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Executives

Greg Panagos - VP, IR and Communications

Steven Newman - CEO

Ricardo Rosa - SVP and CFO

Ihab Toma - SVP, Marketing and Planning

Terry Bonno - VP, Marketing

Analysts

Angie Sedita - UBS

Scott Gruber - Bernstein

Scott Burk - Oppenheimer

Mike Urban - Deutsche Bank

Rob MacKenzie - FBR Capital Markets

Lee Cooperman - Omega Advisors

Roger Read - Natixis Bleichroeder

Ian MacPherson - Simmons

Geoff Kieburtz - Weeden & Company

Pierre Conner - Capital One Southcoast

Jason Mandel - Chapdelaine

Walther Lovato - Passport Capital

Waqar Syed - Macquarie Capital

Arun Jayaram - Credit Suisse

Jim Crandell - Barclays Capital

Jeff Tillery - Tudor Pickering & Holt

Transocean Ltd. (RIG) Q1 2010 Earnings Call May 6, 2010 10:00 AM ET

Operator

Good day, everyone and welcome to the first quarter 2010 results conference call for Transocean Limited. Today's call is being recorded. At this time, for opening remarks and introductions, I’d like to turn this conference over to Mr. Greg Panagos, Vice President, Investor Relations and Communications. Please go ahead, sir.

Greg Panagos

Thank you, John. Good morning and welcome to Transocean's first quarter 2010 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 www.deepwater.com. We've also posted a file containing four charts that will be discussed during this morning's call. That file can be found on the company's website by selecting Investor Relations, Quarterly Toolkit and then PowerPoint Charts.

The charts included cover average contracted dayrate by rig type, out of service rig months, operating and maintenance cost trends and free cash flow backlog and debt maturities. The Quarterly Toolkit also has four additional financial tables for your convenience. These tables cover revenue efficiency, other revenue details, daily operating and maintenance costs by rig type and contract intangible revenues.

Joining me on this morning's call are Steven Newman, Chief Executive Officer; Ricardo Rosa, Senior Vice President and Chief Financial Officer; Ihab Toma, Senior Vice President, of Marketing and Planning; and Terry Bonno, Vice President of Marketing.

Before I turn the call over to Steven, I’d 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 is 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 US 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 may use various numerical measures on the call today that are may be considered non-GAAP financial measures under Regulation G. As I indicated earlier, you will 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, Quarterly Toolkit and Non-GAAP Financial Measures and Reconciliations.

Finally, in order to give more people an opportunity to ask questions, please limit your questions to one initial question and one follow-up. Thank you. That concludes the preliminary details.

Now I’ll turn the call over to Steven.

Steven Newman

Thank you, Greg. Good morning, everyone and thank you for joining us this morning. Before making any comments about our first quarter results, I want to say a few words about the Deepwater Horizon incident. I know you are concerned about the incident and its aftermath. Many of you have sent condolences and messages of support and all of us at Transocean appreciate your concern very much.

On the evening of April 20 at around 10 pm the Semisubmersible Deepwater Horizon experienced an explosion and catastrophic fire. The rig had a crew of 126 people and through the quick actions and courage of many onboard a 115 people were safely evacuated. Tragically, however, we lost 11 of the Horizon’s crew nine of whom were Transocean employees. At this point we do not no the cause of the fire and explosion.

We are working to support BP and containing the well and we are conducting an investigation to determine the cause of this tragic accident. We will be dealing with the emotional consequences for some time to come we are deeply saddened by the loss of our team members and we are working closely with their families to assist them through this difficult period.

Before I close my comments on this tragic incident, I want everyone to know the following. We are determined to find out what cause this incident which resulted in the loss of 11 lives, but believe that it is in appropriate to speculate on what may have caused the catastrophic failure of a cased and cemented well in advance of that investigation. We are determined to appropriately honor the 11 individuals who lost their lives in this incident.

We will continue to live by the core values of Transocean, particularly the values of integrity and honesty respect for our customers, our fellow employees and our suppliers and safety. On safety we remain deeply committed to our company’s vision of an incident free work place all the time everywhere.

We will continue to corporate fully with BP and the government agencies to stem the flow of hydrocarbons from the well. The loss of revenue from the Deepwater Horizon will have an impact on our earnings beginning in the second quarter. The company does carry a comprehensive insurance program that will help us address the financial impact of the incidence, in fact coverage is in excess of book value of the rig, and we have already received a significant portion of the insurance reimbursement. Ricardo will provide you with more details on the financial impact of this incident based on what we know today.

Our first quarter earnings came in at $2.09 per diluted share or $2.22 per diluted share after adjusting for the loss on the sales of North Sea mid water floaters, an impairment charge for our oil and gas operations and some discreet tax items. Following a few remarks from me on the state of the markets, Ricardo will comment in detail on the results. We continued to see signs of stabilization and potential recovery in the jackup market with increases in tendering and contracting activity by our customers.

The incremental growth in demand has allowed us to bring a couple of our idle rigs back to work though we also stacked a couple of units since our last call keeping the total number of idle Transocean jackups at 27, two of which are preparing to commence contracts. We remain cautious about any meaningful dayrate recovery in this market in the near-term given the amount of idle existing capacity plus the uncontracted new builds set to enter the market over the next several months.

Turning to the Midwater, the number of stacked Transocean rigs decreased to five as we secured a contract or reactivate the Arctic III for Exxon mobile in the North Sea. We continue to opportunities in the marketplace though generally short-term in nature with leading edge dayrates holding in the mid 200s. The Deepwater market remains an area of concern, the absence of tendering activity in 5000 foot water depths has created the potential for short-term over supply in this market.

I continue to believe that we are well placed to secure work for the market of Transocean units evidenced by our recent contract on the Henry Goodrich in Canada. Our recent fleet status report showed that we have substituted the idled Transocean Rather for the Jim Cunningham in Angola, driven by the significant shipyard required on the Cunningham and we will now cold-stack that unit until market conditions justify that major shipyard project.

Concluding with the Ultra-Deepwater market, this area of our business remains strong demonstrated by the Deepwater Frontier contract which commences in late 2011 at a dayrate of 475,000. As we continue to take additional 2011 capacity off the market, this part of our business will remain extremely healthy.

I think we should now turn to the numbers and let Ricardo take you through some of the details after that Ihab will talk a bit more about what is going on in the market, including some details on the more than $1.5 billion in contracts we’ve executed since our last conference call.

Ricardo Rosa

Thank you, Steven, and good morning everyone. In the first quarter of 2010 we’ve generated net income of $677 million or $2.09 per diluted share, this compares to net income of $723 million or $2.24 per diluted share in the fourth quarter of 2009. First quarter net income was unfavorably impacted by certain items. Highlighted in our press release totaling on a net basis $42 million or $0.13 per share. After adjusting for these items first quarter net income was $719 million or $2.22 per diluted share.

First quarter contract drilling revenues were down $105 million, compared to the fourth quarter of 2009 due to two main factors amounting to a total of $156 million. The first was incremental off contract time from stacked rigs with an adverse revenue impact of $78 million, the second was increases in shipyard and mobilization time which resulted in a further reduction in revenue of $78 million.

Our accounting policies provide that pre-contract commencement mobilization revenues and the associated operating costs are deferred and then amortized to income from the start of drilling operations. In addition, our fleets revenue efficiency with 93.2% in the first quarter, marginally lower than the 93.5% achieved in the previous quarter. The declined primarily due to start-up related unplanned downtime, affecting certain new build rigs, as well as extended unplanned downtime effecting two Deepwater rigs operating in India. These reductions were partly offset by $49 million increase in revenue from new build rigs commencing or continuing operations in the quarter.

Contract drilling revenues for the full-year 2010 are expected to benefit from the start of high dayrate contracts for floaters is shown on the average contracted dayrates are posted in our website. We will also benefit from the commenced in operations in 2010 of four additional Ultra-Deepwater newbuilds, as well as a full year’s activity of five newbuilds and the upgraded Sedco 706, which all commenced operations during 2009.

However, these projected increases in contract drilling revenue in 2010 are expected to be more than offset by the effect of rigs stacked during 2009. The impact of the loss of the Deepwater Horizon of approximately $130 million and a decrease in rates on some jackups and Midwater Floaters as they commence new contracts.

2010 we will also be negatively impacted by out of service time more heavily weighted toward our High-Specification Floaters, mainly due to the timing of the 10-year special periodic survey required by certain units. A chart summarizing our expected 2010 out or service rigs months can be found on our website.

Operating and maintenance expenses in the first quarter were $1.196 billion versus $1.296 billion in the fourth quarter. The quarter-to-quarter decrease in operating and maintenance costs of $100 million was primarily attributable to $123 million impact in the first quarter from reduced maintenance cost. The reduction is primarily a result of $28 million of non-recurring costs recognized in the fourth quarter related to the storm damage Trident 17 and $71 million in lower non-shipyard maintenance expenditures resulting from project postponement.

In addition, we benefited from a $21 million decrease in operating and maintenance cost related to stacked rigs. These reductions were partially offset by a $24 million net favorable impact in the fourth quarter 2009 from litigation settlements and in the first quarter of 2010 a 17 million of after sale chartering expenses of the GlobalSantaFe Arctic IV and the $15 million in operating costs for newbuild rigs starting operations during the two quarters.

We currently expect our full-year 2010 operating and maintenance expenses to range between $5.2 billion and $5.5 billion, roughly inline with 2009. This range includes about $630 million of expected costs related to our low margin other revenue items and an estimate of $200 million traditionally expenses associated with the Deepwater Horizon that I will address separately.

Relative to 2009 operating and maintenance expense levels will be significantly affected by the increased operating time of our newbuild units, higher maintenance expenses resulting from the increased number of shipyard days expected to be incurred by our High-Specification Floaters and additional costs resulting from the Deepwater Horizon into them.

The main factors that we believe will impact our cost levels within the range that I have indicated are rig reactivation expenses, potentially inflationary pressures, and the strength of US dollar as we respond to increased demand for our rigs. We expect our full-year costs to be at the low-end of range with rig reactivations are limited to those we have already announced.

If the dollar parity against the currencies of our key markets for instance the UK, Norway, and Brazil remains at current levels and if there are no significant inflationary pressures affecting our personnel maintenance cost. Our expenses will trend toward the upper-end of the range, if the recovery in the jackup market is sustained and further reactivation occur, if inflationary pressures increase in particular due to demand for experienced personnel and if the US dollar weakens by up to 10% from its current levels.

In establishing the range, we’ve assumed up to $80 million in potential additional reactivation cost up to $100 million as a result of potential inflation and up to $90 million for adverse currency moments. We are still assessing the impact of the Deepwater Horizon incident on our costs for 2010. Based on the information we have available at this time, which assumes all environmental exposures related to the hydrocarbons released from the well are the responsibility of BP.

We expect an increase of approximately $200 million in operating and maintenance expenses in 2010, comprised primarily of insurance deductibles higher insurance premiums and additional legal expenses. I mush emphasis that this estimate is preliminary and is subject to changes in regulations, operating requirements, and additional information that may be come available after today.

General and administrative expenses were $63 million in the first quarter compared to $46 million in the prior quarter. The increase was primarily due to share based compensation costs in part associated with the retirement of our former Chief Executive Officer. We expect general and administrative expenses for 2010 to be between $240 million and $250 million.

Capital expenditures in the first quarter of 2010 were $379 million versus $857 million in the fourth quarter, with the decrease primarily due to the reduced payments related to our newbuild program which is nearing completion. We expect capital expenditures for the full-year 2010, to drop significantly to about $1.4 billion including capitalized interest, with $940 million relating to newbuilds and $430 million primarily related to upgrades and sustaining capital expenditures of the existing fleets.

Interest expense net of amounts capitalized and interest income was $127 million in the first quarter. We continue to expect our full-year 2010, interest expense net of amounts capitalized in interest income to be about $540 million. This is net of an estimated $90 million in expected capitalized interest, this assumes repayment of debt maturity, no additional new builds commitments and short-term interest rates remaining at current level.

For the first quarter our annual effective tax rate were 15%, we expect our annual effective tax rate for the full-year 2010 to be between 15% and 17%, after taking into account the estimated $200 million cost increase projected for the Deepwater Horizon incident.

The lowering of the estimated range compared to our previous guidance is based on changes in our assumptions with the mix of income that will be generated in various tax jurisdictions. To give you a complete of financial picture possible regarding the Deepwater Horizon Incident, let me provide you some additional information based on what we know today.

In the current quarter we expect to receive approximately $560 million in insurance proceeds and the code and accounting gain of approximately $270 million for the total loss of the rig. Of the $560 million in expected insurance proceeds we have already received $481 million including amounts received today.

We have incurred costs in the current quarter related the incident and we will provide an update on them during our second quarter call, including commentary and provision for contingent liability. For Form 10-Q for March 2010 outlines or insurance program which in addition to [hollow machine recoverage] generally provides excess liability coverage up to $1 billion.

Subject to deductibles and self insured retentions of up to $65 million on claims related to personal injury, wreck removal and other third party claims. The consequences of this incident continue to evolve and this initial assessment of their financial impact is likely to be incomplete. We will not speculate the matters that are still evolving or on the possible impact of future events. We will however provide material information as it becomes available.

Lastly, during the first quarter and through Wednesday, May 5th, we have acquired approximately 2,450,000 treasury shares for approximately $210 million at an average price of around $86 per share as part of our 3.5 billion Swiss franc share repurchase program that the Board authorized us to commence in February.

We successfully listed our shares on the SIX Swiss exchange effective April 20th under the ticker RIGN and incompliance with Swiss regulations we now provide a weekly report on our website showing the number of shares repurchased during the previous five trading days.

I will now hand over to Ihab to provide some comments on the market.

Ihab Toma

Thanks, Ricardo and good morning to everyone. I will move straight to various markets. The Ultra-Deepwater fleet utilization has improved for 2011 as a result of the contracting of two of our drill ships. The Deepwater Frontier for two years in Australia at 475K and extending the Enterprise for 18 months in the US Gulf of Mexico at 435K. Both of these contracts are very encouraging, given the small number of fixtures reported for Ultra-Deepwater market during the first quarter.

We remain confident that we will extend our last three Ultra-Deepwater units available in 2011, despite the number of competing units in the market. The ongoing inquiries and tendering the US Gulf of Mexico and West Africa for Ultra Deep rigs could result in five to seven contracts thereby further tightening the Ultra-Deepwater market for 2010 and early 2011. Incremental demand is also expected from Brazil, as Petrobras will look to bridge the gap with the anticipated delivery of any Brazilian newbuilds.

Future Ultra-Deepwater demand will continue to grow based on the recent drilling success in the US Gulf of Mexico, Brazil, Angola and Mozambique and Ghana and new areas of opportunity coming to market in the Red Sea and East Africa. With the solid worldwide resource base, we remain optimistic about the healthy future of the Ultra-Deepwater market.

Our focus on growth opportunities in the Ultra-Deepwater continues with the Petrobras newbuild tender in addition to the Voyager and Arctic designed vessels. The Brazil tender process has been extended due to the complexity of restarting the Brazilian shipyard industry additionally Petrobras has changed the requirement of the Petrobras built units to a possibility of up to 28 units giving Petrobras maximum contracting flexibility.

Turning to the Deepwater market, we follow through on our previous comments of capitalizing on the available opportunities in the markets with the following fixtures. Henry Goodrich extended for three years at 335K in Eastern Canada, Jack Bates extended for 225 days at 420 in Australia. Sovereign Explorer extended through year-end 2010 at 250K with a water depth restriction of 2,000 feet. Our only two remaining Deepwater unit available in 2010 are already the subject of advanced discussion and we expect to capitalize on these opportunities shortly.

Moving on the worldwide Midwater Floater market, the tendering and contracting activity remains steady, supporting healthy Midwater pricing. However the contract terms are short in duration and often on well-to-well basis. The increased activity over the previous month has resulted in a number of fixtures as follows: reactivation of the Arctic III for five wells at 250K in the UK, extension of the JW McLean for two wells of 260K in the UK.

Extension of the Grand Banks for three year at 295K in Eastern Canada, extension of the Sedneth 701 for one well at 265K in Angola. The Extension of the Rig 135 for six months at 255K in the Congo, extension of the Arctic I for eight months at 250K in Brazil. Our 2010 availability consists of five exit units with five additional units currently cold stacked. We are optimistic that continuing commodity prices stability will fuel more projects and we remain well positioned to take advantage of these additional opportunities.

Moving to the jackup market much like Midwater market they increased tendering activity has results in a significant number of fixtures largely due to commodity prices stability. These fixtures resulted in the reactivation of the Key Hawaii in Qatar, the Trident IX in Indonesia, and Trident VIII in Gabon. In addition to eleven other contracts for various rigs with dayrates changing from 50K in the niche low-spec markets, like the Gulf of Suez to 115K for high-end equipments.

We are optimistic about the sustained tendering activity and expect more fixtures are on the way. However, we remain cautious about the supply overhang from the newbuild entries. Market utilization and dayrate pricing remain steady and we expect this to continue through 2010. This concludes my discussion of the market, so I will turn it back to you Steven.

Steven Newman

Thank you and we will now be happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) We’ll take our first question from Angie Sedita with UBS.

Angie Sedita - UBS

Steven, I certainly respect your request not to speculate on the cause of the accident. But if you could talk a little bit about in general how you see the industry could change as far as what could be asked on the safety side. There has been commentary on the acoustic system, whether they are reliable or not reliable. So any thoughts there, just what you see going forward is possible changes, besides obviously the insurance side for the industry?

Steven Newman

I’ll qualify any comments I make with respected to your question on the basis that we are looking forward and speculating on the impact and there has been a lot of conversation in the media regarding acoustic controlled systems in that acoustic controlled system is just one more alternative means of functioning BOP and addition to the many means that already exist for functioning BOP, so in terms of adding additional flexibility or redundancy I’m not sure that once you consider all of the redundancy and flexibility that already exists that adding an acoustic controlled system changes that picture meaningfully. With respect to the other additional safety regulations or operational procedures or polices that might come into play knowing what we know today in the very early stage of our investigation I think it‘s just far too premature to speculate on what might come about as a result of what we learn during the investigation.

Angie Sedita - UBS

And then in the Q at least, there was a comment, if it could be clarified, somewhat of vague comment. You can come the details that it could be subject to various claims, costs, penalties for which we would not be indemnified. Could you give us an idea of what this could possibly be?

Steven Newman

Well, in terms of the specific situation we’re talking about here with respect to our contractual relationship with BP. Under our drilling contracts for the Horizon, Bp has agreed to assume full responsibility for the costs and the liability of pollution and contamination and we believe that contract is clear there is a long history of contract sanctity in our industry; and we expect that BP will honor that contract. There is tremendous amounts of investigation and scrutiny being paid to this particular incident as it should by both our sales and the governmental agencies and what remains to be seen is the root cause of why a cased and cemented hole would have failed so catastrophically, so trying to speculate on that root cause, I think it’s premature and consequently trying to draw any conclusions about what impact that root cost might have I think is very, very early

Operator

We’ll take our next question from Scott Gruber with Bernstein

Scott Gruber - Bernstein

I want to turn to the jackup fleet. I realized there is a wide range of incremental investment needed to reactivate the idled rigs. But could you estimate for us the threshold level of investment beyond which most of the rigs can return to service? Meaning that most of the jackups need less than X amount to be reactivated?

Steven Newman

I can give you a thoroughly good write down of that Scott, in our fleet of stacked-rigs there are eight of those that are still stack that would require reactivation investment less than $10 million, $10 million or less, but the other end of the spectrums there are handful five of them that will require reactivation expenditure in excess of $40 million and the remaining 12 are in-between that amount So the remaining 12 would be somewhere between 10 and 40 million.

Scott Gruber - Bernstein

Okay. Are they smoothly distributed between the high-end and low-end?

Steven Newman

Yeah, that spans the spectrum.

Scott Gruber - Bernstein

Okay. Do you think during the previous cycle, was your rate of investment in the jackup fleet less than peers or does the idling of the equipment now simply reflect a different strategy of investing in the fleets?

Steven Newman

Our rate of the investment, I would say, relative to our peer group is probably comparable. We focus a lot on operating standards and maintenance standards designed to keep the fleet competitive with respect to the worldwide fleet and the opportunities available in the marketplace. Whereas stacking of our jackups is a result primarily of where the jackups were. We were the largest operator in West Africa and the political uncertainty in Nigeria and the OPEC quota restrictions in Angola forced our customers there to reduce their activity levels and so they quit working and they laid down Transocean jackups when it came to the end of those contracts. It wasn’t a specific strategy designed to take capacity off the market, it was a result decisions being made by our customers.

Operator

We will take our next question from Scott Burk with Oppenheimer.

Scott Burk - Oppenheimer

I know the Discover Enterprise is drilling a relief well for BP. I just wondered, is the other rig also transition rig and are they earning normal dayrates while they are doing that activity?

Steven Newman

Actually the Development Driller III is the rig that has spudded the relief well and it is operating under its normal contract with BP. The Discover Enterprises is preparing to mobilize two of the location and may or may not undertake operations with respect to relief well or crude oil recovery, affluent recovering. And yet it too will be operating under its existing contract with BP.

Scott Burk - Oppenheimer

Okay, so in terms of recovery, that means the rigs might actually be involved in putting this dome over the leak somehow?

Steven Newman

That’s one of the alternative operations being contemplated for the Discover Enterprises. Discover Enterprise as you probably know has crude oil storage capacity on the vessel, it is fitted with the third party completion and separating equipments to be able to handle those well fluids. So it’s ideally suited be able to undertake these kinds of operations.

Scott Burk - Oppenheimer

Okay. Can you give us pessimistic and optimistic case for the amount of time required to finish the relief well that Development Driller has already spudded?

Steven Newman

Yeah, to answer a question like that Scott, I would just point you to the comments and official prospective that’s coming out of the Unified Area Command there in Louisiana. I believe the latest estimates are up to 90 days.

Operator

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

Mike Urban - Deutsche Bank

It may be too early to understand the market impact, but since the Horizon incident have you noticed any slowdown or delays in conversations with customers about picking up new deepwater equipment?

Steven Newman

I’ll tell you that the outpouring of first sympathy and secondary support from our customers has been overwhelming and extremely appreciated. Like us they are anxious to understand what happened, so that whatever changes need to be made can be efficiently and swiftly implemented, but with respected to specific conversations about actual deepwater activity, I would say that there hasn’t been very much of a change at all, the customers continue to be interested in executing their plans.

Mike Urban - Deutsche Bank

Then I guess same kind of question on newbuild discussions. I guess you have been talking about a few things, in particular in one Arctic-class rig, anything to report on that front?

Steven Newman

I’ll let Terry update you on when we have the first specific conversations.

Terry Bonno

Mike, the conversations continues, on Arctic we’re still in conversations with our customer. I would say there isn’t really anything to update at this point. On the Voyager we are seeing some interest in the smaller ship design and we’ve continued that discussion with several other customers. So, we continue the discussions and we believe that at some point that we’ll have something meaningful to report.

Operator

We’ll take our next question from Rob MacKenzie with FBR Capital Markets.

Rob MacKenzie - FBR Capital Markets

I wanted to delve more deeply actually back into the jackup market, which you guys illustrated some increased confidence in here. If you could tell me where you see the potential for incremental growth in tenders over and above what we are already seeing. So where is the next new source of demand likely to come from based on your conversations with your customers?

Steven Newman

Terry will give you an answer to that one.

Terry Bonno

Rob, right now the interest from our perspective certainly continues in South East Asia. We were also seeing a little bit of pick-up in activity in West Africa, so those two areas we believe are going to continue to improve and certainly there is a lot of pent-up demand in Nigeria. So I think that those could certainly be optimistic areas that we could put more effort to work and/or extend our current fleet there. And then again writing on Pemex and their fleets that they currently head our and we did believe that there will be more tenders in Mexico. Also Middle East we understand there may be a few more requirements from Saudi Aramco, so I think that with this continuous price stability we are going to see these markets pick up.

Rob MacKenzie - FBR Capital Markets

My follow-up question is, I wondered if you can comment or share with us some of the precautions you might be taking on your other deepwater rigs. Not knowing exactly what happened with the Horizon, what precautions are you taking elsewhere to ensure you don't have a similar event?

Steven Newman

I’ll tell you Rob, we haven’t really provided any specific guidance to the worldwide fleet and tell we know exactly what happen, but we’ve simple reminded our people that our comprehensive systems, our policies and procedures are traditional approach to our business, we think addresses specific aspects of well control and operational efficiency and safety and so we’ve just had continuing conversation and dialogue with our people around the world about those aspects of our business.

Operator

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

Lee Cooperman - Omega Advisors

Just a question really on the repurchase program, have we suspended the re program or do we intend to continue to pursue it?

Steven Newman

Repurchases under our program are function of our outlook for the business, our estimates of the future cash flow the companies ongoing capital requirements and a lot of factors like that, the relationship between debt and backlog, general market conditions and other things and so as we continue to evaluate the potential impact of the Deepwater Horizon incident and how that might affect one or more of those factors that made determine what we ultimately decide to do with respect to the stock repurchase program but as it stands right now, we’ve not made any changes to that program.

Lee Cooperman - Omega Advisors

Would the pace certainly slowed down? If I am tracking it right, we were seem to be buying back or I’m not saying you shouldn’t by the way, I just wanted as a measure of your confidence in the outlook and what’s going on, I wouldn't be surprised if you suspended it. That was the question I was really asking. Do you think you’ll step to the sidelines to see things settle out?

Steven Newman

What we’ll do is watch out the situation with the Deepwater Horizon incident evolves and if it significantly influences any one of those factors particularly our estimates of cash flow or our outlook for our business and that would obviously have a significant impact on our thinking about the stock repurchase program.

Operator

We’ll take our next question from Roger Read with Natixis Bleichroeder.

Roger Read - Natixis Bleichroeder

I guess I’d like to maybe delve in a little bit on the op costs just to make sure I've got all the moving parts here. On the last call, $5 billion to $5.5 billion for the year, now $5.2 billion to $5.5 billion, so really all we have added in is the estimated $200 million of costs associated with the Deepwater Horizon event, right?

Steven Newman

Ricardo is going to give you an answer to that Roger.

Ricardo Rosa

In fact just a small correction, I think the last guidance that we gave in February was between $5 billion or $5.4 billion, excluding of course any reference to Deepwater Horizon cost and if you take the range that we effectively tightened our guidance today excluding the Deepwater Horizon cost of $200 million and placed it between $5 billion and $5.3 billion and I highlighted in my comment, the factors that would cause us to coming at the high-end of the range or the low-end of the range.

Roger Read - Natixis Bleichroeder

Right, I got the factors, now I’m just trying to make sure what baseline was to start from there. Okay, and then maybe just a little bit on kind of acquisitions, dispositions side. I mean you've got some jackups that may cost a substantial amount to reactivate; I would imagine those rigs could be in the disposition category and then maybe if you could just comment, I know it is probably not foremost on your mind, but you are always looking for rig acquisitions on the higher end of the jackups scale or potentially deepwater. Just what you are seeing there on the bid prices, the ask prices on those units?

Steven Newman

The cost to reactivate an asset Rogers is one factor we take into consideration and other factor would be the basic strategic quality of the asset itself. So it’s a high-end jackup, a high specification jackup even if it might cost the significant amount of money to reactivate it. We may not be necessarily inclined to sell that kind of asset. So in terms of looking at the strategic quality of the fleet we’ll continue to do what we have done over the last several years which is look for opportunities to dispose off non-core, non-strategic assets and similarly continue to look for opportunities to acquire strategic assets. There are conversations going on on both sides of that spectrum all the time, we get approached regularly about opportunities to dispose off assets and we are looking for opportunities to acquire asset.

Roger Read - Natixis Bleichroeder

Any comments, I mean have prices changed at all one direction or the other over let's say year-to-date?

Steven Newman

I wouldn’t say that there has been a meaningful change in price expectation at all, either our price expectations for selling assets or the seller’s expectations for assets we might be looking to acquire.

Operator

We’ll take our next question from Ian MacPherson with Simmons.

Ian MacPherson - Simmons

I guess with regard to the Horizon related costs of $200 million; could you repeat what that entails and how it might breakdown into the respective elements and also provide any indication as to how it might impact the year timing-wise?

Steven Newman

Ricardo, do you want to answer that?

Ricardo Rosa

I hesitate to give you a detail breakdown, I’ve given indication of the cost that comprise the $200 million, I mention the insurance deductable, the possibility of increased insurance premiums and additional legal fees is the main components. It’s difficult to tell at this stage at which point these costs will be incurred during the year.

Steven Newman

Ian, we will start incurring those costs in the second quarter.

Ian MacPherson - Simmons

Okay. Switching to a question on the markets, part of your opening comments you talked about Petrobras's expected need to backfill their newbuild program with other rig requirements and I think that seems to me to be one of the biggest X factors for Deepwater demand over the next couple years. And I wonder if you might throw some numbers out there to kind of frame what you think that demand opportunity could be, given maybe a high and low case?

Terry Bonno

Really the speculation for us to throw a number out there, but we do believe that they do need incremental units and believe that their strategy has been to have open tendering inquires and then they select only a few rigs from that tender and then the last example I write it a couple of months and then I presented a new tender inquiry and it resulted in lower pricing, so we believe that they will follow the same strategy and another tendering inquiry maybe forth coming that we would be speculated on the number of units.

Ian MacPherson - Simmons

If I may to squeezing one more quick one, the $80 million in cost variability for this year that relates to the potential for reactivations above what’s already been disclosed, just to confirm, that is all jackup related and would it be fair to assume that that might correspond with say four to five jackups?

Steven Newman

I wouldn’t make either one of those assumptions, Ian, it might relate to reactivation of Midwater Floater assets as well, what we are trying to do in terms of guiding the street or giving the street some additional information with respect to what we think drives the range, we have targeted $80 million or identified $80 million in potential reactivation costs that could drive us towards that upper end of that range, but that would likely be a combination of jackup assets and Midwater assets, difficult to be too precise about the numbers, but directionally that’s what we would expect would drive us towards to upper end of that range.

Operator

We’ll take our next question from Geoff Kieburtz with Weedon & Company.

Geoff Kieburtz - Weeden & Company

Steve, I don't know to make a comment on these calls, but I just want to express my appreciation for your decision to field questions on the Deepwater Horizon under the circumstances. But with that, my questions are, one, are you aware of there ever being a blowout with a subsea BOP?

Steven Newman

I’m aware of well control incidence on floating, drilling rigs and I can give you crisp numbers, but there are a couple of them that stand out in my mind on Transocean rigs over the history of the offshore drilling industry and I’m sure if we did a thorough deep dive into the record books, I’m sure we would identify well control events where hydrocarbons were allowed to get to the surface.

Geoff Kieburtz - Weeden & Company

Okay

Steven Newman

Non-obviously magnitude, but there have been well control events in past on floating-drilling rigs.

Geoff Kieburtz - Weeden & Company

But we would have to say that, pretty exceptional circumstances?

Steven Newman

I would say it’s a rare event, yes.

Geoff Kieburtz - Weeden & Company

And I had been told down at OTC that BP had sent out a letter asking drilling contractors to verify the condition of their BOPs. I don't know what the specifics were. It seemed to be something to do with original manufacturer specifications. Are you aware of such a letter?

Steven Newman

Yes, I can confirm that we have received the letter from BP and we are currently going though the exercise of responding to the questions that are addressed in that letter.

Operator

We’ll take our next question from Pierre Conner with Capital One Southcoast

Pierre Conner - Capital One Southcoast

I am sure Greg has passed on, just wanted to know that many of us are thinking of you and all your employees at this time.

Steven Newman

Thank you appreciate that

Pierre Conner - Capital One Southcoast

Steve, I want to ask you about revenue efficiency and sort of the trends we are seeing, more so the Deepwater fleet. If I am looking at the numbers correctly for the first quarter, we're about 90%. What’s that target, it seems like the last couple of quarters have been fairly flat. Do you see some trends there? Do you have some projects underway to improve it?

Steven Newman

We do have projects underway to improve it, we’ve put in place a teams specifically looking at the performance of the Deepwater fleet in general and significant effects underway to address where we think the equipment reliability issues are? The conventional Deepwater fleet in the first quarter of 2010 was affected by primarily two rigs operating in India, the 534 and Seven Seas, the 534 was a dynamic positioning issue and the Seven Seas was a BOP issue.

Pierre Conner - Capital One Southcoast

Okay. As a follow-up, just to ensure, as a result of the incident MMS is doing a number of rig inspections in the Gulf. And my assumption is that additional testing that they might require, that that would be at full dayrate costs and not a part of any downtime cost?

Steven Newman

As always the testing is successful.

Pierre Conner - Capital One Southcoast

Right

Steven Newman

As always the testing is successful and then the cost of meeting regulatory requirements and satisfying regulatory oversight is a normal part of the operation.

Pierre Conner - Capital One Southcoast

Okay. My follow-up is for actually Ricardo. Maybe I missed it. Any guidance on other revenues? In particular, integrated services revenues, any update from prior guidance that you had given in last quarter?

Ricardo Rosa

Pierre, there is no additional guidance and with regard to the last quarter.

Pierre Conner - Capital One Southcoast

Okay. I’ll stick with that. Thank you, gentlemen.

Operator

We’ll take our next question from Jason Mandel with Chapdelaine.

Jason Mandel - Chapdelaine

I just wanted to get a little bit of more clarity if possible regarding the progress in rolling over renewing the insurance policies that were set to expire on May 1, that was extended for a month given the current situation. Given that you have a $200 million estimate which includes expectations for higher premiums, does that mean you’ve made progress in sort of negotiating the rolling of the insurance contracts?

Ricardo Rosa

What I can tell you with regard to our insurance coverage is that, we review it every year within this timeframe this month in fact. We’ve posted that negotiating we got underwrite to renewal before May, 2010 through 2011. Clearly the Deepwater Horizon incident will have an impact on the level of premiums that we can expect, however, at this stage and the discussion is going to be fluid. Although we expect prices to harden, we also have to taken into account the opportunity to increase the level of risk that we retain in-house. This is difficult, but we’ve made on initial estimates, but it’s difficult to determine at this stag were it was under panel.

Jason Mandel - Chapdelaine

So as part of the discussions, and as part of your own decisions there, there is a consideration of possibly ending up with, in one way, shape or form, reduce coverage for certain types of events or cats things of that nature?

Ricardo Rosa

That is the possibility that I wouldn’t rule out.

Operator

We will take our next question from Walther Lovato with Passport Capital.

Walther Lovato - Passport Capital

I’m sorry; my questions have been answered. Thank you.

Operator

We will take our next question from Waqar Syed with Macquarie Capital.

Waqar Syed - Macquarie Capital

My question relates to the taxes. In your 10-Q you mentioned there are some additional investigations that have recently been started in Norway and in the U.S. Could you kindly provide us with some more color on those investigations?

Steven Newman

I think they are well defined and articulated in the 10-Q. So, there is not lot more that I can comment in addition to what’s already in there in either case.

Waqar Syed - Macquarie Capital

Okay.

Steven Newman

In the case of Norway, as we indicated, we have received a notification of some criminal charges, but however this clarification doesn’t constitution in itself in incitement and now we can low and we are continuing to discuss issues with authorities there. And in the US we have yet to receive any formal notification of the assessment. And once we have received them, we will defend our position vigorously we believe that our position is clear and very defendable.

Waqar Syed - Macquarie Capital

Okay. Then lastly just one general question, in various places in the disclosures you say that some event could have a material impact on the financials. What is your definition of material? What is the cutoff where you - revenue impact cut off where you say okay, now it is in the material range?

Ricardo Rosa

I think that’s a question that is very difficult to answer, Waqar, I think it depends on the circumstances and clearly the amounts involved and the financial situation of the company of the time that we estimate that decision.

Waqar Syed - Macquarie Capital

Okay. Is it on a percentage of earnings basis? If it has a certain percentage impact that you start to call it material?

Ricardo Rosa

I really don’t think I can comment further in any informative way on that, Waqar.

Steven Newman

Waqar, my perspective on that is, there is always two issues of material, I wanted to quantitative measure and that’s when the accountant spend a lot of time trying to articulate and mail down and the other one is a qualitative measurement of materiality and that’s how might the information impact a prudent investor in the company. And so it’s difficult to be too very crisp about that qualitative aspect of materiality, but that factors heavily into the conversations that was a bit difficult to give you a meaningful answer to the question.

Operator

We will take our next question from Arun Jayaram with Credit Suisse.

Arun Jayaram - Credit Suisse

As you know, standard IADC contracts in the Gulf of Mexico indemnified drilling contractors such as yourself from the release of hydrocarbons and cleanup costs. My question is if the indemnity clause would limit your potential exposure to lawsuits brought off by fishermen, the tourism industry, etc, so, lawsuits resulting from the impact of the spill?

Steven Newman

The way the contract language typically reads, we are indemnified from any expense or claim related to pollution from the well bore and we believe in this particular incidence the contract is pretty clear about that. As I said at the outset, our industry has a long history of contract [sign within] and we expect BP to honor that.

Arun Jayaram - Credit Suisse

Okay, so I just wanted to be clear about that, the indemnity would, you think, limit your exposure to those types of lawsuits, should they be brought?

Steven Newman

We think so, yes.

Arun Jayaram - Credit Suisse

Okay. My follow-up question is, your policies or your indemnity clause are subject to there not being any form of negligence or gross negligence, I believe. And I was just wondering, Steven, if you could just comment on the documentation you have on the historical maintenance of the rig and how this is maintained, including the BOP. Do you believe that the rig was appropriately maintained where there wouldn’t be some form of negligence here?

Steven Newman

I can appreciate, Arun, that everybody wants to know the answers to those questions and nobody more than and those are details that are being evaluated and assessed as part of the investigations, so I am just on prepared comment on that aspect right now.

Greg Panagos

Arun, this is Greg, just to further comment on your question about the indemnity, the indemnification of the contract is very broad.

Operator

We’ll take our next question from Jim Crandell with Barclays Capital.

Jim Crandell - Barclays Capital

Steve, I think you in response to question talked about the impact of the accident on your Company's business, could you speculate on what you think the impact of this on Gulf of Mexico drilling will be in general going forward here? And then really international deepwater as perhaps as far as what countries contemplate further regulations.

Steven Newman

The (inaudible) of word there, Jim being speculate, and so I am, so this is my opinion and it is speculation. I think it’s difficult to overemphasize the importance of the energy industry to the US economy. The Minerals Management Service is the second largest source of federal revenues after the IRS and then when you consider all of the revenues that are collected by the local and state governments, the industry contributes a tremendous amount for the federal and state budget and then when you consider the contributions to the IRS by energy companies and by individuals employed in the energy sector, the amount of contribution to federal and state budgets is significant.

The energy industry is a source of revenues, it’s a source of jobs and it’s a source of economic growth. I don’t think that the administration are going to act rashly about this, I think there going to be as thorough as the industry is in understanding what happened? What the root causes are, that caused this cased and cemented well to catastrophically fail and the industry and the administration will implement whatever regulatory requirements are justified in response to that root cause and the industry will continue.

Jim Crandell - Barclays Capital

Okay. My follow-up question, Steve, relates to another question about Brazil. You have, I assume, by this point submitted bids, or you will be submitting bids to build rigs in Brazil, which have not really built or don't have the capacity anyway to build many rigs, and where the costs are extremely uncertain. So it would seem that you’d have to have a lot more clarity in order to want to submit bids that would give you a good chance of winning. With that as a backdrop, how do you think this whole thing in Brazil will play out with the 28 rigs that are due, and I think 19 of them, I guess, scheduled to be bid on by contract drillers?

Steven Newman

This is a very fluid situation, Jim, the bid submission date is recently been extended to early June and so we are continuing to work through the process of assessing all of the aspects of contemplating building up a rig in Brazil, where there is no existing rig building capacity to speak out. Assessing all of the risks in terms of delivery risk, cost risk, the performance of the sub-contractors and equipment manufacturers and vendors and trying to quantify all of those risks and properly allocate them in a commercial relationship with an appropriate shipyard partner and then present those in a form of a responsive tender to Petrobras, I think it’s going to be an interesting challenge, but the company is taking a thorough look at it.

Jim Crandell - Barclays Capital

You think this is something that because of its nature that it is unlikely that we would see any contracts awarded to a contract drilling company this year?

Steven Newman

I am nor sure necessarily had abruptly rule it out, but I know the exercise were going through and the complexity of the challenge to the extend that and international drilling contractor can get comfortable with all of those challenges and present the responsive submission to Petrobras. I suspect this is going to take a fair amount of time for Petrobras to go through their evaluation exercise and then conduct all of the interpretive of negotiation exercise, before they ever get the contract signature.

So if your question is really about the time frame of it, my guess is, there is going to be a challenge to get all the way through that process to contract signature in 2010. But I do believe that the international community of drilling contractors is paying close attention to it and the opportunity to grow in Brazil is an attractive opportunity and Petrobras are obviously driven by their desires to develop their resource and so both sides I think are going to be interested in participating and making it happen, but it is a complex and time consuming effort.

Greg Panagos

Operator the next question will have to our last.

Operator

Okay thank you. We will take our last question from Jeff Tillery with Tudor Pickering & Holt.

Jeff Tillery - Tudor Pickering & Holt

Hi, just one quick question. Most of mine have been answered. As you went through the new fixtures in Ultra-Deepwater, you talked about the Enterprise 18 months at 435 and Frontier at $475,000. If I got those right, I guess, is my question? And then can you amplify on who the customer is for each of those?

Terry Bonno

Yes, you got the math right there, we extended the Deepwater Frontier for two years in Australia, and that will be with Exxon Mobile and then the Enterprise has been extended by BP for 18 months at 435 in the Gulf of Mexico.

Greg Panagos

Okay, thank you all for listening and Amy Roddy and I will be available to answer your questions all day.

Operator

That concludes today's conference. Thank you for your participation.

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Source: Transocean Ltd. Q1 2010 Earnings Call Transcript
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