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Transocean Ltd. (NYSE:RIG)

Q3 2011 Earnings Call

November 3, 2011 10:00 am ET

Executives

Thad Vayda - VP, IR

Steven Newman - President and CEO

Ricardo Rosa - EVP and CFO

Terry Bonno - SVP, Marketing

Analysts

Angie Sedita - UBS

Collin Gerry - Raymond James

Kurt Hallead - RBC

Geoff Kieburtz - Weeden & Company

Ian MacPherson - Simmons

Douglas Clifford - Omega Advisors

Mark Lacey - Investec Asset Management

Dmitry Baron - Decade Capital

Andreas Stubsrud - Pareto Securities

Operator

Good day, everyone, and welcome to the third quarter 2011 results conference call for Transocean Limited. Today's conference is being recorded. At this time, for opening remarks and introductions, I would like to turn the conference over to Mr. Thad Vayda, Vice President of Investor Relations. Please go ahead, sir.

Thad Vayda

Welcome to Transocean's third quarter 2011 earnings conference call. A copy of the press release covering our financial results along with supporting statements and schedules is posted on the company's website at deepwater.com. We've also posted a file containing four charts that 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 include average contracted dayrate by rig type, out-of-service rig months, operating and maintenance cost trends, free cash flow from backlog and debt maturities. The Quarterly Toolkit also has four additional financial tables for your convenience covering: first, revenue efficiency, then other revenue details, daily operating and maintenance costs by rig type and contract intangible revenues.

Please note that to aid you any analysis of our performance, we have expanded the table containing daily operating and maintenance costs to include data for each of our six major rig types.

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

Before I turn the call over to Steven, I'd like to point out that during the course of this call, participants may make certain forward-looking statements regarding various matters related to our business and company that are not historical facts, including future financial performance, operating results and the prospects for the contract drilling business. Such statements are based on the current expectations and certain assumptions of management and are therefore subject to certain risks and uncertainties.

As you know, it's inherently difficult to make projections or other forward-looking statements in a cyclical industry since the risks, assumptions and uncertainties involved in these forward-looking statements include the level of crude oil and natural gas prices, rig demand and operational and other risks, which are described in the company's most recent Form 10-K and other filings with the US Securities & 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. Transocean neither intends to nor assumes any obligation to update or revise these forward-looking statements in light of the development which differ from those anticipated. Also note that we may use various numerical measures on the call today that are or may be considered non-GAAP financial measures under Regulation G.

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 deepwater.com under Investor Relations, Quarterly Toolkit and Non-GAAP Financial Measures and Reconciliations.

Finally, to give more people an opportunity to participate in this call, please limit your questions to one initial question and one follow-up.

Thank you and I'm now going to turn the call over to Steven Newman. Steven?

Steven Newman

Thanks, Thad. Hello everyone and thank you for joining us today. Let me say at the outset how disappointed I am with the third quarter results. While there were some real positives on the marketing side of the business, we simply did not deliver the operational results we wanted.

For the third quarter, we reported a net loss of $0.22 per diluted share. After adjusting for discontinued operations and the other items noted in our press release, adjusted diluted earnings per share would have been $0.03. This compares to $0.59 for the second quarter of 2011.

When compared with the second quarter, the third quarter's adjusted results were impacted by lower revenues, higher costs and an increase in our effective tax rate. Before turning the call over to Ricardo and then Terry, let me make a few comments on revenues and costs.

As you will see from the published results, revenue efficiency of 89.5% during the third quarter deteriorated from the 92.1% we reported in the second quarter. While the revenue efficiency trend was favorable through August, we suffered a significant setback in September.

Among our ultra-deepwater rigs, we had five rigs that significantly underperformed during the quarter: The Deepwater Expedition which we have elected to take out of service to overhaul the BOP control system, the Jack Ryan which is undergoing significant maintenance to its BOP control system on location in Nigeria, the Discoverer Spirit which generated lower revenues which undergoing mobilization to West Africa from the Gulf of Mexico and also underwent repairs to its BOP control system, the GSF Explorer which underwent repairs to its BOP, and the Discoverer Enterprise which underwent extensive acceptance testing by BP following an out-of-service project earlier this year.

The Explorer, Spirit and Enterprise returned to operating rate in October, while the Jack Ryan and the Expedition are scheduled to return to operation in November and December respectively.

As you know, we've been focused on the issue of revenue efficiency for several quarters now. As a reminder of the main components of our improvement program, we are focused on continually enhancing equipment reliability, which involves thorough inspections by Transocean and third-party experts to understand the baseline condition of the equipment, standardize maintenance plans to ensure the equipment needs Transocean's high standards and regular testing to make certain the equipment performs as required.

Based on our performance in the second quarter and the early portion of the third quarter, I am confident that we are doing the things that best position Transocean for success over the long term.

That said, the recertification of the BOP is oftentimes the critical path for returning the rig to service. Based on continuing discussions with our key pressured control OEMs, I remain concerned about their ability to adequately respond in a timely manner to the changing requirements and the significantly increased workload imposed by Transocean and the rest of the offshore drilling industry.

Even with the additional demand planning and quality control support we have provided in over 45 vendor facilities around the world, vendor capacity constraints continue to adversely impact our revenue generating ability, while driving higher costs. We will continue to explore every means available to us to assist these key vendors in coping with the new reality.

However, while I remain very confident that we have the correct plan and team in place to address these critical issues and achieve historical levels of revenue efficiency, it now seems likely that it will take longer than I originally anticipated to reach this goal.

Regarding the increase in operating costs, the third quarter reflected increased spending on BOP maintenance and overhaul activity. The third quarter was also negatively impacted by a significant increase in effective tax rate, which is a direct result of our operating performance in the period. Ricardo will provide insight into the main drivers for this in his comments.

For the last several quarters, we have reported results below results below our and the Street's expectations. I believe there are two primary reasons for this, both of which we are diligently working to address. The first is of course our disappointing operational performance and I have regularly outlined the steps we are taking to correct it.

The other relates to the challenges the analyst and investor community face in modeling our financial performance. Recognizing the fundamental role we play in this, we have recently made enhancements to the information we disclose to provide more insight into the key drivers of Transocean's performance. These include out-of-service time, revenue efficiency and asset class specific operating cost.

On a more positive note, I'm pleased that we have closed the acquisition of Aker Drilling. And I'll take this opportunity to welcome the Aker Drilling personnel to the company. The transaction was executed very efficiently by our team and the integration is proceeding smoothly. The acquisition strengthens our industry leadership position in the harsh environment in ultra-deepwater market. The two drill ships under construction in Korea are already generating considerable interest among our customers.

We also recently celebrated the naming of the Transocean Honor, the first of four high-specification jackups we have under construction in Singapore. These are concrete examples of our asset strategy, which is focused on increasing our exposure to high-specification assets, both floaters and jackups and reducing our exposure to low-spec or commodity rigs.

In the third quarter, we sold four rigs and divested our interest in the joint venture that owns the research vessel JOIDES Resolution for net proceeds of $106 million. Subsequent to the close of the quarter, we divested certain other oil and gas properties for net proceeds of about $50 million. Our efforts to divest non-core assets continue and there remains significant interest from third parties to acquire Transocean rigs. Additionally, we are exploring options for larger scale transactions to accelerate the high grading of the fleet.

I won't spend much time on the market recognizing that Terry would give you a thorough review of the each asset class. But let me say that we continue to see increased demand across all rig classes. The ultra-deepwater market continues to tighten. We're discussing with customers opportunities to reactivate deepwater rigs like the Transocean Richardson and the Discoverer 534. The midwater market remains pretty good and the jackup market, including the low-spec standard jackups base, is improving.

Finally, regarding the ongoing litigation related to the Macondo well incident, we recently filed the claim in the multi-district litigation, asking the Court for partial summary judgment on the contractual indemnity which BP owes us. Throughout the incident, BP has repeatedly and publicly proclaimed that it will make this right and that it will pay all legitimate claims.

Moreover, following the recent BP-Anadarko settlement, BP complimented Anadarko for recognizing its responsibilities and meeting its obligations under the Mississippi Canyon 252 joint operating agreement. Similarly, we expect BP to live up to its word and make this right by recognizing our legitimate claim and meeting their obligations under the contracts of the Deepwater Horizon.

With that, I'll turn the call over to Ricardo to take you through the numbers.

Ricardo Rosa

Thank you, Steven, and good morning, everyone. As Steven mentioned, we reported a net loss of $71 million or $0.22 per diluted share for the third quarter of 2011. Excluding $81 million in certain net unfavorable items, the largest of which was a $78 million exchange loss related to the acquisition of Aker Drilling, our adjusted diluted earnings were $0.03 per share. This compares with adjusted earnings of $0.59 per diluted share in the second quarter.

The exchange loss resulted from a forward foreign exchange contract executed to lock in the economics of the Aker Drilling transaction in an environment of high currency volatility during this six-week period prior to acquiring the Norwegian krone denominated shares of Aker Drilling. During this period, the U.S. dollars strengthened materially relative to the krone generating this loss. $5 million in other cost related to Aker transaction were also incurred in this quarter.

Remaining net unfavorable items pertained mainly to discontinued operations and to assets either sold in the quarter or held for sale as we execute our strategy to dispose off non-core drilling unit and other assets.

I will now comment on the drivers underlying our disappointing operational performance in the quarter. The ultra-deepwater and deepwater rig categories both saw a lower utilization and lower revenue efficiency in the quarter. This combined with an increase of $48 million in operating and maintenance expenses and a higher effective tax rate resulted in the significant decline in earnings compared to the second quarter.

Revenue efficiency was 89.5% compared with 92.1% in the previous quarter, resulting in a $50 million revenue reduction. Steven has already addressed the drivers of the deterioration in the ultra-deepwater fleet's efficiency which fell to 86% from 89% in the second quarter. The efficiency of the deepwater unit fell 6 percentage points to 88% due largely to the transition rather in Angola and the Sedco 710 in Brazil.

Overall fleet utilization improved 3 percentage points in the quarter to 58% from 55% due to fewer idle rigs, primarily four standard jackup; one high-specification jackup and one midwater floater, but was lower than we expected as shipyard related out-of-service time rose to 33 rig months from a projected 24 rig months.

This was largely attributable to the haul repair of the Marianas, following the anchor handling incident in early July, the MG Hulme contract preparation and mobilization to India and the Deepwater Expedition shipyard. The impact of this additional out-of-service time was approximately $95 million that more than offset the $80 million improvement in revenue that resulted partly from the deepwater Discovery which operated in the entire quarter following an extended shipyard.

The increase in total operating and maintenance expense compared to second quarter resulted in part from an increasing cost for BOP and well control equipment recertification. These costs were incurred mostly during shipyard projects and largely depend on the timing of the equipment overhauls and the individual rigs involved.

Stringent standards imposed by our customers and vendors to comply with NTL-05 regulation significantly increased the quantity and cost of spare parts required in the process. These costs are indicative of the higher level of maintenance expense required for such equipment in the future.

The effective tax rate of 212.8% incurred in the quarter compared to 33.5% in the second quarter. The annual effect of tax rate for 2011, which excludes various discreet items, was 82.6% in the third compared to 25.6% in the second quarter.

The increase in the annual effective tax rate is primarily due to reduced profitability in certain jurisdiction where activities are either taxed on the deemed profit basis or subject to lower tax rate. The third quarter amounts are also impacted by the approximately $60 million catchup adjustment require to reflect the change in the forecasted annual effective tax rate for first and second quarter activities.

The increase in the third quarter effective tax rate is primarily due to the items noted earlier as well as the impact of the $78 million loss on the forward foreign exchange contract which provided no tax benefit. This adjustment to the annual effective tax rate does not reflect any significant new tax exposure.

Net cash flow generated from operations amounted to $492 million in the quarter, an improvement of $152 million compared to the second quarter and is largely attributable to a reduction in working capital. However, cash on hand at the quarter-end diminished by $103 million due to the acquisition of the initial interest in Aker Drilling for $199 million, the $78 million settlement of the forward foreign exchange contract and the payment in September of the second installment of the dividend amounting to $254 million.

Capital expenditures totaled $137 million, down from $293 million in the second quarter due to the timing of shipyard milestone payments associated with our newbuild construction program and were partly offset by $88 million in proceeds from asset sales.

Cash at September 30 was $3.3 billion, but will decline in the fourth quarter due to the acquisition of the remaining shares in Aker Drilling for approximately $1.2 billion.

We have renewed our revolving credit facility effective November 1 for further five years, and we expect $1.7 billion in outstanding senior convertible notes to be put towards in the fourth quarter. And we are evaluating alternatives to fund the repayment.

I would now like to provide you with some updates to our guidance for the remainder of 2011. Other revenues are now projected to amount approximately $650 million, reflecting improved activity for our drilling management services.

Looking at expenses, we are revising our pervious guidance of $5.6 billion to $5.8 billion for operating and maintenance expenses upward to $5.8 billion to $6 billion, with the increase attributable to the consolidation of Aker Drilling's results and to higher shipyard and daily operating expenses driven in party by well controlled equipment recertification costs.

These expenses are offset to some degree by a reduction in forecasted expenses related to the Macondo well incident, which are now estimated to be about $100 million, down from $135 million previously forecasted, but subject to Court ruling associated with the interpleader filed by our underwriters.

Depreciation is forecasted at the lower end of the $1.5 billion to $1.6 billion range, inclusive of the two semisubmersibles acquired from Aker Drilling, while general and administrative expenses are projected to fall between $260 million and $270 million for the year, excluding Aker acquisition cost.

Net interest expense is now expected to range between $570 million and $580 million with the consolidation of Aker net debt of approximately $1.1 billion. Effective tax is now projected at between 33% and 35%, a 12 percentage point increase from pervious guidance for the reasons I have already highlighted.

Income attributable to non-controlling interest which relates mainly to our TPDI and ADDCL joint ventures is forecast to range between $70 million and $75 million. Our forecast for capital expenditures is unchanged at $1.1 billion.

With respect to the Aker acquisition, we will be incurring certain one-time expenses in the fourth quarter of 2011 which we estimated between $35 million and $40 million. These expenses include professional fees relating to the transaction as well as certain integration cost and about $30 million will be recorded in G&A.

As explained in the 10-Q, certain fair value measurements have not been completed yet, and the purchase price allocation remains preliminary due to the timing of the acquisition and due to the number of assets acquired and liabilities assumed.

Key among the preliminary fair values are current assets at $341 million, property and equipment at $1.8 billion, other assets at $738 million, current liabilities of $205 million including short-term debt of $176 million, long-term debt of $1.8 billion and goodwill of $397 million. The figures for current and other assets that I have mentioned above include $970 million of cash investments restricted to the payment of certain assumed debt instruments.

We would not normally provide guidance on 2012 until next February, but given the significant amount of uncertainty in today's challenging post-Macondo operating environment, we wish to share some initial insights as to how we're currently viewing the coming year.

Because our budget process is not yet complete, I want to emphasize that this is only an initial view and we'll revisit this guidance when we report our fourth quarter and yearend results.

As discussed on our last earnings call, we expect shipyard activity to be concentrated on deepwater and midwater rigs rather than ultra-deepwater rigs. As a result, we expect lower revenue losses from out-of-service time even though shipyard expenditures are unlikely to decline compared to 2011.

We anticipate operating and maintenance costs to fall into a highly preliminary range of $6.2 billion to $6.5 billion in 2012, reflecting high utilization, a full year's activity for the Aker Drilling semisubmersibles, continued well control equipment certification cost, Macondo expenses and general inflationary pressures, particularly on personnel costs.

As it relates to Aker, we are not expecting cash operating expenses of the acquired company to change significantly in 2012. The operating expenses are mainly complied to the two semisubmersibles operating in Norway and we currently assume no significant synergies or cost savings.

At this time, we do not expect depreciation or general and administrative expenses in 2012 to change significantly from 2011. We currently expect that the annual effective tax rate will fall from the projected 34% in 2011, to the up at 20 in 2012. As profitability in certain deemed profits and low tax jurisdictions improved. Absent additional newbuild commitment, capital expenditures are expected to stay within the $1 million to $1.5 billion range.

With that, I will hand it over to Terry to update you on the markets.

Terry Bonno

Thanks, Ricardo, and hello to everyone. Before we cover specific markets, I would like to make few general comments. 2011 continues to be an exciting year for Transocean with the recent Acquisition of Aker Drilling, strengthening our position in the Norwegian market, and expanding our ultra-Deepwater fleet with two DSME designed drillship under construction.

In addition, we executed leading day-rate contract totaling approximately $1.2 billion, since our last earnings call and $5.8 billion year-to-date. Since the last earnings call, we've successfully executed three high-spec floater contract, 11 midwater floater contract, three high-spec and 11 standard jackup contracts.

Even more significant is our ability to build to contract one more newbuild jackup, extending one of our existing fifth-generation 7,500 floaters at leading edge rate of 500,000 a day and return three ideal jackups to the market.

Despite the recent uncertainty in the global economy, tendering and contracting activity in the ultra-deepwater market has continued to strengthen with customers contracting units at a brisk pace. With little to no global availability remaining for '11, we are now seeing the available 2012 rigs quickly being absorbed by the market. Although still our softest segment, tendering and contracting activity in the deepwater market is improving, with long-term fixtures in Australia and Brazil, the Petrobras current 1,200-meter and 1,500-meter tenders are ready to absorb additional units.

Midwater activity increased substantially in the third quarter with multiple fixtures especially in the U.K. and Norwegian sectors of the North Sea. Demand for U.K. and Norway exceeds available supply and we expect upward pressure on pricing in these markets. Premium and standard jackups are enjoying an increase in utilization over the previous quarter and strong demand is leading to the reactivation of some of the world's idle standard jackups. Demand continues to improve in Southeast Asia, West Africa, Saudi Arabia and Mexico.

Let's now look at the various market segments beginning with the ultra-deepwater. U.S. Gulf of Mexico, Brazil and West Africa remain the hotbeds of ultra-deepwater activity. Limited availability in 2011 and '12 is pushing the rates up as evident by multiple fixtures well above the $500,000 a day level. As outlined previously, the U.S. Gulf of Mexico demand is increasing, indicating our customers' intent to implement their delayed exploration and development programs.

This coupled with Petrobras' additional demand as demonstrated in the recent 1,200 and 1,500 meter tenders, along with a new 2,000 meter tender, further improves the supply and demand balance on a worldwide basis. Indicative of this positive market sentiment, we have been able to execute a six-month contract extension for the Sedco Express, 7,500 semisubmersible at $500,000 a day with Noble Energy in Israel.

Based on our bullish sentiment on the ultra-deepwater market, we believe we are well positioned to further benefit from opportunities in late 2012 and '13 at attractive rates for the limited number of units that are scheduled to be available in our fleet. The newest editions to our fleet, the 2 DSME designed ultra-deepwater drillships under construction are drawing interest from our customers, as they begin to explore their need for 2013 and beyond.

With new discoveries in the Golden Triangle coupled with the emerging markets of Australia, French Guiana, Sierra Leone, Ghana, Liberia, Tanzania, Mozambique and Mexico, we remain confident about the future of the ultra-deepwater market and our ability to capitalize on the opportunities.

Turning to the Deepwater market, tendering and contracting activity has picked up slightly from the previous quarter, with 10 fixtures in last two months with most activity occurring in Australia. We see demand improving in this segment to the continuing tightness in ultra-deepwater markets. So Transocean has no active availability in 2011 after extending the Discoverer Seven Seas through the end of 2011.

We are in advanced discussions with multiple customers on our active Deepwater units, remaining available in 2012 and are confident to close these out in the near future. Petrobras' recent tender will also absorb additional global supply, further improving the outlook in the Deepwater segment and potentially providing an opportunity to reactivate a few of our idle units.

Turning our attention to the active midwater floater market, contracting activity in the North region and U.K. sectors of the North Sea has further diminished available capacity through 2012 and '13. The earliest availability of incumbent units in Norway is Q1 2013, providing opportunities to relocate capable capacity which is limited from the outside into this attractive market.

Little supply remains in the U.K. continental shelf for our 2012 commencement. We are in discussions with multiple operators to not only secure our remaining active units, but also to reactivate one of our two-spec midwater units in the U.K, the Sedco 712 during the upcoming year.

ONGC has been the driving force in India thus far taking three midwater unit of which Transocean has been able to secure one, the Actinia at attractive terms. Since our last call, we've been able to add and secure additional 5.5 rig gears in midwater class, the dayrates ranging from 235,000 a day to 293,000 a day.

Additionally since our last fleet status report, we had a further year and half with dayrates ranging from 250,000 a day to 273,000 a day. Based on our discussions with multiple operators in Norway, the U.K, West African and South-East Asia, we remain optimistic to secure further contracting opportunities through '11 and '12.

Living to the jackup market, the tendering and contracting pace for premium and standard jackup remains strong. As we predicted the undersupply in the high speck segment has caused demand to thrill over into the standard unit, causing utilization and market dayrate levels to rise.

In this improved market environment and since our last earnings call, we've been able to secure a multiple contracts across our jackup fleet, about 8 rig years, with dayrates ranging from 63,000 a day for the lower-spec jackup to a 191,000 a day for the premium unit.

Additionally, since our last fleet status report we added more than a rig year with dayrates ranging from 63,000 a day for the lower-spec unit to a 130,000 a day for the standard jackup. Most notably, we were able to execute a contract with Chevron in Thailand for delivery of a third newbuild jackup for a three-year term at a 145,000 a day.

In addition, we were able execute an extension of the GlobalSantaFe, Galaxy II with Galaxy has three wells at a 191,000 a day in the U.K. We are confident that the additional demand from our customers for premium and standard jackups will lead the further contract execution for our active fleet and provide opportunities to reactivate some of spec-asset.

In conclusion, we continue to experience strong demand across all markets segments and all major oil and gas provinces in emerging market, which reinforces our view that utilization in dayrate, will continue to improve.

Transocean has been at the forefront of this cyclone adding significant contract backlog at market leading rates and putting some of our spec-asset back to work at attractive returns. The underlying market strength combined with the addition of high specification, newbuild jackups, harsh environment semis and the ultra-deepwater drillships well position Transocean to provide our customers with the right assets for their future programs and create a positive growth outlook.

That concludes my overview of the market. So I'll turn it back to you, Steven.

Steven Newman

With that operator, we're ready to open up the lines for Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question today is from Angie Sedita from UBS.

Angie Sedita - UBS

Steven, clearly your vendors are behind in ramping up to meet the new industry standards and the demands that the contractors now have out there versus in times past. Is the way time on vendors as much as 30% to 50% of the issue of what we saw here in the third quarter?

Steven Newman

I'll tell you, Angie, it is a significant component of what we saw in the third quarter. I'm not sure I can be crisp enough to give you a specific percentage. If we went rig-by-rig, which would be way too detailed for this kind of a conversation, I could tell you what the issues were on each rig, but how did this still that into an overall fleet percentage I think would be a just a bit tough. It was a significant component.

Angie Sedita - UBS

And then are you incurring any cost or BOP standards on a global basis that your peers are not. I'm trying to understand why your cost and rig efficiencies could be more impacted than your peers, obviously for certain reasons. But are you taking any actions that you were taking on your BOPs that others may not be on a global basis?

Steven Newman

From an industrial perspective, Angie, I don't think the standards are any different. We may have taken a bit more of a proactive approach, taking advantage of opportunities where we had already scheduled a special periodic survey or were already in the process of mobilization rigs from one location to another. We may have taken advantage and already planned out-of-service period like that to incur the incremental cost of recertifying the BOP. But as far as the recertification standards themselves, that's an industry-wide issue.

Angie Sedita - UBS

And then just one quick for Terry. Certainly the ultra-deepwater markets are encouraging here. How much ability do you think the industry has to push for higher rates in 2012? Do you think that rates generally stay here in the low 500s or is there a possibility we could move into the mid-500s in 2012?

Terry Bonno

Look at the availability that, it's rumored to be less for 2012. I think it's only about five units. I think you are going to see the right thing pushed up. The demand is clearly out there. Were in a lot of conversations where the customers simply don't have a rig for 2012 program that they're trying to enact. So I think you're going to see upward pressure.

Operator

And moving on our next question is from Collin Gerry from Raymond James.

Collin Gerry - Raymond James

One of follow-up on kind of the BOP topic. It seems that that's the bigger cause here for some of the operational stuff. And maybe you could talk to us about the progress through the fleet. You highlighted five rigs that are undergoing repair or recertification. If you looked at your ultra-deepwater fleet, how would you qualify your progress there? Are 25% to the fleet are based on these new standards? Is it 75%? Maybe just give us a better sense of where we are.

Steven Newman

Collin, it's going to be tough for me to give you a crisp number. But if you look at the 27 operating ultra-deepwater rigs today, 10 of those are newbuilds. So this is really no issue there. Another significant percentage, and I don't know what the number is, probably five or six of those operate in the Gulf for Mexico and have already been through NTL-05 recertification.

There are another couple that I identified as part of the issues we're experiencing in the third quarter. We'd gone back to work or will go back to work shortly here in the fourth quarter. So if you just look at the 27 ultra-deepwater rigs, I would say we're more than 50% of the way through, but still some work to do.

Collin Gerry - Raymond James

I now want to switch gears a little bit to the revenue efficiency side. Steven, you mentioned in your comments that it's going to take longer than you originally thought. Maybe you could qualify and numerically specifically if we look, your progress went from 89 to 90 to 92 and then back down this quarter, how long do you think to go back in the 90% range.

Steven Newman

Let me try and give you a perspective on it. I think there are three issues we're facing. One of them is the broad industrial perspective, and that's just the result of the post-Macondo environment that higher expectations, more scrutiny, less tolerance on the part of our customers, on the part of the regulators. That's here to stay.

And while that situation continues to evolve, I think our industrial leading operating experience and our subject matter expert and our technical capabilities put us in a very good position. I would argue that it's an advantage for Transocean. As that environment continues to evolve, we're in a good position to respond to that. And I have no concerns at all about our ability to compete and perform in this post-Macondo environment. It's here to stay, but I'm confident we'll be able to respond to that.

Second key issue that we're facing is just Transocean's continuous improvement program are always improving our operating procedures, our maintenance protocols and our standards and our policies. And based on what we saw in the first and second quarter and early part of the third quarter, we've made very good progress there. And I'm confident we'll continue to see progress there.

The third issue is kind of the one that's in between, and that's the industry's reliance on this small cadre of key vendors. And if you look back over the last 10 or 12 years, Collin, we've seen this a couple of times in the past happening in 2000, 2001 and it happened in about 2006 and 2007 where the vendor community just got overwhelmed.

They've responded do it every time in the past. The frustrating aspect of that is it takes time. So the situation we're in is going to endure into 2012. I think we will able to regularly demonstrate progress but as sign September, it's not linear, it's not clean. It tends to be frustrating at times, as September. So I'm confident, Collin, that we're able to continue to demonstrate progress for the analyst and investor community.

Operator

Our next question today is from Kurt Hallead from RBC.

Kurt Hallead - RBC

I'm going to ask somewhat of an unfair question. But you were to put a probability on 2012 earnings higher or lower than $4 per share, which way do you think it will lay, higher than $4 or lower than $4 at this point based on what you know? And I won't hold you to it as the quarter goes on.

Ricardo Rosa

Kurt, this is Ricardo. You know that it's not our practice to give any form of guidance of that nature. We've set up to the plate. We've talked about our initial perceptions of what we can expect in 2012. We believe that the guidance that we've provided there will provide you a reasonable basis for starting to model 2012 with more accuracy.

Kurt Hallead - RBC

My follow-up question is then on the vendor front. Steven, you mentioned you expect that to endure throughout the course of 2012 with progress being made. So it's all duly noted. You've also mentioned I think in the past that you guys have taken some action on your own to get some Transocean people into facilities of the vendors and so on.

So could you update us on how that has progressed, what kind of improvements you've been able to garner from that approach? And from the vendor standpoint itself, how quickly do you think they are trying to address this issue, because in certain extent, the bigger backlogs they have gives them maybe some opportunity to get better pricing and margins on their front. So I don't know if their interests are necessarily aligned with yours.

Steven Newman

I think you've hit on a key issue for us. We have Transocean personnel in over 45 vendor facilities around the world. And since we embarked on that effort in terms of helping the vendors, supporting the vendors with demand and capacity planning and QA/QC, we have seen concrete examples of where we've had an impact on the ability of the vendors to meet our expectation.

The challenge is there is only so much capacity and it takes time for the likes of the NOVs and GEO oil and gas and Cameron to construct new facilities and buy and install new machine tools and train new machinists and welders. That's the significant effort that those vendors are going through right now.

We've had an opportunity over the last several weeks to meet with many of those folks and review their plans and try and provide as much incentive as we can for those plans to be implemented as quickly and efficiently as possible.

And as I've said, we've seen them do it in the past. So I have no doubt about their ability to do it this time around. I'm just really frustrated with the amount of time it's taking. Your point about their backlog and their ability to push prices is well noted. And we push against that every chance we get.

Kurt Hallead - RBC

I've just one additional follow-up here. The challenge for all involved in this process, including what you guys said, in your fleet status reports, you provide us with some really extensive information and you try to give us some sense of what the out-of-service time is going to be or planned out-of-service time is going to be. Over the last two quarters, it's been over 1,000 days and fourth quarter it's mapping out to be 500.

You've provided your guidance in your operating cost and the odd numbers. Are you going strictly by what's in the fleet status or are you providing some sort of margin of error in that out-of-service time. As I'm trying to calibrate it myself at this juncture, I just want to get a sense on how you guys go about that process.

Ricardo Rosa

Kurt, this is Ricardo again. As you know, we've extended the visibility of our out-of-service time in the fleet status report and we've pushed it out through to the end of 2012. We include those shipyards of major projects where we have a high level confidence that they will take place and clearly our level of visibility diminishes as we look further out of course to the next 15 months. So we share with our investors what the out-of-service time that we expect to incur and we review that very regularly, in fact, months prior to the re-issuance of the monthly fleet status report.

So we respond effectively to changing circumstances to the developments that have affected each one of the individual rigs. We always have an element of contingency in our evaluations. The level of accuracy clearly depends on the expectations that we have from various external factors.

Kurt Hallead - RBC

And just for clarity, that does include what your expectations are BOP recertification and so and so forth, right?

Steven Newman

BOP recertification is an integral part of the project.

Operator

(Operator Instructions) We'll go next to just Geoff Kieburtz from Weeden & Company.

Geoff Kieburtz - Weeden & Company

Just to clarify here a little bit more on the subsea expenses, are we talking about essentially an event of one-time, event of recertification, or is there an element of ongoing operation of maintenance expense increase here related to subea systems.

Steven Newman

The significant aspect to it, Geoff, is the one-time recertification. As I mentioned, we're also continuing to enhance our operating standards and our maintenance protocols. So there will be some upward bias to the overall cash operating costs of the rigs in response to that. But that's not going to be material relative to the one-time expenditure necessary to recertify the BOP.

Geoff Kieburtz - Weeden & Company

Steven, earlier you responded to the question about sort of why is Transocean having this increased problem we're not seeing at least so far in your peer group. And I think your answer was perhaps Transocean was being more proactive in taking advantage of planned shipyard time to get everything done.

Yet, it appears as if there was some sort of communication problem between Transocean and its vendors, because they are not ready to do this in the timely fashion that you expected. Can you elaborate on that a little bit?

Steven Newman

I met with one of our key pressure control OEMs about 10 days ago. And they showed me a chart of the average amount of work Transocean had given them in the prior five years compared to the amount of work we've given them in the last 12 months. And it is a significant increase. Absent the facilities to accommodate that, it overwhelmed their capacity. And so when you talk to those guys, they describe it in terms of roofline, and the addition of roofline to their statistics takes time.

Let me give you one other perspective, Geoff, on why I think it is a disproportionately affecting Transocean. If you think about Transocean's historical leadership in ultra-deepwater, more of our rigs relative to our ultra-deepwater fleet came from prior newbuild cycle. Two-thirds of our ultra-deepwater fleet comes from prior newbuild cycle.

As far as the peer group is concerned, only one-third of their fleet comes from prior newbuild cycles. That's reflective of Transocean's historical leadership in ultra-deepwater. Everybody else is a bit later to the game than we are. Consequently as these issues manifest themselves in ultra-deepwater marks subsea BPO control systems, we're going to be impacted disproportionately by it.

Operator

Moving on, our next question is from Ian MacPherson from Simmons.

Ian MacPherson - Simmons

Ricardo, do you see your second half 2012 cost lower than the first half based on the evolution of framework we've been talking about and the recertification, et cetera?

Ricardo Rosa

Ian, in the guidance I gave on 2012, I did indicate that there will be a shift in the mix of major projects between 2011 to 2012 away from the ultra-deepwater rigs into more of the deepwater and the midwater fleet. We expect it to result in reduced loss of revenue due to out-of-service time.

In terms of cost, it's relatively difficult to say, because the project, even though it may take less time, could involve a higher cost per day incurred, depending on the state of each individual rigs that is being brought into shipyard. So I have to state that it's very preliminary stage to indicate that it's going to be lower in the second half of 2012.

Ian MacPherson - Simmons

My follow-up would be the Richardson and the 534 were mentioned in the opening comments. Has any reactivation work begun ahead of contracts for those that may have shown up in your third quarter costs or your fourth quarter costs and/or CapEx? Is there any color that can be provided or elaboration on the prospects for those two units?

Ricardo Rosa

I don't think that anything we've done to those rigs in the third quarter would necessarily qualify as reactivation. The 534, we have kept enough of a crew on there to keep the high tech systems, the DP system and the power management system, alive and well. I wouldn't call that reactivation, but it's certainly going to aid in the reactivation of the rig when the time comes. We've not spent any significant money at all on the Richardson.

Terry Bonno

Yes, just to give you a little bit of a color on both of the rigs, we actually have both of them bid into some of the open tendering. You may have seen that the Richardson is the number two rig on one of the Petrobras tenders. So we're in the number two spot, and we believe that we'll be in conversation regarding the Richardson's opportunity with Petrobras in Brazil.

And also, we are seeing a lot of interest from Norway potentially to upgrade the rig to take it to Norway. So we are very optimistic on returning the Richardson back to work. The 534, also there has been some interest from Petrobras and the inquiry for some lockover work and that hasn't been made public. So the enquiry has been open, but we're just going to wait and see on that one.

So again, we think they're both positive opportunities. And we're hopeful that we can evacuate that this year to start the process.

Operator

We'll take our next question from Douglas Clifford from Omega Advisors.

Douglas Clifford - Omega Advisors

This is an accounting question on your cost side. Was there some cost in shipyard during the quarter that management had thought would be capitalized and it ended up getting expensed to sort of explain the surprise element on the cost?

Ricardo Rosa

Doug, this is Ricardo. In the quarter, we had a very close look at expenditures on recertification of BOP and related well control equipment. We upgraded and reviewed our guidelines in respect to that. We haven't placed a policy that is clear as to the call for the deferred as opposed to expensed. The third quarter was partially affected by some increased costs on BOP recertification.

Some of those costs, approximately $50 million, relate back to prior quarters of this year. So there was a slight uptick as a result of a closer review of our guidelines and implementation of the policy.

Douglas Clifford - Omega Advisors

Was there an effect on the third quarter also, $50 million on prior quarters?

Ricardo Rosa

There were expenditures incurred on BOP recertification in the third quarter of approximately $30 million, yes.

Douglas Clifford - Omega Advisors

Steven, does this quarter affect any way your outlook for Transocean's dividend and the sustainability of it?

Steven Newman

I anticipated that that question would come up at some point during the discussion today. We will continue to engage the Board in thorough review of the dividend issue. And the Board will take the same things in the consideration that they've always taken to consideration which is our outlook for the business, the approximate for cash flow generation, the opportunities to redeploy cash in our business.

It will be a thorough review. We'll start that review as it relates to the 2012 dividend again with the Board when we meet here in a couple of weeks time. And the Board will make a final decision on that at the Board meeting.

Operator

Mark Lacey from Investec Asset Management has our next question.

Mark Lacey - Investec Asset Management

I'm not going to ask you whether you're going on $4 for next year. It's more of just strategic question rather than anything else. You had the out-of-service rig months for 2012 given you knew that the issues with Macondo. And given the dividend is such an important factor for translation as a demonstration of its ability to generate free cash in this difficult time, what droves the decision to actually buy Aker Drilling? As a shareholder, we just can't see the logic of this decision. Can you give me some comfort on what drove that decision in this very, very difficult time?

Steven Newman

Mark, I think one of the things that the shareholders want us to do is to identify opportunities to redeploy capital in our business at attractive rates of return. And the opportunity to acquire Aker Drilling and expand the company's presence and leadership in the harsh environment market and the ultra-deepwater market to bring two additional ultra-deepwater drillships into the fleet at fair valuation was an attractive opportunity for us. And so we chose to pursue that. We're going to continue to look for opportunities to redeploy capital in our business at attractive rates of return.

Mark Lacey - Investec Asset Management

Steven, your problem with this is you still got a $1.9 billion debt maturity that you know you have outstanding. So with all the moving costs that you have, doesn't it make a fair transaction marginal?

Steven Newman

I'm not sure what you mean by making a fair transaction marginal. The assessment of the opportunity in our minds was that this was an attractive opportunity for us to redeploy capital and grow our business, particularly the strategic element of our business.

Mark Lacey - Investec Asset Management

So you don't have any problems with debt maturity then in terms of paying the $1.9 billion?

Ricardo Rosa

Mark, this is Ricardo. We highlighted that we have a number of options that we are looking at. We've just renewed our revolving credit facility of $2 billion for further five years. Even after the acquisition of the shares in Aker Drilling, we have significant cash on the balance sheet. And we continue to be significantly cash flow positive at the operating level. So we are not in a situation where this is holding us a new concern. We have everything available and we're evaluating it.

Mark Lacey - Investec Asset Management

From a shareholders point of view, what you're telling me is that the revolver is unlikely to be used overseas for debt maturity; and secondly, the divided is more than comfortable for 2012?

Ricardo Rosa

No, Mark, I think you're putting words into my mouth there. I would say that as far as the dividend is concerned, it's something that has to be approved by shareholders every year. And it's subject to review both by management and by the board in the light of all the various factors. We have indicated that we are committed to a sustained dividend. But clearly, we have to take all of the externalities into account.

And as I've said, we have had in 2010 we had access with the capital markets. We believe we still have access. So I think the options that existed then still exist for us today.

Operator

Our next question today is from Dmitry Baron from Decade Capital.

Dmitry Baron - Decade Capital

Have you exercised Aker's option to order two more UDWs which was delayed till the end of October. And also for the Ricardo, probably from the bigger picture perspective, then also to follow up on the prior question. Is there a commitment to maintain a few billion of cash as a cushion on balance sheet still in place? And how do you expect to accomplish it between the portable converts the recent payment for Aker. I understand, that you are reviewing different options, but if you could elaborate on that. I will appreciate it.

Steven Newman

So I'll take the first part of that, Dmitry, with respect to the two options that came along with acquisition of Aker Drilling, nominal exploration of those options was earlier this week on the 31st of October. We had engaged in discussions with the SME that option expiry date passed without any formal action on our part.

Ricardo Rosa

Dmitry this is Ricardo, with regard to your question on cash flow and the ability meet the obligations in the short-term. I don't think, I have there is much more I can add to the comment that I gave to Mark. We're looking at a number of options that we have. And we are still generating significant amount of cash. And we've renewed the revolving credit facility.

Dmitry Baron - Decade Capital

But if I may, just a follow up, is it still the goal to maintain a few billion of dollars as cushion of cash on hand?

Ricardo Rosa

That still remains our goal, yes.

Operator

Our next question will comes from Andreas Stubsrud from Pareto Securities.

Andreas Stubsrud - Pareto Securities

Can you just remind us on the average cost of reactivating your spend at jackups?

Steven Newman

When I talk abut the stack standard jackup fleet, Andreas, I always break it down into a third of third of third. The easiest third to reactivate can probably be reactivated for something around $20 million, broad range $20 million. The other third that set the other end of the spectrum, I'm not sure we would contemplate reactivating. They might be attractive reactivation candidates for somebody else. But the cost for us would probably be prohibitive. Then middle third is somewhere in between there, somewhere between maybe $30 million at the low end in $50 or $60 million on the high end.

Andreas Stubsrud - Pareto Securities

And just one quick follow up. And for the five deepwater-floaters, is your significant CapEx, do you need to put into those or investments put into those five floaters, if you want to reactivate them, such as Discoverer 534?

Steven Newman

It's probably a similar sort of break down those in numbers would be a little bit different. You know the rigs like the 534 and the Richardson would be relatively straight forward reactivation candidates. Now there's going to be some significant capital or significant expenditure required to reactivate them.

But we think the economics in the deepwater market. We think, we'll able to find opportunities that justify those economics. There are, probably a couple at the other end of the spectrum that would be significant reactivation expenditures, for that reason or not being actively marketed today at all.

Operator

That's all the time we have for questions. Speakers we'll turn the conference back to you.

Steven Newman

Great, we appreciate the continuing interest in the company. And we'll talk to you next quarter.

Operator

And that does conclude our conference for today. Thank you all for your participation.

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