussions with clients in this technically demanding environment. We also encouraged by the recent discoveries in the Flemish Pass in Eastern Canada, the UK Norwegian North Sea and the Barents Sea. Our strong presence in these markets and our excellent technical and engineering capabilities make us well positioned to also capitalize on opportunities in these harsh environment markets.

Moving on to the midwater floater market, we have experienced a drop off in activity in the North Sea, West Africa and Australia, due to subletting to some of the small players to track funding and changes in client budget priority. Nevertheless, most of our midwater fleet is contracted into 2010 in the North Sea except for the Arctic II and the Sedco 712 which went idle as a result of (inaudible) going into administration in the UK. We are currently participating in a few long-term tenders in India and West Africa. However, we do expect demand from midwater floaters to continue to soften over the near term. We believe that unless oil prices rise significantly, we are likely to see more stacked midwater units by the end of the year.

Moving on to the jackup market, we have managed since our last earnings call to contract a few term fixtures despite the oversupply of jackups in the market as you can see in our latest status report. We are also in discussions with several clients within the current contracts on a few of our jackups. While the forthcoming (inaudible) jackup tender will add significant demand in the market, they will be highly competitive. Recent tendering has resulted in 10 to 12 competitive offers for each opportunity. We expect the overall jackup market to remain challenged for the near term, particularly in Southeast Asia, Middle East and West Africa, where the lack of demand, access to capital, coupled with increases in new build supply are expected to be the most pronounced.

That concludes my discussion on the market. I'll turn it back to you Bob.

Bob Long

Thanks Terry. Tom, I think with that we will open it up for questions.

Question-and-Answer Session

Operator

Thank you sir. The question-and-answer session will be conducted electronically. (Operator instructions). We will take our first question from Angie Sedita with Macquarie.

Angie Sedita – Macquarie

Thanks. Good morning guys. Good numbers. Bob, you did mention the farming out of the rig and I think it was in an ultra deep water, could you give some details there? Not specific but general details, is it a major oil company, where is the rig, how much time you're looking to sublet out and what do you think – what is the driver behind the sublet and are they seeing any interest in this rig?

Bob Long

It wasn't major, it was in West Africa and it was for a short period. We will be able to do is one or two wells and if I recall the driver was the original operator, had a problem with his concession and loss the concession. So he just didn't have the opportunity to drill.

Angie Sedita – Macquarie

Okay. And are you seeing interest in this rig at this point or hard to tell?

Bob Long

Well it has already been farmed out, the deal is done, and so it is farmed out to another operator.

Angie Sedita – Macquarie

Okay. Fair enough. And then obviously it is a difficult market today given commodity prices and just the overall tone of the market, but looking out the next 12 months to 18 months, do you still see Transocean building potentially additional rigs besides what is already under construction today?

Bob Long

Well, I will let – I would say that I see us – we are in conversations with some operators about potentially to build additional new builds but I can't handicap the probability for you that that will actually come about.

Angie Sedita – Macquarie

But still there is interest by major and others for additional rigs?

Bob Long

Yes, that is correct.

Angie Sedita – Macquarie

Okay. And then finally on the early termination, obviously a number of contracts have early termination, is there early termination on ultra-deepwater rigs, deepwater rigs as a case-by-case, or could you handicap the percentage there?

Bob Long

I can't think right now of any early terminations provisions that our customers have. Terry, do you?

Terry Bonno

Well on the new build fleet, the early termination provision typically don't have on other existing fleet any early termination has different types of payout mechanisms but there is a payout mechanism on different contracts but they are on a case-by-case basis but the ultra deepwater fleet, those are no cut contracts.

Greg Cauthen

They can be terminated for lack of performance. So that is the biggest risk if a big rig were to have an unusual downtime event and be down for 90 plus days, but that doesn't happen very often, but other than that, they're hard to cut.

Angie Sedita – Macquarie

Right. And on existing fifth gen not necessarily the sixth gen?

Greg Cauthen

That is true of the vast majority of our contracts, not just the new builds. The new builds are even tougher but our normal contracts are very hard to early terminate even without compensation or unless there is a performance issue.

Angie Sedita – Macquarie

Fair enough. And then finally on Brazil and the interest there, new construction, are you having any conversation with Petrobras that you believe that some of this demand for incremental new rigs, new builds could be led by US contractors or new construction outside of Brazil?

Bob Long

Angie I think that is an evolving situation. Petrobras has significant additional capacity needs and right now it is difficult to see how those needs could be met entirely within Brazil. So we're hoping we get additional opportunities. We're also interested in participating in opportunities where we build in Brazil if we can find a way to do that to satisfy our technical requirements. So it is hard to say what's going to happen down there.

Angie Sedita – Macquarie

But you would consider building in Brazil if you found a shipyard the full rig or a portion of the rig?

Bob Long

Right now not sure what the capacity there is in Brazil to build a full rig, but if something develops, happens, we will certainly look at it.

Angie Sedita – Macquarie

Great, well thank you.

Operator

We will take our next question from Tom Curran with Wachovia.

Tom Curran – Wachovia

Good morning guys.

Bob Long

Good morning.

Tom Curran – Wachovia

Bob, you have been constructive for some time now on the long-term demand outlook for Arctic class floaters. As we stand today, are there any other potential opportunities out there to add to your fleet by buying either existing other Arctic class floaters or those that are currently under construction and if so are any of them currently potentially up for sale and how attractive are the asking prices at this time?

Bob Long

I'm not aware of any existing capacity, Arctic capacity that is up for sale. And frankly there is only one potential Arctic rig currently under construction and there has been no indication that it would be available. We're working on our own design and spent a lot of time working on a design and we're working with some customers on it, so I think you'll see us actually going forward we are doing with our own design with a new build.

Tom Curran – Wachovia

Okay. And then conversely turning to the potential divestiture front, are you still seeing interest in those rates that you have been looking to dispose off for some time now not just you know the Arctic II and IV semis but even some of the jackups, are you still seeing interest in those rigs and it is just a question of waiting for the offering price to be right or have you just seen all potential buyers go away?

Bob Long

Well I think that for the most part the buyers are going away. There are a couple of potentially interested buyers and one or two was the jackups but I'm not sure how serious they are at this point. So I would not anticipate to be selling very many or any rigs other than the Arctic II and IV.

Tom Curran – Wachovia

Okay, thanks. And then lastly a follow up to one of Angie's questions, if you were to take on a new build project in Brazil, would you be willing to do it with a standalone Brazilian shipyard or would you insist that there would be some form of involvement from one of the established Korean or Singaporean yards?

Bob Long

That is a little bit of a hypothetical question, difficult to answer. If there is a Brazilian shipyard that our technical people thought could build rigs to our specifications, I think we will proceed on that basis. But right now I'm not sure whether that capacity exists. So we just have to look at it up front.

Tom Curran – Wachovia

Okay. Thanks for the color. I'll turn it back.

Operator

We will take the next question from Ian Macpherson with Simmons & Company.

Ian Macpherson – Simmons & Company

Hi good morning. Bob, when you talk about the sublet market, the ultra-deepwater not involving any discounted rates, do you have any comfort level as to how sustainable that condition is throughout the rest of the year? Do you think that we will see that stand up or would you say that there is some risk to discounted sublets becoming more visible as the year unfolds?

Terry Bonno

Ian, this is Terry. I will answer that. We do see some ultra-deepwater sublets but they are not the entire contract. They are only a couple of them here, we see a few slots that the operators are operating, we see some of the sublets going on in Brazil or Petrobras is certainly very happy to pick up the sublets. But by and large, the sublets that are out there, they are being taken fairly quickly and at the same prices that they have been contracted for. So we're just watching, we are monitoring, just making sure that we know where we are in the market but things seems to be okay at the present.

Ian Macpherson – Simmons & Company

okay. My follow-up question would be on the jackup side, could you build a case during for a recovery in the market by sometime in 2010 or would you be more cautious than that in your assessment of supply and demand as you see it?

Bob Long

I think it would be very difficult to build a compelling case for the recovery of the jackups as early as 2010. There is just too much new capacity coming on without contracts, so you would have to have a significant recovery in demand not only to where demand used to be, but to above where demand used to be. And I personally don't see that happening as early as 2010.

Ian Macpherson – Simmons & Company

Okay. Thanks.

Operator

And we will take the next question from Andreas Stubsrud with Pareto.

Andreas Stubsrud – Pareto

Hello. Good afternoon.

Bob Long

Hi, Andreas.

Andreas Stubsrud – Pareto

Just a question on the Reliance sublets, have you, have Reliance tried to renegotiate the terms in the contracts with you at all or is it sublets for those new builds just out in the market there without any participation from your side?

Bob Long

If the question is, is Reliance trying to renegotiate the terms of the contract with us, the answer is no. They have been negotiating as I understand with ONGC. I'm not sure there's any discussion with anybody else not particularly bidding for assets.

Andreas Stubsrud – Pareto

Okay. And on the Gulf of Mexico deepwater market, we have heard some of your competitors talking about that, especially the third and fourth generation rigs having more pressure on day rates for those kinds of rigs, do you seem a large difference in the interest from the oil companies regarding the new build already for the units compared to the fourth generation, more of the moved rigs from the 90s and 80s build?

Bob Long

Andreas, we had a little bit of trouble hearing your question, could you summarize that again for us? Then Terry will try and answer it.

Andreas Stubsrud – Pareto

Okay. Just if you see any differences between the ultra-deepwater new builds, the interest from the oil companies compared to fourth generation especially in Gulf of Mexico, do you see that the pressure on day rates, especially with more sublets are going to be much higher, the pressure on the day rates for the fourth generation compared to sixth generation new builds?

Terry Bonno

Well Andreas is it is going to be dependent upon the type of program that the operators are looking for. We do have some capacity in 2010 from a lot of the fourth generation units that are going to be coming on to the market. And that is certainly going to be some pricing pressure there but there are some opportunities right now that are being tendered in West Africa and we're very optimistic about that. But you're talking about two different types of units where the operator would have specific needs for that particular area. So the sixth generation unit except for the few that are still uncontracted and speculative builds is just two different opportunities and two different areas by which the operators have used those units.

Andreas Stubsrud – Pareto

So when Petrobras gets out in the market, for example for a rig on the 2B field, do you get a sense that they would rather have a new build ultra-deepwater unit than a fourth generation sublet from the Gulf of Mexico?

Terry Bonno

Well the 2B field is a difficult field to be drilling in and a fourth generation couldn't drill in it. So you would have to have a fifth or sixth generation rig to drill that opportunity.

Andreas Stubsrud – Pareto

Okay. So sublets from Gulf of Mexico for lower spec rigs is not an option down in Brazil for some of the fields down there, is that what you're saying?

Terry Bonno

Well it could be not for the (inaudible) field, it could be in the other field where we do have fourth generation, third – second, third and fourth generation rigs, so it is a big midwater deepwater market.

Andreas Stubsrud – Pareto

Okay. Very good. Thank you so much.

Operator

We will take our next question from Jas Patel [ph] with Natexis Bleichroeder.

Jas Patel – Natexis Bleichroeder

Hi. Good morning guys. Just one question with regard to sublets wondering if you have seen any change thus far this year and the duration as you walk across the different asset classes, appreciate the comments about the one deepwater being through one or two well program but could you walk us through what you're seeing in general with regard to the duration of the sublet?

Terry Bonno

Yes. We don't know about all of the farm outs in the market. I think this is just some of the things that we hear about and certainly when we are participating in farm out. And the one that we have been participating in farm out that's predominantly been our ultra-deepwater fleet. And as I previously stated, they have been at the same prices that we contracted the rigs for, and we haven't seen any subsidies in the ultra-deepwater or the deepwater market. We do hear that that there is a few subsidies that may be going on in the midwater market but at this point I think that is pretty limited to the UK. But again those aren't our fleet, so we can't substantiate that. But there are farm outs going on across the different fleets. I think the majority of farm outs we hear about are in the segment of about 5,000 feet to 7,500 feet. So I can't be much more specific than that.

Jas Patel – Natexis Bleichroeder

No. I appreciate that. I guess switching over to as you start to continue to valuate stacking rigs, how long do you have to look out and say the market really doesn't show a lot of signs for improvement particularly for jackups before you start to consider using that as a window of opportunity for some more upgrades on those rigs?

Bob Long

I am not sure I understand the question completely Jas but to tell you our general philosophy here is that if a rig goes idle and we don't have a real opportunity for it in the near term, meaning even if there is a bid outstanding and we're waiting to see the results of or we know of a opportunity to negotiate with a customer, we're going to stack the rigs as quickly and expeditiously as we can. We do have some rigs that have planned shipyards in our forecast and we will look at those depending on the technical specifications of the rig and what needs to be done and decide whether or not we want to take advantage of the downtime to put it in a new yard and do a life expansion or special survey or something that we have already identified through our asset organization that needs to be done. But I suspect that those are going to be few and far in between. I won't say we won't do any of them but we are not going to do many of them.

Jas Patel – Natexis Bleichroeder

Okay, thanks. That is helpful.

Operator

We will take our next question from Dan Pickering with Tudor Pickering Holt.

Dan Pickering – Tudor Pickering Holt

Good morning. Bob could you remind us again how many of your existing jackups will roll into new contracts during 2009?

Bob Long

I can't, terry's can.

Terry Bonno

There is 31 jackups that were available in 2009 and right now of the 31, we have 10 that are stacked.

Dan Pickering – Tudor Pickering Holt

Okay. And so we have got 21 additional kind of potential opportunities to be contracted out there. I am just, as you go over or under half get stacked, is it more than that, just trying to get a feel for the true level of demand and your confidence or lack thereof in the market?

Bob Long

Dan, it is a little difficult to say what – I wouldn't be surprised as I indicated. We want to almost certainly be stacking more rigs. I wouldn't be surprised if our 11 – nine jackups went to 15 or 20 by the end of the year.

Dan Pickering – Tudor Pickering Holt

And Bob when you – your philosophy right now as a market leader is to stack asset. I mean day rates are holding up relatively well. You know the competitive dynamics if you don't think things get better in 2010, why not walk us through the decision of stacking versus taking $30,000 or $40,000 hit and putting a rig together to work for a year and cash flowing Showing on that rig instead of zero cash flow on the rig?

Bob Long

Well it is a little bit difficult to come down to a black-and-white decision like that, Dan. I think we are seeing very (inaudible) any jackup opportunities out there, we're seeing anywhere from 8 to 10 to 12 different bids on it. So it is a very competitive market. The rigs of holding up except for a well as you indicated. But as soon as somebody starts to try and buy a contract, cut day rates by a significant amount, they will start to spiral down that my get us one or two rigs on contract, earning little bit of cash, but very quickly you will drive that market down towards cash breakeven, so it is not something that we are inclined to want to do.

Dan Pickering – Tudor Pickering Holt

So the market has been fairly disciplined so far I mean surprisingly so I guess.

Bob Long

I would characterize that way, yes.

Dan Pickering – Tudor Pickering Holt

Okay. And I guess my other question then would be for Terry, lots of us trying to understand the rate dynamics in the kind of fourth gen market given there are several rigs being marketed there. I mean is the over under here 400,000 a day, is it less than that, is it more than that, I mean everybody is grasping for information, help us out on the rate side?

Terry Bonno

I would love to do that, but we are in a competitive tender right now and that might tip my competitors to what I am taking about. So I wouldn't want to do that. But you are right, there is quite a bit of competition in this current tender that we are in. There is a lot of availability. It will be competitive and I think you'll see the fourth generation rate will decrease.

Dan Pickering – Tudor Pickering Holt

All right. Thank you.

Operator

We will take our next question from Brian Uhlmer with Pritchard Capital.

Brian Uhlmer – Pritchard Capital

Good morning. Two quick follow-ups. First one talking about Brazil, are there going to be opportunities similar to the deal that you did with a PBR Mitsui or did we operate these rigs, are you guys interested in management contracts?

Bob Long

I would say we are not interested in management contracts whether or not we get an opportunity to do something like we did with Petrobras Mitsui in the future is a little bit difficult to say. If we had an opportunity to do something like that again, we really want to look at it. But I can't give you any feel one way or the other whether those opportunities would come up again.

Brian Uhlmer – Pritchard Capital

Okay. And the follow-up has to do with stacking rigs, and when you say you stack them as quick as possible, what level are they stacked? I mean how much crews left on them and what kind of cost are we looking at and how quickly do you think you can get there on those rigs?

Bob Long

In general, it depends a little bit on where the rig is and what type of rig it is. But if we stack a jackup, we probably will have near full crews for approximately a month and then we will ramp down to whatever the stacking crew is going to be. And I think generally depending on the area we will get down to a very small crew and basically just have insurance costs and whatever harbor fees we need. We may have jack up somewhere around $3,000 a day but I think that number carefully because it very significantly depending on geographical where the rig is. A midwater floater is likely to be a little bit – if you take the same philosophy, it would take us at least a month with full crews as we go through the stacking process, and then get down to a fairly small crew of supervisory and technical people, and I am not sure there again what the cost might be, but it would be higher than the jackup, maybe the $05,00 a day range or possibly a little higher again depending on where it is stacked.

Brian Uhlmer – Pritchard Capital

Okay. Thank you.

Operator

We will take your next question from Mike Urban with Deutsche Bank.

Mike Urban – Deutsche Bank

Thanks. Good morning. I have been asking this question a lot on call and people are probably sick of it at this point but the responses have been interesting. So the question is you know a lot of folks have been saying that with oil prices around $50 a barrel plus or minus, a lot of projects out there, especially once you get away from kind of the very high end of the market are not economical, would be interested in your take on that in a couple of different respects, one is that a view of $50 oil relative to 2008 costs and as costs come down that changes or is it a confidence issue, 50 is okay, just we need confidence on the part of customers that it is sustainable?

Bob Long

Well, I'm not sure that we can answer that question. We really need to be talking to our customers. When we talk to them we get varying answers, particularly in terms of what makes deepwater economic and we believe that answer is it ranges all the way from $40 a barrel up to $60 or $65 a barrel depending on where the prospectivity or opportunity is. I'm not sure I can give you any real insight into that.

Mike Urban – Deutsche Bank

And that is not really an easy answer to it, or else we would obviously know. But maybe I will ask it another way, do you have customers out there that would drill today if they felt like they were confident of sustaining their price, if they felt like they had – they were confident in their ability to secure financing on access to credit markets?

Bob Long

Mike, I just cannot answer that question. In terms of the competition, the price, there is a lot of operators out there, and I think on differing projects because of cash flow is used whether or not they have prospective opportunities that they like to drill but just don't have the access to capital good is hard to say but my sense is that there is certainly a lot out there right now.

Mike Urban – Deutsche Bank

Okay. That is helpful. Thank you.

Operator

We will go next to Dan Boyd with Goldman Sachs.

Dan Boyd – Goldman Sachs

Thanks. I would like to follow up on the jackup market where as you mentioned you have seen much more discipline in this cycle despite 8 to 12 jackups bidding on each tender. What do you attribute that the discipline to? Is it just the level of backlog out there and the lack of need to compete aggressively to keep the rigs working? And then hoping you can comment on did you have any level of confidence that this level of discipline can last?

Bob Long

I'm not sure I can give you any reason for why there is discipline out there. In fact that is what is happening. And in terms of how long it could last, that is difficult to say. I would have to say that I'm surprised at this point that the rigs haven't gotten a bit more competitive as more and more of this capacity comes into the market without contracts, you are going to start seeing even rigs bid on every opportunity, and depending on the profile of the owner as these rigs come out, you could see some people get very aggressive. Now to the extent that some of these are being built by speculators who are near the hundred percent financed and need high day rates to service their debt, that may be instilling some of the discipline in the market. But ultimately as someone said before, if you can get a job and generate some cash, it is better than stacking the rigs. So we are start to say when if the discipline is great, but if you look at history, this is going to break at some point.

Dan Boyd – Goldman Sachs

Yes. I guess the only thing different is the companies might not be as desperate this time around, they don't need the cash flow. And then sticking with the jackup market, you mentioned unlikely to see recovery in 2010, but let us look at when do you think we might see some stabilization in the jackup market? I think the deadlines starts to – you actually start seeing rigs being re-contracted, some type of stabilization in day rates, and then if you go put some type of oil price range around those comments, that would be helpful as well. For example if we were ending the year at $60 oil and with an upward trajectory so there is actually confidence that we're not going to go below 50, would you expect stabilization at some point early in 2010?

Bob Long

I just don't think I can answer that question. You have to remember I had been fairly pessimistic about the jackup market for a long time and have been wrong for a long time about how good it got, so I'm not sure that you're talking to the best guy to forecast what might happen in the jackup market.

Dan Boyd – Goldman Sachs

Okay, fair enough. Thanks for your help.

Operator

We will take our next question from Lee Cooperman with Omega Advisors.

Lee Cooperman – Omega Advisors

Let me get you out of the speakerphone, one second please, I apologize. Sorry, can you hear me now?

Bob Long

Yes.

Lee Cooperman – Omega Advisors

I am going to be the academic addition in the crowd, I want to focus in on your dividend policy and your policy returning money to shareholders. I'm not quite sure how to read the decision to authorize $3 billion in buybacks as opposed to dividend. And what I would like to do at the risk of being academic is read you something out of the 1999 annual report from Warren Buffett, he is kind of the master of things. And this is what he said in 1999 and I think he would say it today again. There is only one combination of facts that makes it advisable for companies to repurchase its shares. First the company has available funds, cash plus sensible borrowing capacity beyond the near-term needs of the business. And second finds it stock selling to the market below its intrinsic value conservatively calculated. To this we add a caveat. Shareholders should have been supplied all the information they need for estimating that value, otherwise insiders could take advantage of their uninformed partners and buy out their interest at a fraction of true worth. We have on rare occasions seen that happen.

I guess I am worried about the reverse that we are going through a down cycle now and I think there is much of a chance here that you guys are not wanting to pay recurring dividend because of the uncertain outlook and that we are going to put this buyback on the shelf and not do anything with it until we assess the outlook. And I'm wondering whether the shareholders would have been better served if just to pick a number we went to say $4 dividend which is a fraction of what you're earning and put a nice yield on the stock to pay us while we are waiting for the outlook to clarify. So I would like with as much specificity as you to explain the Board's decision to not pay cash dividend, to authorize a buyback, are we going to buy back stock, and are we convinced that if we are buying back stock, that we are selling significantly below the intrinsic value of the business? That is a mouthful.

Bob Long

Yes it is. I'm not sure that I can do justice to answer that question.

Lee Cooperman – Omega Advisors

I'm going to see you next week I think, or this week, I don't know. How about giving you time to think about it?

Bob Long

Okay.

Lee Cooperman – Omega Advisors

You are coming to New York, aren't you?

Bob Long

Two weeks…

Lee Cooperman – Omega Advisors

Two weeks?

Bob Long

Yes. As we said before, the Board has considered a lot of different factors here. And whether or not and when we will execute on the stock repurchase, assuming the shareholders authorize it, is subject to all of the factors that Greg mentioned in his opening remarks. So we'll just have to wait and see what the results would be in the future.

Lee Cooperman – Omega Advisors

But in all likelihood, is this authorization likely not to be used given the uncertainty of the environment for now? I'm not advocating you use it, I want to make it very clear. I only want to buy back dollar bills of $0.50, $0.60 $0.70. It was not clear that it was significantly valued, my preference would be to hedge our bets and pay out a third of the cash flow in the form of recurring dividend, because at the end of the cycle, I don't want to find out that we bought back stock at inappropriate prices and I got no return.

Bob Long

I understand what you're saying but I don't think but we can add anything to what Greg said in terms of all of the factors that we would consider. And it is difficult to say whether we will execute on the program as you put out in the near term or not depending on how we come out on all of those different factors.

Lee Cooperman – Omega Advisors

Got it, okay. I missed the beginning of the call, so I'll get a transcript and find out what I missed.

Bob Long

Okay.

Lee Cooperman – Omega Advisors

Okay. Thank you.

Operator

And we do have a follow-up question from Ian Macpherson with Simmons & Company.

Ian Macpherson – Simmons & Company

I hate to follow that up with something more mundane, but Terry the Cajun Express I think is now the first available ultra deepwater rig in the market and can you talk about how the opportunities are for that rig in terms of the competitive bidding environment and how rare that timing is for that rig and what value there is for that early availability because (inaudible) was available before but then the Noble swapped it out for a fourth gen contract. So grappling with how valuable it is to have ultra deepwater capacity earlier as opposed to later now?

Terry Bonno

Well right now in the Cajun Express is in play, it is the first one up as you know now that the (inaudible) has swapped the rig out. We are in discussion with several clients and they are serious discussions. We like one of the positions that we have, we're very encouraged. We will have to wait and see how it plays out but I believe it will have some positive news here shortly, but it is being discussed with several clients, so it is not just one opportunity. So the early availability is very attractive for Brazil. It is very attractive for West Africa. And then also we have we have just seen a new tender come up with Nigeria. So it looks to be almost a four-year program. So the opportunities are starting to suddenly appear and like I said, the horizon for this rig looks very good.

Ian Macpherson – Simmons & Company

Okay. Sounds good. And then lastly, are you prepared to give us tighter start dates for the new builds coming into the fleet this year or should we assume the most conservative timing parameters relative to the guidance given?

Greg Cauthen

We will continue during the year to show the new build start dates in our fleet status report. So, certainly as we get closer, if there are any changes, we will make those changes in our fleet status report. But right now our fleet status report shall stand.

Ian Macpherson – Simmons & Company

Okay. Thanks a lot.

Operator

And ladies and gentlemen, that does conclude today's conference call. We appreciate your participation. And you may disconnect at this time.

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