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Transocean Ltd. (NYSE:RIG)

Q4 2010 Earnings Call

February 24, 2011 10:00 pm ET

Executives

Gregory Panagos – Vice President of Investor Relations and Communications.

Steven L. Newman – President and Chief Executive Officer

Terry B. Bonno – Vice President, Marketing

Ricardo H. Rosa – Senior Vice President, Chief Financial Officer

Ihab Toma – Executive Vice President, Global Business

Analysts

Robin Shoemaker – Citigroup Inc.

Angie Sedita – UBS

Collin Gerry – Raymond James

Michael Urban – Deustche Bank

Scott Gruber – Bernstein

Joseph Hill – Tudor Pickering & Co.

Geoff Kieburtz – Weeden & Company

Kurt Hallead – RBC Capital Markets

Judson Bailey – Jefferies & Co.

Ian Macpherson – Simmons & Company International

Operator

Good day, everyone. Welcome to the Fourth Quarter 2010 results conference call for Transocean. Today’s conference is being recorded.

At this time, for opening remarks and introductions, I would like to turn the conference over to Mr. Gregory Panagos, Vice President of Investor Relations and Communications.

Gregory Panagos

Thank you, [Treeka]. Good morning and welcome to Transocean’s fourth quarter and full year 2010 earnings conference call. A copy of the fourth quarter press release covering our financial results along with supporting statements and schedules is posted on the company’s website at deepwater.com.

We've also posted a file containing flowcharts 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 first average contracts at day rates by rig type, out of service rig months, operating and maintenance cost trends and finally free cash flow backlog and debt maturities. The Quarterly Toolkit also has four additional financial tables for your convenience covering revenue efficiency, other revenue details, daily operating and maintenance costs by rig type and contract intangible revenues.

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

Before I turn the call over to Steven, now 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 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 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 may use various numerical measures on the call today that are or may be considered non-GAAP financial measures under Regulation G.

As I indicated earlier, you will find the required supplemental financial disclosure for these materials, including the most directly comparable GAAP measure and an associated reconciliation on our website at deepwater.com under Investor Relations, Quarterly Toolkit, and Non-GAAP Financial Measures and Reconciliations.

Finally, 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 and now I’ll turn the call over to Steven.

Steven L. Newman

Thanks Greg. Hello, everyone, and thank you for joining us today. Our reported fourth quarter earnings were a net loss of $2.51 per diluted share. After adjusting for the items highlighted in our press release, diluted earnings per share would have been $0.68.

Before I turn the call over to Ricardo to provide some additional insight into the fourth quarter numbers, and our guidance for 2011, I want to make a couple of comments on 2010 and the company and our business.

During 2010 company faced unprecedented challenges and I want to thank our employees and our shareholders with unlimbering support, their commitment to a company and their compassion for their colleagues.

Our internal investigation into the events of the Macondo tragedy is nearing completion. However in light of continuing delays in obtaining information on the third-party testing of the Horizon’s BOP we expect to release the findings of our investigation in the next month or two.

We continue to work closely with our customers to help ensure the industry benefits from the lesson learned from this tragedy and then implements any necessary improvements to ensure doesn’t happen again. Improved safety is the best way we can honor the memories of those we lost last April.

As we look forward, we also on our commitment to never forget the events of the past. As the industry moves forward following Macondo, there is understandably increased scrutiny on all aspects of drilling operations including the performance in reliability of well control equipment.

While we believe that our subsea equipment on the Horizon functioned as designed, we have adopted and enhanced to approach to maintaining and operating well controlled equipment, particularly subsea BOPs on our floating rigs.

We have implemented more expenses between well’s maintenance and we are stress testing subsea BOPs to new levels before they are deployed on each new locations. In the short-term, this is resulting in some incremental out-of-service time and also impacting our revenue efficiency.

In the fourth quarter, our revenue efficiency was 91%, excluding an adjustment for our customer dispute compared with 92% in the third quarter and 92% for the full year. In my view our revenue efficiency has been disappointing.

We are taking concrete steps to increase revenue efficiency by improving personnel competency through training, development and assessment programs and equipment reliability through rigorous standardized maintenance staffs as well as adding more robust operating procedures to equip our crews with the knowledge, skills and competencies to carry out safe and efficient operations.

In our India and Middle East divisions where we began implementing our enhanced approach in the second quarter of last year, we saw measurable results in the fourth quarter where this division delivered revenue efficiency of 97%. As we roll out this enhanced approach across the company, I expect our revenue efficiency in 2011 to return to normal historical levels.

At our recent Board meeting, the Board of Directors recommended our shareholders both rescind the $1 billion 2010 distribution by way of a par value reduction. Contingent on the cancellation of the 2010 distribution, the Board has recommended that 2011 dividend of approximately $1 billion paid out of the additional paid in capital in four quarterly installments of approximately $250 million. This approach recognizes the uncertainties and difficulties associated with the legal challenges, we have encountered in registering the par value reduction.

The share holders will vote on this proposal at our upcoming annual general meeting in May. And if approved we expect to be able to make the first quarterly payment of approximately $250 million in June. As a reminder there was a change in tax law at the beginning of 2011, which makes these dividends out of additional paid-in capital free of Swiss withholding tax.

Also unlike a distribution via a reduction in par value, a dividend out of APIC is not required regulatory approval. This recommendation reflects the Board’s focus on returning value to shareholders, and our disciplined approach to capital management.

As further evidence of our disciplined approach, we recently announced the construction of two new Super B Class high specification jack-ups to be built at Keppel Fels' Singapore Yard backed by long term contracts with Chevron in Thailand. Our ability to secure contract supporters value creating reinvestment opportunities stands us in clear contrast to our peers who have recently been reinvesting on stack.

I think speculative additions to industry capacity negatively effect market sentiment and long-term industry fundamentals. Our ability to secure firm contracts to support profitable reinvestment in our business speaks to the strength of our customer relationships, and the disciplined approach we take to managing our capital.

We’re also actively involved in efforts to dispose of some of our low spec and non-strategic rates. These efforts coupled with our reinvestment deals are a direct result of our strategy to reduce our exposure to low end commodity assets, both jackups and floaters, and reinvest in a high specification rates. This strategy will enable us to continue to lead our industry going forward just as we have for the last several years.

I think we should now turn to the numbers and Ricardo will take you through some of the details. After that Terry will talk about a bit more about what is going on in the market. Ricardo?

Ricardo H. Rosa

Thank you Steven and good morning everyone. As Steven as already highlighted, we reported a net loss of $799 million or $2.51 per diluted share in the fourth quarter of 2010. This compares with net income of $368 million or $1.15 per diluted share earned last quarter.

Fourth quarter results include three items highlighted in our press release. Most significant of which was an impairment charge that reduced the carrying value of our standards jack-ups by about $1 billion. Excluding these items fourth quarter net income was $218 million equivalent to $0.68 per diluted share compared to $411 million or $1.28 per diluted share earned in the third quarter.

A $0.68 per diluted share, we missed the Street’s fourth quarter consensus of $0.92 per diluted share primarily due to a $52 million provision related to our customer distribution in US Gulf of Mexico.

As we indicate in our public filings, we regularly test the possible impairments of our long lived assets. US GAAP requires us to conduct impairment tests of our long lived assets by asset group if we identify indicators of impairment such as unfavorable changes in our outlook for day rates and neutralization.

The test resulted in an impairment that affected only standard jack-ups acquired in the merger with GlobalSantaFe, which were revalued in 2007 on the purchase accounting guidelines.

Adjusted fourth quarter earnings were $193 million below the third quarter due to $149 million reduction in revenues combined with $139 million increase in operating and maintenance expense. These adverse balances were partially offset by a reduction in income taxes, which I will discuss momentarily. The largest facts that are causing the $149 million decline in the fourth quarter revenues was $90 million decrease in rig utilization.

Low utilization occurred has six rigs were idled, during the quarter due to a lack of customer drilling programs immediately following completed contracts and three additional rigs were called back. This was compounded by reduced revenue from shipyard out-of-service time primarily from the Paul B. Loyd, the deepwater navigator and the Jack Ryan with a $41 million adverse revenue impact compared to the prior quarter.

Also impacting revenue in the quarter was a $52 million provision resulting from a customer distribute associated with standby activity in the Gulf of Mexico. This provision, adds us the impact to the overall revenue efficiency for the fourth quarter, reducing it from 91% to 89%. These variances from contract drilling were partially offset by increased drilling management services revenues of $44 million.

The $139 million increase in operating and maintenance expense compared to the third quarter, resulted from a $73 million increase in costs, mainly related to the Paul B. Loyd and the deepwater navigator shipyards.

In addition, there was a $34 increase in general non-shipyard maintenance costs across the fleet as various projects were completing before year-end. Lastly there was a $35 million increase in expenses due to the improvements in drilling management services activity in the quarter.

Macondo well-related legal insurance and investigations expenses, net of insurance recoveries were $28 million in the fourth quarter, giving a total of $137 million for 2010. Macondo related expenses came into $33 million lower than projected for the year, largely due to expected insurance recoveries and the timing of legal fees.

Operating and maintenance expenses in 2011are expected to range between $5.4 billion and $5.7 billion and include $100 million in projected Macondo well-related costs.

Total expenses are projected to increase as a result of new built ultra-deepwater rigs that commenced operations during 2010 although commenced operations in 2011. We expect these increases to be offset by cost savings from stacked rigs.

Shipyard expenses are projected to increase by $200 million to $250 million compared with 2010. These increases will significantly impact the first and second quarters of 2011 and relate primarily to the Sedco Energy, the Deepwater Navigator, the Deepwater Discovery and the Falcon 100 shipyard projects as detailed in Chart Two on our website and in our Fleet Status report.

In addition, wage inflation driven in part by new builds entering the market has impacted of into our cost projections. We also intend to increase investments in retention, recruitment and training.

General inflationary pressures during 2011 are also expected to increase other operating and maintenance expenses.

Other revenues for 2011 are projected at $500 million. The costs associated with its low margin other revenue categories are estimated to be $450 million in 2011 and that included in the operating and maintenance expenses range of $5.4 billion to $5.7 billion.

The low-end of the range assumes that inflationary pressures especially wage inflations will not exceed what we have included in our guidance and they are offset by other savings. At the top end of the range, we have assumed that all proposed incremental shipyards will take place, all identified reactivations will occur and inflation will exceed budgeted projections.

General and administrative expenses for 2011 are projected to range between $245 million and $255 million in line with 2010.

Appreciation will range between $1.5 billion and $1.6 billion for 2011. Certain depreciation is expected to be more or less flat with 2010, because $160 million decrease in depreciation as a consequence of the impairments to the carrying value of the standard jack-ups will be largely offset by the increased depreciation related to new build rigs, which entered service in 2010 over rental service in 2011.

Capital expenditures in the fourth quarter was $428 million, up $124 million compared to the third quarter, reflecting the investments in the new build Transocean Owner.

Capital expenditures for 2011 are projected to be $1.1 billion with about $450 million relating to new build construction costs and associated capitalized interest and the remaining $650 million for expenditures on the existing fleets.

Interest expense, net of capitalized interest is expected to range from $570 million to $590 million and would be higher than 2010 as a consequence of lower capitalized interest from re-construction activity and the full-year impact of the $2 billion in senior notes issued in September 2010.

The annual effective tax rate for the first-quarter and the total year 2010 benefited mainly from the relocation in the quarter of certain rigs. Rig relocations with similar tax impact are not expected to reoccur in 2011. As a result, we estimate that the annual effective tax rate in 2011 will range from 17% to 19%. Achieving the lower end of the range will be dependent on activity levels and a mix of jurisdictions in which the activity occurs.

Net income attributable to non-controlling interest is projected to increase from $27 million in 2010 to about $90 million in 2011 as in three new build drill ships owned by joint ventures will be acted throughout the year.

We expect to continue generating positive cash flow in 2011 as we monetize part of our three firm free cash flow backlog and incur lower capital expenditures as the ultra-deepwater new build construction program is virtually complete with nine of the 10 units on contract.

We have repaid the Series A convertible senior notes in December 2010 and expect to utilize part of our 2011 cash flow to be repay the outstanding Series B notes in December 2011.

We've also developed a capital structure strategy with the primary objective overtime of achieving and maintaining a high [yield] investment grade rating while in reinvesting in value creating growth opportunities over the business cycle and returning cash to shareholders in a sustained and disciplined fashion. In pursuit of this strategy we are targeting all the time a range of gross debt between $7 billion and $9 billion.

Our current priorities are to reinvest in the business maintained between $2 billion and $3 billion in cash on hand reduce gross debt and return excess cash to shareholders in the form of a regular dividend and when appropriate repurchase shares.

With that I'll now hand over to Terry to provide you some insight into the market.

Terry B. Bonno

Thanks Ricardo and good morning to everyone. Before I cover specific markets, I would like to make a few general comments. Contracting in ultra-deepwater market over the past quarter results have been several short-term awards while we await the outcome of some outstanding long-term tenders in Brazil, West Africa and the Far East that we expect to be awarded by mid 2011.

Tendering phase remains active within short-term projects expected to start up in the next six months. We expect this pace to continue with the commodity pricing approaching $100 a barrel.

Contracting activity in the deepwater market has been light but we expect to see some opportunities developed over the next few months. Challenges still remain with the overhanging of out of ultra-deepwater capacity in the near-term, especially for the more deepwater fleet.

The midwater market continues to experience active tendering in the U.K., Asia, Australia, India and West Africa with a few short-term contracts they were awarded during the past quarter. A high-spec jack-up market demand continues to improve since our last earnings call resulted in anticipated demand and outpacing supply of high-secured by mid-July 2011. The market should further improve in long-term demand coming from (inaudible) Mexico, Southeast Asia, India and the U.K.

Finally, we are excited to report the execution of approximately $1.8 billion of contract revenues since our last earnings call. This improvement over the previous quarters represents a very positive trend that market activity is moving in the right direction.

I will now move to the various markets and will begin with the discussion on the ultra-deepwater market. The ultra-deepwater market has further improved with multi-contract award taking further supply out of the market. While these awards were mainly for short-term programs, day rates have firmed up out with most fixtures in the mid to high 400 and some over of [500,000 K].

As a result of these positive trends, we are in advanced discussion with several customers for our only ultra-deepwater units available in 2011. Unfortunately, despite the official listing of the moratorium in the U.S. Gulf of Mexico, new drilling permits have not been granted by the regulator leading some uncertainty when activity levels in the region will return to normal. This uncertainty has resulted in further relocation of ultra-deepwater units set up to other operating arenas.

In Brazil Petrobras recently announced the award of seven new wells from an initial tender of up to 28 units. In order to bridge the gap to the first Brazilian new build delivery anticipated in 2015, we believe Petrobras will take multiple units under the long-term 1500 meter tender which is still outstanding.

Additionally the recently announced tender for 3000 meter capability also supports our previous comments about much-needed ultra-deepwater capacity to fulfill the demands of the (inaudible) Brazil. We regard these tenders as the prime opportunity to further increase our market share in its important ultra-deepwater markets.

Continued exploration successes in the Frontier oil and gas licenses Tanzania and Mozambique in East Africa and Ghana, Liberia, fairly on Ivory Coast in Gulf of Guinea have already resulted in further incremental ultra-deepwater demand offshore subsea here in Africa, the combination of the incremental capacity requirements of Petrobras off shore Brazil.

We anticipated increase in activity in emerging provinces coupled with demand in the US Gulf of Mexico which continues to accumulate during current levels of inactivity, supports our optimistic views that the current open supply is of the short-term nature. A long-term fundamental for the already solid ultra-deepwater market remains strong.

Turning out to the deepwater market where contracting activity has been very light over the past quarters. We fixated in securing an 11-month extension for us that comes 702 at 364K in Nigeria.

We continue discussions with some of our customers and believe its only question of time before the secure the mark for our marketed deepwater units. We believe that and sell ultra deepwater over supply has been absorbed by anticipated demands, the Deepwater fleet especially more units will continued to be challenged in the near term by the supply over hand.

In the harsh environment mid market, we have been extremely successful in contracting our units in the last couple of months resulting in following fixtures; Transocean Arctic for six wells plus multiple options and average rate of 403 K, Transocean Leader for three years firm at 390 K plus one year options, Paul B Loyd Jr. for 12 months firm at 345 K plus say by three month option, Transocean Searcher for 12 months firm at 380 K plus 12 to 18 month options.

Given other recent fixtures in Norway, there is little near-term capacity available except on a four month basis. This in combination with (inaudible) new build center for up to four units bodes well for this Harsh Environment market and Transocean is ideally placed to benefit from this positive developments.

Moving onto the worldwide midwater floaters markets, contracting activity albeit for short-term durations have been high, especially in the North Sea resulting in multiple fixtures for Transocean during the last quarter.

Transocean prospect for one well at 245 K and further one well option plus options for them at 225K, Sedco 714 for six months at 250 K, Transocean John Shaw a 180 day at 245 K, Sedco 704 for five wells at 260 K and GSF rig 135 for two wells at 264 K in Nigeria.

We are also in advanced discussions for multiple midwater units for our customers in U.K., West Africa, Asia and Australia and expect to capitalize on these opportunities in the near term. The positive demand takes though the Midmarket water is rounded up by some anticipated long-term tenders coming to market in India, which we believe we’re also well placed to capture. Caution however is still needed regarding the competition from the Deepwater fleet and the supply as midwater units available in the market.

Moving to the jackup market we see improvement in high spec demand in Southeast Asia, West Africa, Mexico and the North Sea and expect this for the continue for 2011. The continued strength in the high spec market and our operational excellence in Thailand resulted in a contracting work for two new builds Keppel Super B units. The time of this contract is five years with firmed pricing of 135K for the first three years, and a market adjustment provision in year four and five based on a dayrate 4 of a 135K and it sealing of 160 K.

Our newly executed contracts plus the acquisitions of an already existing high-spec jack-up, the Transocean Owner reflect Transocean’s commitment to renewing our jackup fleet and the strong confidence in the future of this market.

Further transaction fixtures were extension as a GSF (inaudible) key for 8 months plus one year option at 103K in Vietnam, reactivation at the GSF monitors were 120 days plus 100 day option at a 110K in Nigeria.

In our actively marketed jackup fleet we have multiple high specification standard jackup, coming all contracts by 2011. But based on our current contract with our customers and the continued tendering activity we remain optimistic that we will secure programs for most of these active units.

We acknowledge the fact that customers will continue to prefer new build high spec units even for programs that cannot be executed by standard jackups, due to the increased efficiency and perform with capabilities of new equipment.

We believe this bifurcation of a jackup market will continue for sometime, until the market utilization in the day rate for high-spec jackups rising levels that operators will return the capable standard jack-ups as the cost-effective solutions for their standard jack-ups program.

We will continue to look for opportunities to re-activate our standard jack-up fleet and also high-grade our fleet with profitable new build opportunity on a case-by-case basis.

In conclusion while we still encounter some near-term challenges in the US Gulf of Mexico, near-term other supply in ultra-deepwater and deepwater category and continued bifurcation in jack-up market, the high level of commodity price has led to increased tendering and contracting activity across those markets.

We remain very positive in our long-term outlook and believe that Transocean with its unique fleet portfolio is well priced to benefit to this improving market environment.

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

Steven L. Newman

Okay [Treeka] with that, we are happy to open up the lines for Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is from Robin Shoemaker with Citi.

Robin Shoemaker – Citigroup Inc.

Thank you. Steven I want to ask you, you know in the last building cycle you had several other companies besides yourself who were sort of disciplined in terms of seeking contract supported rig construction and were successful of that for the most part including yourselves. But this time it seems like you might be the only company with that strategy. So I know you see the same trends right? We all see, but is that likely to be the case this time?

Steven L. Newman

Well I’ll tell you Robin it is the case that we are going to remain disciplined in our approach to how we think about our business and how we manage our capital. So to the extent that drives the approved distinction between ourselves and our peers, then I think you can characterize that as sustainable. I think there are two fundamental differences between this building cycle and the last and that is who is doing the building and who is providing the capital. In the last new building cycle folks do in the building were outsiders to our business.

There were looking at the business from the outside in they viewed this is an attractive business and wanted to deploy capital and so they wanted to enter our industry and the capital was readily available. This time around its existing industry participants who are doing the building and buy and large because of the attractive commercial arrangements with the shipyards are providing there are basically financing the construction. So it is really is a different field of this new build cycle than the last one.

Robin Shoemaker – Citigroup Inc.

Right, okay. So my follow-up if I could ask Terry about the tender in Brazil that 1500 meter water depth tender, as you’ve indicated you talk they take multiple rigs under that tender, is do you have a kind of a better number in mind or is that the first of perhaps several tenders in that more differentials?

Terry B. Bonno

Robin I have what I believe is going to be the number of units that are taken that I think is no better than anyone else of guess. So there is a lot of folks that believe it could be up to 4 to 8, but I think it's just going to have to be a wait-and-see as Petrobras have filled their needs. And I do believe there will be more tenders but again we are going to wait and see how Petrobras places, they are very clever about going about their strategy of contracting rigs and I don’t think this could be any different.

Robin Shoemaker – Citigroup Inc.

Okay, thank you.

Steven L. Newman

Thanks, Robin.

Operator

Angie Sedita with UBS.

Angie Sedita – UBS

Hi, good morning.

Steven L. Newman

Hi Angie.

Terry B. Bonno

Hi Angie.

Angie Sedita – UBS

Good morning. Terry, I will start with you. On the Gulf of Mexico, are you hearing any change of tone regarding commenting your positive or negative and could you also, 13 Deepwater rigs in the Gulf of Mexico as of March I believe. How many are actually operating today versus on standby rigs and what would be your best case and base case for rigs that you are operating late 2011?

Terry B. Bonno

Angie that’s, hello Angie by the way. Its good to have you back on the call. I think as far as trying to project what's going to be operating at the end of 2011, I think that's something that's going to be difficult to predict.

Today, I think we have four that are actually operating and I believe there is three more that are operating in the Gulf of Mexico. I think the sentiment by some of the customers that turned positive. I would say if you pull them I would say they are all those that have moved to the positive category. But there are some that that fell like they tell me to take their rigs back out of the Gulf of Mexico and still they are feeling very positive. And we now actually being moving one out here shortly. I would rather not say which one it is, but because it hasn't been firmed up, but we are in discussions about one particular unit.

Angie Sedita – UBS

Okay, that's helpful. And then Steven you mentioned that you may or you are looking to disclose some of your low end jack-ups, how many rigs could be up for consideration and I would assume this will be a consideration for a sale?

Steven L. Newman

Yeah it's difficult to be crisp because we are looked at asset by asset or in small packages. We have segmented our fleet between those rigs that we characterize as long term core assets and those rigs that are not long-term core assets but simply because the rig falls into that category have been not long term or not core doesn't mean, we are necessarily going to rush to the auction block to get rid of it.

So we look at our fleet like that we have active discussions ongoing with potential buyers, looking at them on individual asset base or in some cases packages of assets value where you could think about Transocean selling going concern type business strong relationships with the customers in that particular area and a mix of operating rigs and stacked rigs, so you get some immediate cash flow and near-term outside through possibility of reactivation.

Angie Sedita – UBS

All right. Okay. And then finally as Robin indicated you guys have been a stand out here as to sticking to having the contract before building, are you in any conversation today for building ultra-deepwater rigs for contracts?

Steven L. Newman

We're always in conversations about the possibilities and the best way for Transocean to meet the needs of our customers. So we don’t, we take anything off the table as part of those expensive conversations that Terry and her folks have with our customers.

Angie, Ihab just wants to make a couple of comments here about your previous question Angie.

Ihab Toma

Hi Angie, I just want to add little bit Terry's earlier comments. Well you know it is proved that we have maybe four rigs or so actually conducting operations in the Gulf of Mexico most of the rigs in the Gulf of Mexico that are on standby rates are still generating rigs that are pretty close to their contracted dayrate. It's only a couple of rigs that have special standby rate that is significantly below the contracted day rate.

Angie Sedita – UBS

Right. Fair, that is certainly well aware. Just assuring some were actually working. Thank you.

Ihab Toma

Just wanted to make sure that was clear.

Operator

Collin Gerry with Raymond James.

Collin Gerry – Raymond James

Hey, good morning.

Steven L. Newman

Good morning Colin.

Collin Gerry – Raymond James

So, I guess I want to follow up on the new build conversation as well. Could you remind us what with the thresholds, whether it would be from a greater return or a percentage of the new build costs that you would us a contract that you require when you looked into the jackup sufferers, is it a hard and fast role or is it a little softer?

Steven L. Newman

Well, it is not hard and fast. We have a definite starting point, and when we talk about an ultra deepwater floater economy, we start an initial expectation of 80% simple payback in the first five year of firm term contract. So we will negotiate off that. We have accepted, as well as 60% in three years in the past, but our starting point is 80% over five years.

Now some of ultra deepwater floater but its indicative when think about jackups though in the case of the jack-ups, we would look at the full life of asset in turn of rate of return so these are 35-year economic models. It’s like the case of the Chevron, Thailand rigs where we got a five-year firm contract, we’re modeling the out 30 years to identify the full life of asset internal rate of return to make sure that, that exceeds our cost of capital.

Collin Gerry – Raymond James

Perfect. It's very helpful. And you spent some time on the revenue efficiency, seems to be a pretty big push internally within Transocean. I wonder if maybe you could out level is there certain class of asset or maybe a geography that stands out within that stands out within that context and also, I’m afraid of another answer to this question already but any chance to get quantify may be if, what that means in terms of dollars and revenues if you do get back at full levels you are hoping.

Steven L. Newman

Let me take the fast part of question first, you know I taught during my prepared comments about the initial efforts we made in our India and Middle East operation and that was as a result of some particularly acute issues both in terms of our performance and in terms of the relationship with our customers there. So we intended to focus initially on the India and Middle East, but it did provide an. excellent improving ground for the strategy we’re adopting and the actual casts we’re implementing and I think it highlighted what’s possible when we get focused on it.

So, I’m encouraged by the fact that our worldwide management team is now focused on this and I'm optimistic, that we’re going to see some measurable results in 2011. Now I’m going to show away from giving you specific quantifiable outcome other than to reiterate what I said in my opening comments, which is over the course of 2011, we expect to return our revenue efficiency to historical levels, and I think we do good job of disclosing overtime what our performance has been. And so you can look at what are historical performances is been and figure out what is – what do we look like when we get back to that level.

Collin Gerry – Raymond James

Alright, thanks, I appreciate it. That’s it from me.

Steven L. Newman

Thanks Collin.

Operator

Mike Urban with Deutsche Bank

Michael Urban – Deutsche Bank

Thanks, good morning.

Steven L. Newman

Hi Mike.

Michael Urban – Deutsche Bank

Why didn’t you keep going on the (Inaudible) you are seeing today of contracts and like there are on new builds. So it certainly commanding guys from staying disciplined and its pretty clear that on the Deepwater side, at least at this point, you wouldn’t be drilling a rig, unless its against contract, and of course you got a good job on the jack-ups side with the Chevron rigs. Would you roll-out building any rig on spec concluding in the jack-up market or is that a little bit different animal just because of the nature of that market?

Steven L. Newman

I think it would fundamentally go against our historical discipline. And we have for long time prided ourselves on the disciplined approach, we take the managing our capital and thinking about our business. And as you and Robin and Angie had pointed out, it does stand us and start contrast to our peers. But we think that the right way to manage our business this is at the end of the day Mike this is a supply and demand business. And we just don’t think it is a good industry behavior to add the capacity on a speculative basis.

Michael Urban – Deustche Bank

I would tend to agree. Now does that then necessarily I mean just kind of I know you don't necessarily have a target per say in terms of your mix of assets, but with that just given the age of the jack-up fleet roll-out to the floater fleet given that its probably less likely to get a contract on a jack-up new build or support a new build, will that tend to push you more in the favor of the – from a mixed perspective to the floater side as we go forward here?

Steven L. Newman

No, I think for the last several years folks have said it would be impossible to build a jack-up to a contract. And yet our marketing people have proven that it is possible and I think it's something we will continue to focus on and continue to strive for opportunities to do that. I don't think that the challenges of securing an opportunity that build a jack-up to a firm contract necessarily sways us in the direction of focusing only on reinvestment opportunities in our floater business. We’re going to remain focused on being a high-spec driller both jack-ups and floaters.

Michael Urban – Deustche Bank

Okay. That’s all from me thank you.

Operator

Scott Gruber with Bernstein.

Scott Gruber – Bernstein

Good morning.

Steven L. Newman

Hi, Scott.

Scott Gruber – Bernstein

The vast majority of floaters that have being ordered recently have been drillships, I think there has only been one semi that has been ordered recently. What does this suggest about the demand for the semis, you know there has been this expectation that rates of remote semis bifurcate from that DP units, but we also see a better spread between the Deepwater, DT semi rates and the drillship rates as the demand can be concentrated on the drillship side?

Steven L. Newman

I think the recent decisions on the part of the industry participants to invest in drillships is more I think focused on ensuring to the extent that it is speculative asset but there is as much flexibility from an operational perspective, if possible. So drillships just offer a little bit more flexibility in terms of the ability to move from one location to the next, the ability to operate in remote environments because of the significant deck load capacity.

It’s just a more versatile animal than a semi-submersible. I don't think that necessarily means that the demand is going to be focused by us towards drillships. I just think that's the vehicle that contractors are choosing to invest in for flexibility reasons.

Scott Gruber – Bernstein

Okay, that makes sense. And beyond selling some of the jack-ups to some of your Midwater Floaters also fit into the non-core category at this point, and potentially be up for sales as well?

Steven L. Newman

We’ve even got Deepwater assets, but today we would categorize is non-strategic or non-core if we found the right value proposition, we would consider selling those as well. So that characterization of non-core nonstrategic assets will expand the asset classes with exception of ultra deep water.

Scott Gruber – Bernstein

Okay, great. I'll turn it back. Thanks.

Steven L. Newman

Thanks Scott.

Operator

Joe Hill with Tudor Pickering Hold.

Joseph Hill – Tudor Pickering & Co.

Good morning.

Steven L. Newman

Good morning Joe.

Joseph Hill – Tudor Pickering & Co.

Steve, just following up on the last question, what character characteristics and the reporter states space would you characterize as defining non-core?

Steven L. Newman

Age capability technical outfitting, survey class status, if the Rig is coming up against the significant shipyard to enable it to work the next five years we might consider that investments, the size of the investments to be uneconomic to us, not attracted to us and that would shift an asset into the non-core category.

Joseph Hill – Tudor Pickering & Co.

Okay, under the technical capability side what specifically are you thinking of?

Steven L. Newman

It's generally going to be things around, pit capacity accommodations or quarter’s capacity, variable deck load, hook load, things like that.

Joseph Hill – Tudor Pickering & Co.

Okay, great. Terry talked a bit about day rates and ultra deep space being in the mid to high 400, maybe some over 500. Feels like that market is starting to firm up a little bit, saw last night (inaudible) there you got a prettiness rate at the of 45 before bonus. Curious as to why you think we are seeing things up from a bit given the magnitude of un-contracted new build capacity coming to the market.

Terry B. Bonno

Joe, I think if you look out what's available in the market today and that availability is shrinking very quickly, and then also you have the outstanding centers and the ability for Petrobras to take a significant portion of 2011 availability and I think that pendulum has swung because the customers are now saying well you know what we need to push some of this demand out there and let's move the contract and I think that what we're seeing.

I think that the urgency as now started moving in the right direction. But there is more conversation there is seems to be a bit more demand and not long-term at the moment, but we'll see expectation of Petrobras will take off some of this supply I think there has been an improvement in urgency with our other customers.

Joseph Hill – Tudor Pickering & Co.

Okay, so this is more perceptual than anything else at this point.

Terry B. Bonno

I would say it could be really real here in the next couple of months.

Joseph Hill – Tudor Pickering & Co.

Okay. And then last just quickly follow-up as shipyard swap prices began moving up there?

Steven L. Newman

We have really asked a shipyard for a price in recent past. Its difficult for me to give you a definitive answer on that. My sense is that with the pace of new building announcements that have materialized than last three or four months, it wouldn't surprise if shipyard pricing starts to move.

Joseph Hill – Tudor Pickering & Co.

Okay, that's it from me. Thanks guys.

Steven L. Newman

Thanks Joe.

Operator

Geoff Kieburtz with Weeden & Company

Geoff Kieburtz – Weeden & Company

Thanks very much. Just a follow-up.

Steven L. Newman

Hi Geoff.

Geoff Kieburtz – Weeden & Company

Good morning. Joe’s question here, I think we've got shipyard pricing we also as you’ve mentioned have shipyard financing. If we were going to see the shipyards start to tighten up would you expect that would be outweighed costs that moves first or would you start to first see changes in there willingness to finance these projects?

Steven L. Newman

Geoff, I haven't spent a lot of time looking at the shipyard balance sheet. So I'm not sure just exactly what kind of capacity they have in terms of capital and financing. My sense is that they can move pricing pretty easily and the commercial arrangement is almost entirely up to them. It's a shipyard market right now. So trying to handicap which one of those they’d move first I'm just not sure.

Geoff Kieburtz – Weeden & Company

Okay. And second question clarification on the revenue efficiency comments you made, wasn't quite clear whether take Middle East, India segment as an example perhaps, but how much of this initiative you’re undertaking is a response to Macondo versus addressing issues that we’re existing independent in the Macondo?

Steven L. Newman

Yeah, there's obviously a Macondo component to it, as I alluded to in my comments there is increased scrutiny on well operations in general, but probably more particularly on well control equipment. So some of what we’re doing around between standardize, between wells maintenance and rigorous pre-deployment testing and stress testing and pre-deployment checks. Part of that is clearly in response to Macondo, but our deteriorating revenue efficiency trend predates Macondo and so some of those within in some process since the April 20 of last year.

Geoff Kieburtz – Weeden & Company

And the key drivers of that – let's say pretty existing trend in your mind is it predominantly training in personnel related or is it predominantly equipment or can you really say?

Steven L. Newman

I don't think the split between those two is meaningful in one direction or the other, we are trying to address personnel competency so going through a comprehensive program of training and development and formalizes competency assessment and greater emphasis and greater focus on equipment reliability. Our approach is really too prompt in that respect.

Geoff Kieburtz – Weeden & Company

Okay, thank you.

Operator

Kurt Hallead with RBC Capital Markets

Kurt Hallead – RBC Capital Markets

Hey good morning, and good afternoon I guess for everyone.

Steven L. Newman

Good morning

Kurt Hallead – RBC Capital Markets

Just wanted to follow-up first on the looking those jackup contracts, I think you guys are pretty well aware the investor base taught the they offered very low returns and I heard you comment earlier about projecting it out of the 30 years and you get better than cost of capital type return.

In that context with a hurdle rate of some better than 11% in jack-ups and your calculations give you and the mid teens, I kind of return or more like a low teens kind of return?

Steven L. Newman

The way we evaluate our cost of capital, so we think we are in the range of 10% and when we model the 35 year economic life of the jack-ups that we have just invested and the returns over that 35 year period are in excess to the cost of capital and so, what we are looking at when we build a model like that is what’s our base case expectations and the when you model up that out 30 years, there is significant upside depending on the direction about your day rates, that you are there is and we think that over time the reliance on new equipment is going to increase our customers are showing a clear preference for the capability, efficiency and the performance of that kind of equipment, and so while the five-year firm term of the contract gives you a that portion of the return, we think we have 30 years provide significant up sight.

Kurt Hallead – RBC Capital Markets

Okay. Then as I it is the follow-up to your comment, that’s of, they are – in terms of the sense of urgency, was actually very bullish in the context of it essentially coming here in the next couple of months. In the prepared remarks, you had referenced the day rates in the mid to high fours and even some exceeding $500,000 a day. Do you think that $500,000 pay is going to become more than norm? Do you think that’s possible that we are going to cross over that point here in 2011, or do you think that is more likely in 2012 type event?

Terry B. Bonno

Well, we have already seen some short-term fixtures over, over 500,000 in other words, a harsh environment areas. So, I think it's going to be difficult to predict, just when this occurs and when it becomes to norm. Other than this space, again it's as a supply demand fixture and it point out again that the Petrobas type more of market. And I think you will see it. And I think also, we are in discussions about the demand of hazards been put on the table. So we have a little bit closer view to the customer than I think it is known in the market today.

So, that's why the comment makes on the little bit bullish, but I do believe that the fundamentals have improved and that again we’re going to wait and see what Petrabras has to say and I think this is going to happen quickly. I think we’re going to have this tender done in March. And that they will be able to contract these rigs fairly quickly. So that's why I say that, it could be a next couple of months and you’ll see a change.

Kurt Hallead – RBC Capital Markets

Okay. And then, Steven just from your comment about this planned use of capital. So, despite your competitors lacking discipline on user capital, you’re still very optimistic about the supply demand balance for the Deepwater raise going forward, is that a fair assessment.

Steven L. Newman

Yeah, I mean, you can always take things that to logical extremes, if the pace continues what it has been over the four months. As I said in my comments, that tends to change market sentiment, and it will have an impact on long-term industry fundamental. We believe today in the long-term industry fundamentals. But we recognize we are in a supply and demand business and we are hopeful that the industry can be collectively disciplined about managing supply.

Kurt Hallead – RBC Capital Markets

Great, thank you.

Steven L. Newman

Thanks Kurt.

Operator

Jud Bailey with Jefferies & Co.

Judson Bailey – Jefferies & Co.

Thanks, good afternoon to you.

Steven L. Newman

Yes. Jud.

Judson Bailey – Jefferies & Co.

Follow up on some of the comments regarding just the deep-water market in the mid-water market. It sounds like those two segments of making slow improvement. Terry do you think that we could see some of the rigs that are currently idle to those potentially be reactivated maybe in 2011 or would we push that off in to 2012?

Terry B. Bonno

Jud. I think that again that’s going to depend on how quickly the ultra-deepwater capacity is taken off the market because we are having some pushdown and as you know, we are also having some pushdown from the deepwater market into the mid-water market.

I think things are going to have to tighten up a bit before we see some reactivation of cold stacked rigs. But again, I'm hopeful that this increase in demand that will be able to some of the idle capacity back to work.

Judson Bailey – Jefferies & Co.

Okay. And my follow-up is we’ve seen in various companies rigs have gone, cold stacked, not because actually roll of a contract and it was more because they acquired significant capital expenditures to remain active and marketable and so they don’t like to spec those rigs. Coming up this year or next, are there any rigs in your fleet that mainly we don’t know about that we need to be aware of that may require some substantial survey work or something of that nature where there is more a risk of it being idle than what we would believe right now?

Steven L. Newman

Jud, there maybe one or two, but I’m not sure that it is material and I'm not sure I want to take our hand quite yet.

Judson Bailey

Understood, okay. Thanks guys.

Operator

Ian Macpherson with Simmons & Company.

Ian Macpherson – Simmons & Company International

Hi, thank you. Good morning.

Steven L. Newman

Hi, Ian.

Ian Macpherson – Simmons & Company International

I wanted to circle back earlier in the call about the cost guidance and frame it again against expectations for activity levels and I know that the top end of the cost guidance assumes the maximum number of identified reactivations. Would you be able to give us a flavor of how many reactivations are embedded within the low-end of cost guidance if any?

Ricardo H. Rosa

Good morning, it’s Ricardo here. Yes we have embedded some reactivations at the low-end, can’t give you the exact details, but I mean effectively we are looking at perhaps four or five units built in to the pipeline of $5.4 billion.

Ian Macpherson – Simmons & Company International

Okay. And then quickly Ricardo, a follow-up for you, you said you want to keep $2 to $3 billion of cash on hand and looking at back ‘07, ‘08, ‘09, you only kept about $1 to $1.1 billion, is this increase a function of the higher risk profile of the business today versus then or why do you need $2 billion to $3 billion of cash on the balance sheet?

Ricardo H. Rosa

That's the good question and I think it's not our intent to forecast on that facility, but there are additional uncertainties in the environment post Macondo and we believe it remains prudent for us to retain the flexibility to respond to news their consensus and if you look at the growth in the positive as well as the negative sense, and consider opportunities for growth and acquisition, and we don't, but we want to maintain this level to be able to face the opportunities and uncertainties out there without putting any strain in our balance sheet.

Ian Macpherson – Simmons & Company International

Got it, okay, thank you.

Operator

And that concludes our question-and-answer session for today.

Steven L. Newman

Thank you, we’ll talk you all again in next quarter. Thank you everybody.

Operator

Thank you. And that concludes today's conference call. We thank you for your participation.

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