Transocean Ltd. (NYSE:RIG)
Credit Suisse Energy Summit Conference Call
February 7, 2012 9:00 am ET
Steve Newman - President and CEO
We are very, very pleased to welcome Steve Newman of Transocean back to the stage here, President and CEO, Steve Newman. As I think you remember, no real introductions here on my part. I'm going to turn the microphone over for his comments and then we'll have some time for Q&A at the end of the session. So Steve and Thad, thank you very much for coming. I'll turn it over to you.
Thanks, Brad. We're happy to be back at the Credit Suisse conference this year. Believe me when I tell you, I'm happy to be here. Yesterday was a bit of a grueling journey, I transcend it through London which was still dealing yesterday with a little bit of snow and right here at late last night in Wales, and it looks like Wales dealing just a little bit of snowing, fortunately so, hopefully you didn't come here to ski. You came here to hear us.
Standard forward-looking disclaimer, my lawyers tell me I have to say a few words to this slide and believe me with everything is going on in the company today, I listen to the lawyers a lot.
I'm going to make in the course of today's comments some forward-looking statements about our outlook for our business, the prospects for our company, capital reinvestments plans and financial results.
Our business entails a number of risks. Those risks are well explained in our most recent Form 10-K, another periodic filings with the SEC, if those risks materialize, it could have an impact on our business such that our actual results differ from our expectations.
I'm sure many of you are very familiar with the Transocean story. For those of you that are new to the company or newly interested in the stock let me just make a couple of comments at the outset.
First of all, we are the world's largest off shore contract driller with the largest in every asset class. We're the largest operator of standard jackups. We're the largest operator of high-specification floaters, ultra-deepwater significantly you should position across the asset classes. We're also the largest in most of the major markets worldwide. So typically in those markets we have a leadership position way to the first or the second largest drilling contractor in most of the major markets around the world.
And our relationships with our customers expand the spectrum from integrated oils to independent NOCs. And I'll talk about them in a little bit about the importance of those customer relationships and particularly the emerging role that the NOCs are playing in our business.
I think the company has an extremely strong position and is very well positioned to continue to lead in our industry. We saw the possibility and the opportunities in deepwater and ultra-deepwater more than 10 years ago and commence the significant investment program into that asset class such that today we have a well established leadership position in deepwater and ultra-deepwater in harsh environment.
And that leadership position coupled with the company's organizational capabilities, our engineering expertise, our operating experience that combination creates really interesting reinvestment opportunities. The company's historical role in helping the industry innovate and evolve has established us in a very good position to continue to play that leadership role in innovation and development.
A few of the key investment highlights for the company, we've got a three-pronged strategy focused on creating value for our customers, our employees and our shareholders.
And I'll talk about each one of those groups here in a minute. We have a well articulated asset strategy focused on increasing our exposure to high specification assets, both high-spec floaters and high-spec jackups. And decreasing our exposure to low spec or commodity class assets and we are executing against that asset strategy. We executed transactions in 2011 that furthered our progress in that asset strategy.
Our backlog of just under $24 billion creates a foundation, a platform for financial results going forward creates visibility to our financial results going forward. And we're well positioned to capitalize in an improving market and so at the end of today's discussion I'll touch on each one of the asset classes but suffice it to say right now that across every asset class we see improving market fundamentals. And the company's leadership position and our size in those asset classes puts' us in a very good position to benefit from that improving marketplace.
We're committed to remaining an investment grade issuer to retaining a strong balance sheet and retaining the financial flexibility we need to execute our strategy. And we're focused on returning excess cash to our shareholders. We've got a good track record, a good discipline to track record in doing that.
This slide presents a simplified view of our strategy. And if you look at the two end elements the technical expertise on the right hand and our people on the left hand. That really speaks to the company's organizational capability. Our technical capabilities, our engineering expertise, our ability to innovate and apply new technology to our industry is unmatched.
Our company has a longer, deeper track record of firsts than any other company in our space. We were the first to build jackup drilling rig. We were the first to build a dynamically position semi-submersible. We were the first to build and actually operate vessels in excess of 10,000 feet water depths. We were the first to bring dual activity technology to our industry.
Company's long track record of technology innovation and development is unmatched in our business. You coupled that with the operating experience of our people. Our people's ability to manage complex projects, to execute drilling operations in ultra-deepwater and harsh environments. Our people's ability to solve our customers challenges that we're closely with our customers to help them achieve their objective. And so you take this technical expertise and the operating experience and you'll apply it across a global model.
Company has a geographic footprint that is unmatched in our business. And because of our leadership position in most of the major markets around the world, we're in a position where we can establish critical math in those major markets. That gives us a significant presence in the market. It gives us deeper relationships in those markets. It gives us better access to our customers in those markets and a better understanding of what's going on.
And all of that tick in together, the technical expertise, the operating experience in the global model. We apply it to the benefit of our customers, understanding what is it that our customers are trying to achieve and working closely with them to help them achieve that. So that's our customer focused strategy.
The second element of our strategy is really focused on our shareholders, a rigorous approach to creating and delivering value for our shareholders. So if we start in the upper right hand quadrant of this chart we focus on identifying opportunities to reinvest capital in our business.
We've go disciplined reinvestment criteria, we're strict about adhering to those criteria but we're focused on identifying opportunities to grow our business at attractive rates of return. So that upper right hand quadrant is really focused on profitable growth.
The lower right hand quadrant where we continually focus on our margins is about leveraging the company's size to control our costs and positioning ourselves in the marketplace to increase our day rate. So controlling cost on one hand and increasing day rates on the other hand entails a continuing focus on our margins so that's growth in our profitability. The upper right hand quadrant is profitable growth. The lower right hand quadrant is growth in our profitability.
Shifted over to the left hand side, the lower left hand quadrant is about the health and quality of our balance sheet. As I said earlier, we are focused on remaining an investment grade issuer. Its retaining a strong balance sheet and the financial flexibility, we need to execute our strategy.
And then on the upper left hand quadrant, the company is focused on returning excess cash to our shareholders and we have a long track record of doing just that.
With that in mind, it's appropriate for me to make a couple of comments on the recent capital markets transactions that took place in the fourth quarter. Those two offerings, the equity offerings coupled with the debt offering. We're really focused on doing just that. Remaining strong investment grade issuer and retaining a strong balance sheet and the financial flexibility we need to execute our strategy.
So our balance sheet objectives really remain unchanged. We've got a targeted cash balance of between $2 billion and $3 billion and when you see our reported financial results you need to take into considerations that they include about $900 million of restricted cash associated with some export finance credit in Norway. So it's $2 billion to $3 billion of unrestricted cash. That coupled with the company's $2 billion five-year revolver gives us an appropriate level of liquidity.
At second the target adjusted debt levels of between $7 billion and $9 billion and here again you need to take into account the export finance credit and the cash that is pledged against that. So targeted adjusted debt levels of $7 billion to $9 billion.
Now liquidity and debt level are two key metrics that we think support the company's investment grade rating and it's our intention to remain a strong investment grade issuer.
The financial aspect of this, the capital strategy needs to be seen along side the asset strategy that I touched on earlier, the company's desire to increase our exposure to high-spec assets and decrease our exposure to low-spec asset. And the execution against that asset strategy, we've targeted between $500 million and $1 billion in proceeds from asset sales in 2012. We realized just over $440 million in 2011, we've got a target of $0.5 billion to $1 billion in 2012.
Capital structure strategy, asset strategy, operating plan focused on improving the company's operational performance as well. So let me say a couple of things about that. We are focused on delivering best-in-class performance in a post-Macondo. There is no question that we've had our challenges in that regard.
Two metrics that drive our revenue utilization which is the number of rigs on contract, out operating and revenue efficiency which is the performance of those contracted rigs as it relates to revenue efficiency, I continue to believe that our historical levels of operating performance our achievable even in a post-Macondo environment.
I think the lesson from the third quarter is that progress against that objective. It's not necessarily going to be linear. We are making progress.
The out of service if a function of utilization and it really speaks to ability to execute shipyard projects, over hauls and upgrade in a timely and efficient manner and we were challenged in that regard in 2011.
In order to improve that, we are continuing to enhance the level of planning and assessment we do pre-project preparation and we're working closely with our vendors primarily our pressure control OEMs.
BOP recertification was a significant challenge for us in 2011. So we're working closely with pressure controlled OEMs to get BOP recertification off the critical path. In the long term, that's going to entail a program of replacement on our part that takes BOP recertification off the critical path so exchanging like-for-like when a rig comes in, we execute a unit exchange program. Give the rig a recertified BOP that they can then go back out to work with. We take that rigs BOP and we recertify it off the critical path.
Revenue efficiency and utilization are key drivers of our revenue. And as I mentioned earlier, we continue to focus on our cost structure, leveraging the company size in our business to control our cost.
I touched that the outset on the company size and this chart simply serves to highlight the company's leadership position across the asset classes. Whether it's jackups, mid-water floaters or high-specification floaters you can see the company's position relative to our competitors. And so that prior chart talks about asset diversification. This highlights the pie chart on the left hand side. Looks at the first three quarters of for 2011 in terms of our revenue and splits that revenue across our asset classes and you can see that more than half of the revenue came from deepwater and ultra-deepwater. And more than three quarters of the revenue came from the floater fleet. So a very small contribution from our jackup fleet and even smaller contribution from the other activities company's involved in. Right hand chart is an interesting one because of the highlight it shows about the importance of the national oil companies do our business.
You can now see that the NOCs equal the contribution from the IOCs in our revenues. And we've been predicting this for several years now. We've been focusing and we've been working at positioning the company to benefit from it.
So I talked earlier about the companies geographic footprint and our presence in major markets around the world and the relationships did that allows us to develop with those customers.
One of the real benefits of that is the relationship we develop with the national oil company in the domestic market. Our commitment, our market presence to developing local talent to insuring that we have an appropriate level of local talent in our leadership ranks.
More than half of our divisions today are managed by local nationals. So our Nigeria division is managed by a Nigerian. Our Brazilian division is managed by a Brazilian. Our India middle-East division is managed by an Indian. And what that does, it demonstrates the company's commitment to developing local talent and to working with both the local labor market and the local supplier market to demonstrate the company's commitment to local content. So in an era of increasing importance on resource nationalism and local content, I think the company is extremely well-positioned to continue to participate in that and benefit from it.
I touched earlier on our backlog just under $24 billion extending out several years as you would expect the vast majority of that backlog comes from our ultra-deepwater floater fleet. Those are the rigs with the longest contracts, that still remaining after the turmoil that existed in 2008, 2009. But even with that significant backlog, even with that strong foundation for financial performance going forward. You can see that there is significant upside.
So with the company's leadership position in the various asset classes and as those asset classes and those markets improve. The company is extremely well-positioned to capitalize on those improving markets.
I touched a couple of times over the course of today's comments on our asset strategy. So let me set that asset strategy in context. Following the company's combination, Transocean and Global Santa Fe in late 2007, we went through our fairly rigorous exercise in assessing asset-by-asset, the composition of our fleet.
And we ended up breaking our fleet down into three distinct groups, core long-term strategic assets, rigs that we call workhouse assets. You can think of midwater floaters in the North Sea, high-performing standard jackups, core long-term workhorse assets. And then the third category, our non-core, non-strategic and they are clearly divestiture candidates.
The company is focused on maintaining an efficient tax structure around the world, so whether it's operating assets, or divesting assets. We want a tax structure that facilitates our ability to do both. As we think about increasing our exposure to high-specification assets and reducing our exposure to low specification assets. We got an opportunity to either buy or build. So we are regularly looking for opportunities to do just that, buy or build assets that meet our strategic criteria for long-term core strategic assets.
And similarly on the divestiture side, whether it's the sale of single assets or small packages of assets, or large-scale transformative-type transactions like an IPO or a spin. Company is focused on decreasing our exposure to low-spec or commodity assets, such that, in the future, the Transocean fleet is a focused fleet on high-specification floaters, harsh environment floaters, high-specification jackups, and long-term workhorse assets.
We talked a little bit about the buy or build decision. And let me walk you through the philosophy the company applies to opportunities like that. The starting point, the starting point is a specific customer requirement. It's not an analytical supply demand exercise. We all do that. But there is inherent risk in those analytical exercises. And we've seen that risk play out over the last several years.
So our starting point is a specific customer requirement. Somebody, we can sit across the table from and understand exactly what they need. And once we understand that then we can evaluate our existing fleet and identify whether or not we've got a rig in our fleet that today meets the customer's requirements, whether it's a technical specifications or timely availability.
If we don't have something that meets those two criteria, then we'll look at what we can do with our existing fleet to address that. Maybe there are some upgrades we can do. Maybe there are some rig swaps we can do. Something we can do to allow us to meet the customer's requirement with existing Transocean capacity.
If we can't do that, then we'll look at what's available in the marketplace. Is there a rig that would be available in the second-hand market that would meet the customer's technical specifications and timeline expectations. If we can't do that then we'll talk to the customer about building a new rig. But the starting point is always a specific customer requirement.
Couple of comments on the fourth quarter acquisition of Aker Drilling. It was clearly in pursuit of our asset strategy, two, ultra-deepwater harsh environment semi-submersibles that brought $900 million with their contract backlog in Norway so it enhanced our leadership position in ultra-deepwater. It enhanced our leadership position in harsh environment. It enhanced our leadership position in Norway. Two, ultra-deepwater drill ships under construction in Korea. We'll add to the company's leadership position in ultra-deepwater, and they create growth opportunities with the availability of those rigs in the first half of 2014.
Just to close out a couple of comments on each of the asset classes and I'll start with the jackups. And I think we've been very pleased over the last six or eight months with the evolution in the jackup market. We see increasing demand that is serving to absorb the un-contracted newbuilds and allowing four opportunities to reactivate idle capacity.
So as you look across the key metrics of utilization in day rate and contract term and tendering activity on the high-specification jackup market, steady increases across the board and on the standard low-spec jackup market, stability to increasing. So we're optimistic about the continued developments in the jackup market.
I would say the same thing about the midwater market, good indicators, good metrics across the key drivers utilization, contract term, day rate, tendering activity all increasing. Norwegian and UK sector of the North Sea, ONGC is been very active in India, growth opportunities in the Far East.
Conventional deepwater, been a little bit slow, but we see improving conditions there. The tightening ultra-deepwater market will obviously help the deepwater market. We're looking at opportunities to reactivate a couple of the idle Transocean deepwater assets. And ultra deepwater is strengthening.
While, there might be some apparent availability remaining in 2012. We think that it's rapidly diminishing, such that the customers are sensing some amount of urgency to access the remaining capacity in 2012. And start to talk about what's available in 2013.
As we look around the world, whether it's the existing mature provinces in the Gulf of Mexico, West Africa and Brazil or emerging provinces like the Transform margin in the upper coast of West Africa, the exciting developments in East Africa, some potential for exploration success in the black sea, the possibility of the Mediterranean going back to work in a significant way.
India stabilizing and potentially growing and significant exploration campaigns underway in the Far East. We see really a globe full of opportunity and promise for ultra-deepwater.
Couple of comments on Macondo, two, recent court decisions, one on the indemnity, where the court ruled that BP must indemnify Transocean for compensatory damages arising from the spill, and one ruling on the insurance matters where BP had petitioned the court to be named an additional insured. The court clearly rejected that claim finding that the liabilities that were allocated under the contract. And Transocean's insurance in pursue of our liabilities that we assumed under the contract, the insurance should be retained for us to satisfy those responsibilities, those liabilities. Three phase trial scheduled to begin in about two and a half weeks and we are ready to participate in that exercise.
Just close out with the key investment highlights that I touched on at the beginning. Company's three-pronged approach to delivering value to our customers, our employees and our shareholders. The well-articulated asset strategy that company has focused on executing that backlog that provides a foundation for our financial results going forward and the company's exposure across the asset classes to an improving market, our commitment to remaining in investment grade quality issuer and our discipline to deliver excess cash to our shareholders.
So with those comments, I'd be happy to take any questions.
So the first question is related to BOP recertification and I would agree with you that we appear to be disproportionately affected by that in 2011. I think that is reflective of the company's early leadership in deepwater. We just had more older deepwater rigs than anybody else in our business. If you look across Transocean's fleet of deepwater and ultra-deepwater, about two thirds of our deepwater and ultra-deepwater fleet comes from prior newbuild cycles. And only one third of the peer companies are in that same situation.
So I think it did this proportionally affect us in 2011. I think with some of the recent conference call comments, you starting to see some of that in some of the competitor results as well, some increasing downtime associated with BOPs and BOP control systems.
Your second question about the dividend, we've got a board meeting in about 10 days time where management are going to present a recommendation to the board. And the board are going to deliberate on that recommendation. And I am not going to say anything today. It's going to prejudice that discussion. Paul?
With an improving market for standard jackups, would you say that there is a bigger opportunity for Transocean to market some of its older units that might have existed a few months ago?
By market, do you mean market for operating or market for selling?
Yes. As the fundamentals improve in offshore drilling, whatever asset class you're talking about that also has a corollary effect on the second hand market for assets. So if you got a higher utilization, more demand, higher day rates, longer contracts. That creates the kind of environment where incremental capital is attracted into the business.
BOP capital requirements that have been going through the system, how many more quarters do you think that's going to affect the company's number?
Because the planning is not solely a function of our desire, we have to coordinate with our customers. We take into the operating schedule for the rig and the special periodic survey scheduled for the rig. We could see it continue for as much as a couple of years. All things being equal, I would rather delay it until the OEM community is fully prepared to address the increase in demands. And differ the spends as much as I can.
There are some regulatory issues associated with doing it sooner rather than later. But on balance, I think it's probably going to endure for another couple of years.
When I think about cash flow and the impact of BOP recertification on cash flow, the out of service time has a far greater impact on our cash flows than the incremental spend associated with doing the work. So as a touched on, our focus is on reducing the out of service time m that will have unquestionable beneficial impact on the company schedule.
No, I think we'll be able to demonstrate progress in improved out of service time in 2012.
I wouldn't say it is shifting other than what Paul alluded to earlier. There is more interest out there now in the second hand market than there was a year ago just because the industry conditions are improving. And so when we look at potential buyers engage in discussions with potential buyers. We're talking to people who just want one asset. We're talking to people who want packages of assets. We've had conversation with people who want a significant number of assets. So the buyer community really expands the spectrum.
All right, thank you very much. I appreciate the continued interest in the company.
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