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Transocean, Inc. (NYSE:RIG)

Q3 2007 Earnings Call

October 31, 2007 10:00 am ET

Executives

Gregory Panagos - VP of IR and Communications

Bob Long - CEO

Greg Cauthen - SVP and CFO

David Mullen - SVP of Marketing and Planning

Steven Newman - EVP and COO

Analysts

Roger Read - Natixis Bleichroeder

Geoff Kieburtz - Citigroup

Dan Pickering - Tudor Pickering

Thomas Curran - Wachovia

Angie Sedita - Lehman Brothers

Mike Drickamer - Morgan Keegan

David Smith - JP Morgan

Ole Kjerkreit - SEB Securities

Waqar Syed - Tristone Capital

Ben Dell - SanfordBernstein

Robin Shoemaker - Bear Stearns

Ian Macpherson - Simmons & Company

Operator

Good day, everyone. Welcome to the Third Quarter 2007Results Conference Call for Transocean Incorporated. Today's conference isbeing recorded.

Now, for opening remarks and introductions, I would like toturn the conference over to Mr. Gregory Panagos, Vice President of InvestorRelations and Communications. Please go ahead, sir.

Gregory Panagos

Thank you, Sarah. Good morning, ladies and gentlemen, andwelcome to Transocean's third quarter 2007 Earnings Call.

A copy of the third quarter press release covering ourfinancial results, along with supporting statements and schedules is posted onthe company's website at www.deepwater.com. We have also posted a filecontaining four charts that will be discussed during this morning's call. Thatfile can be found in the company's website by selecting "Investor Relations,"followed by "News and Events" and "Webcasts and Presentations."

With me on this morning's call are Bob Long, Chief ExecutiveOfficer; Jean Cahuzac, President; Steven Newman, Executive Vice President andChief Operating Officer; Greg Cauthen, Senior Vice President and ChiefFinancial Officer; David Mullen, Senior Vice President of Marketing andPlanning; and David Tonnel, Vice President and Controller.

Before I turn the call over to Bob Long, I would like topoint out that during the course of this conference call, participants may makecertain forward looking statements regarding various matters related to ourbusiness and company that are not historical facts, including future financialperformance, operating results and the prospects for the contract drillingbusiness.

As you know, it is inherently difficult to make projectionsor other forward looking statements in a cyclical industry, since the risks,assumptions, and uncertainties involved in these forward looking statements,including the level of crude oil and natural gas prices, rig demand and operationaland other risks, which are described in the company's most recent Form 10-K andother filings with the US Securities and Exchange Commission. Should one ormore of these risks and uncertainties materialize, or underlying assumptionsprove incorrect, actual results may vary materially from those indicated.

Also note that we will use various numerical measures in thecall today which are, or may be, considered non-GAAP financial measures underRegulation G. You will find the required supplemental financial disclosure forthese measures, including the most directly comparable GAAP measure and anassociated reconciliation on our website. And for your convenience, non-GAAPfinancial measures and reconciliation tables are included with today's pressrelease.

That concludes the preliminary details of the call. I'll nowturn it over to Bob Long.

Bob Long

Thanks, Greg. Good morning, everyone, and thanks for joiningus on the call. I'll start by giving a brief overview of the quarter and mysense of the current state of the market, and then Greg Cauthen will go intosome detail on the numbers before David Mullen expands on some of thedevelopments in the various markets around the world.

We did have a very nice quarter with a lot of good news.Earnings of $2.12 per share on an adjusted basis were better than expected,thanks in large part to continued good revenue efficiency, and postponement ofsome maintenance projects. We got clearance from the Department of Justice onour Hart-Scott-Rodino filing relating to our merger with GlobalSantaFe,removing one of the critical path items to getting the merger closed.

We achieved a new record day rate of $600,000 a day for our rig,the Pathfinder. We were awarded a commitment for a 4-year contract for thefirst of the two deepwater Pacific rigs, and have exercised our option topurchase a 50% interest in the joint venture that will own those rigs once they'reconstructed.

We obtained a 4-year contract on the Polar Pioneer commencingin late 2010. I think that's the first commitment for a contract for anexisting rig coming up in that timeframe. And finally, our backlog increasedfrom $21.2 billion as of the last conference call, to $22.9 billion today.

Going back to the merger for a second, we still have somethings to do before we can close the merger with GlobalSantaFe. Our shareholdermeetings are scheduled for November 9th, and then we need the approval of Cayman Grand Court.If all goes well, we do hope to close by the end of the year.

Meanwhile, the markets continue to be very good --particularly the Floridamarket. While I would prefer not to see so many new builds ordered, the demandfor deepwater new builds continues to surprise me on the upside. We have a lotof interest in the second deepwater Pacific new build and are very optimisticthat we'll get a contract before yearend.

I'm also happy to see the developing interest in contractingexisting deepwater rigs with availability out in 2010. I mentioned the Polar Pioneercontract already, and we have multiple customers interested in two of ourultra-deepwater rigs with availability in 2010. I do not expect this demand tomanifest itself until next year, so the developing interest now is a nicepositive sign.

As far as the jackups are concerned, I continue to bepleasantly surprised by the strength of the market. We signed a lot of newcontracts during the quarter, adding about $400 million to our backlog. But Iwill let David Mullen fill you in on those details after Greg goes thorough thenumbers.

With that, I will turn it over to Greg.

Greg Cauthen

Thanks, Bob, and good morning to everyone.

In the third quarter of 2007, we had net income of $973million, or $3.24 per diluted share, which includes $276 million of incomerecognized in the quarter from the TODCO tax sharing agreement; a $52 millionreduction in our income tax expense, due to benefits from foreign tax credits;and an $8 million gain from the sale of one rig. This compares to net income of$549 million, or $1.84 per diluted share, in the second quarter of 2007, whichincluded $11 million of similar items.

All of my comments, including our expectations, are based onTransocean as a standalone company, assuming no merger with GlobalSantaFe. Forany questions you have regarding the merger, I would refer you to the proxy wefiled with the SEC on October 3rd.

Total revenues for the third quarter improved by $104million to approximately $1.5 billion. $99 million of this increase in revenuesresulted from rigs commencing our continuing contracts at day rates higher thanin the second quarter, and approximately $13 million resulted from the extraday in the quarter. These revenue increases were partially offset byunanticipated downtime on the MG Hulme.

Third quarter revenue efficiency of 96% remained in linewith the second quarter, and is still one percentage point higher than the 95%average efficiency we saw for the entire year of 2006. As we look forward tothe remainder of 2007 and 2008, we expect revenue to continue to increase dueto the commencement of higher day rate contracts, as shown on chart 1. Weexpect to experience approximately 89 out-of-service rig months in total forthe year 2007, and approximately 68 out-of-service rig months in 2008, as shownon chart 2.

Operating and maintenance expenses in the third quarter were$663 million, which represents roughly a 6% increase from the $627 million weincurred in the second quarter. Versus the preceding quarter, our in-servicecosts increased by approximately $14 million, or 3% in the third quarter, asseen on chart 3. This increase is mainly due to an increase in the number ofmaintenance projects versus the prior quarter.

Our support and integrated services cost increased by $13million, including $6 million of integrated services cost, which is in linewith the integrated services revenue increase. We experienced an increase of $8million in out-of-service cost during the quarter due to the increased shipyardtime.

We expect our total operating and maintenance costs for thefourth quarter 2007 to be between $660 million and $690 million. We expectoperating and maintenance costs for the full year to be at the higher end ofour previous guidance due to an incident during the MG Hulme shipyard, othershipyard overruns, higher costs in the integrated services, and the continuedweakening of the US dollar, with the latter two largely offset by relatedrevenue increases.

The actual amount of cost we incurred in the fourth quarterof this year will continue to be affected by the duration in the amount ofshipyard and mobilization activities we performed and the timing of variousmaintenance projects we undertake.

Looking forward to 2008, we anticipate that our full yearcosts will be roughly 11% to 13% higher than our expected 2007 full year costs.This increase is higher than our previous guidance mainly due to increases inshipyard costs, additional investments in our people and the full year impactof the weaker US dollar, with the latter expected to be largely offset byrevenue increases.

I would continue to caution you however that theseprojections could be affected by a number of factors, including among others,the amount, scope, duration and timing of shipyard and mobilization activities,the actual level of equipment, labor and shipyard inflation, and theperformance of foreign currencies against the US dollar.

General and administrative expenses were $27 million in thethird quarter, compared to $29 million in the second quarter, and we expectthem to be between $28 million and $30 million for the fourth quarter 2007.

Capital expenditures in the third quarter of 2007 were $305million of which approximately $170 million relates to our four new built drill-ships.Roughly $90 million relates to the two 700-series upgrades, and the remaining-- roughly $45 million -- relates to contractually required upgrades, fleetspares and normal operations.

On October 24th, we announced the exercise of the option topurchase a 50% interest in the joint venture that owns the two deepwaterPacific rigs currently under construction for a total investment of $238million. The joint venture will be consolidated with our other financialresults, and we expect the consolidation to have a $15 million impact on thecapital expenditures for the remainder of 2007.

We expect capital expenditures for the full year 2007 toincrease from $876 million in 2006 to roughly $1.5 billion, of whichapproximately $770 million relates to our six new built drill ships and roughly$365 million relates to the two upgrades.

In 2008, we expect our capital expenditures to beapproximately $1.7 billion, including approximately $310 million for the twodeepwater Pacific rigs.

Interest expense, net of interest income, decreased to $16million in the third quarter, and debt levels were reduced and capitalizedinterest increased to $19 million, in line with higher investments in upgradesand rebuilds.

We expect interest expense, net of interest income, tocontinue to decrease based on further increases in the amount of capitalizedinterest and assuming we continue to use free cash flow to build cash or reducedebt.

Other net in the third quarter 2007 of $287 million,included $276 million of income from the TODCO tax sharingagreement, with a $118 million related to amounts received during the thirdquarter under the change of control provisions and the remainder primarilyrelated to amounts received in previous periods related to TODCO's 2006 and2007 tax returns.

As a result of the third quarteracquisition of TODCO by Hercules, we have now recognized most of the earningswe expected to receive under the tax sharing agreement with TODCO.

In addition, other net includes $2million related to licensing income from our dual activity patent. We expect toreceive and recognize roughly $2 million of other income during the fourthquarter of 2007 from our dual activity patent.

Finally, our effective tax rate was 14%for the third quarter excluding various discreet items. We currently expect ourannual effective tax rate to be 14.6% for the fourth quarter, which excludesthe impact of any gains we may realize from the asset dispositions and otherdiscreet tax items.

With that, I will turn it over to Davidfor the marketing outlook.

DavidMullen

Thanks, Greg, and good morning to everybody.

We had an outstanding period in contractfixtures since the last earnings call, highlighted by the exercise our option topurchase a 50% interest in a joint venture with PacificDrilling on the back of a firm commitment for one of the two ultra-deepwaterdrillships that are currently under construction. We paid approximately$238 million for our joint venture interest, which represents half of thedocumented cost for the rig as of October the 18th, 2007.

The first joint venture new build unit, Deepwater Pacific 1,has been awarded a firm commitment for a 4-year drilling contract with RelianceIndustries at a rate of $526,000 a day for operations offshore India.Reliance has the right to confer to a 5-year contract by October 2008 at a rateof $513,000 a day. The drilling contract is expected to commence in the thirdquarter of 2009, following shipyard construction, sea trials, mobilization tolocation and customer acceptance.

The second joint venture new build unit, Deepwater Pacific2, is expected to be completed in the fourth quarter of 2009. We are currentlyin active discussions with several customers regarding the award of a long-termcontract for that rig. As shown on chart 4, our total current contract backlog,including the Reliance contract for Deepwater Pacific 1, has increased byapproximately $1.5 billion since the last earnings call to $22.9 billion as oftoday.

Turning to our existing fleet, I will start with thediscussion of our high specification fleet, which includes our deepwater andharsh environment rigs. The Deepwater Pathfinder was awarded a three wellcontract, with an estimated duration of 120 to 160 days, at a rate of $600,000per day. The Polar Pioneer was awarded a four-year contract with StatoilHydro at$490,000 per day, for work offshore in Norway, with contract commencing in2010.

We've seen a lot of customer interest in the existing highspecification units with availability in 2010, and this interest is beginningto translate into commitments. The fixtures I've just mentioned support theview of an extended upside for the high specification units. We continued tosee unsatisfied demand in the mature deepwater petroleum basins and in theharsh environment bases offshore Northern Norway.We see incremental demand growth for exploration activity in the emergingdeepwater basins.

We also continue to see strong demand in the other floatermarket sector. In the UKsector of the North Sea there is a lot ofinterest in the rigs with time available in 2008. Additionally, we had athree-year term commitment on the Sedco 601 for work in Southeast Asia at $255,000.

We had an active quarter in the jackup sector with a numberof fixtures which translate into approximately $400 million of the $1.5 billionin backlog growth that I referenced earlier. We continue to see growing demandfor jackups particularly in the Middle East and India. While we remain cautious onsupply additions in 2008, 2009, we anticipate that additional supply will beabsorbed by incremental demand through the first half of 2008. Beyond that, wejust don't have the visibility of the demand side.

The CE Thornton and FG McClintock both were contracted onterm contracts for three years, respectively, at a rate of $145,000 per day forwork on the Mumbai High Redevelopment Project with ONGC. The Comet was awardeda 2-year contract with GUPCO in the Gulf of Suezfor $112,000 per day.

The Trident 16 was awarded a firm commitment for 42 monthsat a rate of $180,000 a day for work in Southeast Asia.The Shelf Explorer was mobilized to Johor Port, Malaysiato undergo some maintenance work while waiting to start its next contract inthe first week of December at a rate of $175,000 a day for a minimum of twofirm wells.

The Transocean Nordic was mobilized to Singapore to undergo a scheduledshipyard visit. And we are in advance discussions with a customer follow-upwork on a term basis. Additionally, we have a number of deals under LOI thatare expected to achieve closure by year's end.

That concludes my marketing comments. So I now turn it backover to you, Bob.

Bob Long

Thanks, David. I think with that, Sarah, we are ready toentertain questions.

Question-and-AnswerSession

Operator

Thank you. (Operator Instructions). And we'll pause for amoment to assemble our queue. And we'll take our first question from Roger Readwith Natixis Bleichroeder. Please, go ahead.

Roger Read - NatixisBleichroeder

Yeah. Good morning, gentlemen.

Bob Long

Good morning.

Roger Read - NatixisBleichroeder

Bob, a question for you, I mean, you started off talkingabout how deepwater has really picked up in terms of the contracting ofexisting units for 2010 and beyond. Obviously, for the high spec equipment,that's the case. In terms of maybe fourth generation or a strong thirdgeneration rig trying to compete in this market, is this pretty much just thefifth generation of spec equipment you're seeing this far or are you startingto see demand on down the line as well?

Bob Long

Right now, the interest in contracting rigs coming availablein 2010 is primarily the high specification and ultra-deep rigs.

Roger Read - NatixisBleichroeder

Okay. And is any of that the Artic areas of Norway or Russia that you're seeing at thispoint?

Bob Long

Yes, all are chipping for that one. The Polar Pioneer wasone contract that we did get a follow-on contract commitment starting in 2010.And yes, there is lot of demand in Northern Norway.We see that part of the market with customers willing to sign up term contractsstarting in 2010.

Roger Read - NatixisBleichroeder

Okay. And then my only other question for Greg, youmentioned in the operating cost expectations for '08 a little higher than whatyou had previously expected. Have you had any successes anywhere in terms ofmitigating cost increases or is this -- I mean, it's what the industry isfacing and then, you know, you can't fight the tide, so to speak?

Bob Long

Well, we are actually starting to see some successes on avariety of supply chain initiatives that we have going. But those will really bemultiyear efforts before that starts to have an impact. But frankly, the areas-- our normal operating cost are not the areas that we continue to have issueswith.

It continues to be maintenance shipyards, not our new builtshipyards. Those are all in very good shape. But our shipyards for our olderrigs, the shipyard's capacity is heavily constrained, and we continue to havesurprises on a couple of our shipyards.

Although, I would say, probably 70% of our shipyards gowell. But the few that don't go well, like the MG Hulme this quarter, tend tohave a big impact on our costs. So we are -- and may I let Steven comment on avariety of efforts we have ongoing on shipyards.

Steven Newman

Yeah, I would just echo what Greg said about our new buildconstruction projects. The shipyards, we are working with there, both Daewooand Samsung. New build construction is their core business and so they are veryfocused on it, very process oriented. And on the Clear Leader project inDaewoo, they are meeting their deadlines spot on. So we are very comfortablewith how things are progressing there.

On the routine recurring shipyard projects, the maintenanceshipyard projects that Greg alluded to, we're just going through our regularlyquarterly forecast and budgeting exercise.

And we've really taken a critical eye at those work scopesto try and eliminate as much of the work scope as possible and really identifythe critical items that absolutely have to be done and then focus on executinga very robust plan with a strong partner in the terms of the shipyard to beable to deliver those projects according to our plans.

So I think our regular planning exercise is extremelyrobust, and we'll continue to focus on executing against that plan.

Roger Read - NatixisBleichroeder

Okay. Has there been a -- I mean it sounds like, may be not,but has there been a recurring theme in the 30% sort of challenged R&Mshipyard type projects or is it, you know, different countries, different typesof rigs and you haven't really identified a single issue yet?

Bob Long

Well, if there is a recurring theme, Roger, I wouldcharacterize it as third-party performance, whether it's the shipyard who weare more relying on or the original equipment manufacturers we are relying onfor equipment turnaround. It's just, generally, a very constrained capacity,which is contributing to performance problems on the part of those thirdparties.

Roger Read - NatixisBleichroeder

Okay. Thank you.

Operator

And we'll take our next question from Geoff Kieburtz withCiti. Please, go ahead.

Geoff Kieburtz -Citigroup

Good morning.

Gregory Panagos

Good morning.

Bob Long

Good morning.

Greg Cauthen

Good morning, Geoff.

Geoff Kieburtz -Citigroup

I wondered if you could put the Pathfinder and the PolarPioneer contracts in a little bit more context. You know, with the Pathfinder,we just have a four-month contract. How should we think about that? Is $600,000the new day rate or are there some special circumstances around that situation?

Bob Long

Jeff, I think you need to be careful putting the $600,000 inthe context of a new threshold for the fleet in general. I think this is anexample of what we've been saying for some time that if you have availability,particularly you have an ultra-deepwater rig near-term, then, you can get somevery high day rates.

Now, I'd be careful to not extend that necessarily to othercontracts and roll over to say it might happen in 2010. I do think there is apossibility you'll see some other day rates in that ballpark, based on theunique availability circumstances of some of the rigs. But I'd be careful atthis point to translate that into a general move in the rates.

I think the Polar Pioneer is an example of the tremendousdemand that we're seeing in offshore Norway for high specification rigs.The Pioneer obviously is not a deepwater rig. There is a tremendous amount ofactivity that I think we're going to see in the future there.

Again, that's a fairly limited market in terms of the numberof rigs that are capable of drilling in that environment. So you need to becareful about extrapolating that on a broad basis.

Geoff Kieburtz - Citigroup

How many rigs would you say are in the fleet today that havethose characteristics and how many are being built?

Bob Long

David, can you answer that?

David Mullen

I can't answer that precisely. But in the fleet today, thereis a very limited number. The Polar Pioneer is rather special. It hascapability to work in the Barents Sea, and it's working in Barents Sea very successfully, especially from an environmental point ofview.

There obviously are quite a few rigs under construction thatcan operate in that; namely, the harsh environment semis. Has it been a roughguess, I'd say you're talking about five rigs or six rigs. The demand is suchthat that will be more than absorbed, I mean if you look at what's happening onthe Russian side of the Arctic, look at what's happening in the Norwegian sideof the Arctic. But there will be some additional capacity coming into that space.

Geoff Kieburtz - Citigroup

Okay. And on the jackup side, we've heard from at least onesource and expectation that there will be a new jackup ordered for every jackupdelivered as we go over the next 18 months or so. I'd be interested in yourthoughts on that subject, but my question is really, if that were to occur, doyou think that the market would be there to absorb that many jackups?

Bob Long

Do you want to take a stab at that, David?

David Mullen

I think as I mentioned in the comments, we are pleasantlysurprised. We had a very good quarter on jackup fixtures. And if I look outtowards what we're currently discussing with our customer base, I have everyreason to believe we'll have another excellent quarter next quarter.

With respect to capacity additions, we are concerned of theamount of new bills. And I think the jackup market is such that you don't havea whole lot of visibility as you go out there. I mentioned in my comments thatwe have good visibility to the end of '08, but beyond that we don't really havevery clear visibility.

We see there are certain areas where there is strong growth.Middle-East is a very strong growth environment. Some people will tell you thatSaudi Aramco are looking for anything up to 20 more additional units over thenext two years or three years. Other reports will come in and say that's morelikely 10. But 10 to 20 is still a huge number India have a huge demand. ONGC hasa big demand with their redevelopment of the Mumbai High. I don't know what thetotal number is there. We're also seeing a number of independents going into India.The rest of it is more a slow growth pattern.

And the big question mark is the US Gulf of Mexico. But Ithink there is probably a mile positive in the US Gulf of Mexico. It's reacheda low point where I think there is about 18 jackups, which you would say areinternationally marketable jackups remaining in the US Gulf of Mexico, which isa low point, and the recent lease sale was positive in the US Gulf of Mexico.There were a number of pretty high lease activities in the jackups space,higher than what we've seen in the past.

So on the demand side, we're encouraged and we're concernedon the supply side. How the two balance remains to be seen. And really, if wecontinue to add supply, I would get concerned.

Geoff Kieburtz - Citigroup

There was a little disappointment on the contracts yousigned for jackups in India.Is there any comment you can offer on that?

David Mullen

Well, the two contracts are term commitments of three years,which is quite unusual in the jackup space, and to also consider, these arerelatively low spec jackups. They've got two mud pumps. They are part of olderset of jackups. So in balance, we think that's a good rate for those jackups.And as you can see on some of our higher spec jackups, we have gotsubstantially a better rate. In the range, I think we're at a very healthyrange.

Geoff Kieburtz - Citigroup

Great, thank you.

Operator

And we'll take our next question from Dan Pickering withTudor Pickering. Please, go ahead.

Dan Pickering - TudorPickering

Good morning, guys.

Bob Long

Hello, Dan

Dan Pickering - TudorPickering

Bob, maybe you could walk through for us how many of yourhigher end rigs do have 2009 spot availability? And then, does the Pathfindercontract indicate that essentially now you are sort of moving to a spot marketmodel there that you want to keep those rigs on spot and won't worry about 2010for the longer term contract?

Bob Long

Dan, I think that, if I'm not mistaken, we don't have anyother high spec rigs available in 2009. We have a Nautilus which comesavailable very late '08 that might slip into '09. Nautilus is not a DP rig.It's got 7,000 or 8,000 foot mode capability. But that's the only rig that wewould have time available on right now before 2010.

We are in discussions with a number of operators for thatrig. But in terms of whether or not we'd stay spot or go wrong, based on theinterest we see in the market, I think we're still in the mode where we've beenfor a long time. We're not trying to trade rate up against terms. We're lookingfor good rates and good terms, and I think we can get both.

Dan Pickering - TudorPickering

Okay. Thank you. And then just as we look at theGlobalSantaFe transaction, you mentioned two items, the shareholder vote andthen they came in court. Could you walk us through the status in any of theother foreign jurisdictions? I know the UK was looking at the deal. Is thata condition to close and what's the status there?

Bob Long

I think as far as the merger goes, we need to limit ourcomments to just referring you to the proxy and the other information that'sout in public for the time being.

Dan Pickering - TudorPickering

That's no fun. Then one other question if I might, as we lookout there, we saw Diamond basically take an approach which looks like sort of aconsistent special dividend, if you will, in terms of returning cash toshareholders. You've talked about your focus being finding rigs and thenpotentially debt. Has there anything changed post, I think, Pacifictransaction?

Bob Long

No, I don't think anything has changed. Obviously, with themerger and the debt that will be incurred as part of that, our focus in termsof cash is going to be on paying down that debt for the next couple of years.

That being said, we think we still have a tremendous amountof financial flexibility. And if there were opportunities to acquire additionalrigs, particularly rigs that are already under construction, and if we could dothat at a regional cost, we would certainly be interested. And we think we'vegot plenty of financial capacity to do it.

Dan Pickering - TudorPickering

Thanks. Thank you.

Operator

And we'll take our next question from Thomas Curran withWachovia. Please, go ahead.

Thomas Curran -Wachovia

Good morning, guys.

Bob Long

Good morning.

Thomas Curran -Wachovia

I was hoping to explore the shipyard issue in a little bitmore detail. I was curious, you know, Diamond mentioned that they've beenstruggling with rising in efficiencies and go from the next Clear shipyards inparticular. Could you speak to what you're seeing in the various shipyards youuse around the world on a regional basis?

Bob Long

I think Steven has referred to this already. In terms of theshipyards for, what I will call, no more maintenance, special surveys and thestandard start that we go through all the time, it's extremely difficultbecause of the amount of work the shipyards have committed themselves to thenew builds.

It's extremely difficult to find capacity when you have ashipyard that you have to go into and you have on certain timing, whichfrequently we have, because you can't a rig optimization in the mode of thecontract, you have to wait till the end of a well. And those can get extendedfor a long time. That causes additional problems in terms of buying the space.

You might find some capacity available to negotiate a dealand then not be able to deliver the rig in the window that you promised it. Atleast, you are scrambling for shipyard space on relatively short terms, whichdoesn't put you in the best negotiating position.

And when you get in the shipyard, take a leave and see yardthat has some major projects of new builds, that's the primary focus of theshipyard. And you can frequently find yourself coming up with less peoplededicated to your project than was originally scoped out. Those types of issuesare difficult to deal with, and we are seeing them in shipyards virtually allaround the world.

Thomas Curran -Wachovia

And so it sounds like, Bob, that you are not necessarilyseeing any meaningful differences between certain regions that might lead youto ship somewhere or mobilize rigs solely to get some shipyard work done,because you don't want ongoing exposure to the yards in certain places.

Bob Long

It's not a lot of that. We are seeing some shipyards thatare coming to as new capacity being introduced. Whether or not it makes sense,you know, mobilizing a rig at very long distance can add as much of more timeas the inefficiencies in the shipyard that you are closer to. So we look atthat.

I don't want to give you any impression that there is awhole shopping list out there and a lot of choices. But we do look at theavailable alternatives and have to make those payoffs in terms of thedistances.

Thomas Curran -Wachovia

Yes. And on that topic, I was just thinking of somethingthat's fairly proximal like sending the rig from the North Sea to Las Palmas or somethinglike that. And then on the vendor side, you know, on average, how manydifferent vendors you're dealing with for standard regulatory inspection orrepair and maintenance stay?

Bob Long

David, you want to take a shot?

David Mullen

You can really be dealing with a number of vendors, if yougot to send electrical motors off the rig to be cleaned and rewound and you gotto find an electrical shop to do that. If you are dealing with POP equipment orwell control equipment, you got to deal with the vendor that does that.

If you are dealing with simple fabrication work, you've gotto find a vendor that's capable of doing that. If you've got electronicequipment you need some help with, the list of vendors can be quite longdepending on how much equipment you got to ship off and what type of equipmentyou've got to ship off.

Thomas Curran -Wachovia

So it doesn't sound like you are having issues with, say,one very big one in particular?

David Mullen

No. It really spans the space we are dealing in.

Thomas Curran -Wachovia

Okay. That's helpful. And then my last question, returningto the jackup outlook. You know, we saw over a month at downtime on the ShelfExplorer in Malaysiabefore its most recent contract was announced.

Could you provide some color on what happened there, andthen looking out, whether or not there is the risk of the similar incurrence ofdowntime arising for further jackups that are going to be rolling over soon?

Bob Long

With respect to the Shelf, it was the follow-on work whichleft a small gap and it was an opportunity to get caught up in somemaintenance, so it actually stand out pretty well.

As I said for the first half of '08, we see that with theongoing dialogue we've got with our customers, we can see that we're going tofill our gaps pretty smoothly and we'll see them rollover from one contract toanother contract. Beyond that, we don't really have a clear visibility.

Thomas Curran -Wachovia

Okay. That's helpful. I appreciate it, guys, I'll turn itback.

Operator

And we'll take our next question come from Angie Sedita withLehman Brothers. Please, go ahead.

Angie Sedita - LehmanBrothers

Thanks. Hi, guys

Bob Long

Hi, Angie?

Angie Sedita - LehmanBrothers

Hi. On the mid-water market, Bob, you stated on prioroccasions that you thought that there potentially will be some upsides there inrates, and that was the one segment that there was still some potentialmovement. You have the Shaw and the Sedco 700 rolling over early 2008, both atgood rates there. But is there some potential for those rates rolling higher, doyou think we could still see some leading-edge rates that are a bit higher thanwhere we are today or are we starting to hit a wall?

Bob Long

David, I'll give that one to you too.

David Mullen

Okay. If you go long, I think you will see the rates will bepretty much where we are today. If we go short, we will see some potentialupside on the rates. The demand in the North Seais still very, very strong. The current high commodity price is driving a hugeamount of demand in the North Sea. And we arecontinuing to see growth areas in the mid-water sector. Libya and Italyand Mediterranean are prime growth areas. Sothe mid-water sector remains very, very strong.

Angie Sedita - LehmanBrothers

Okay. And then, I would assume it would be similar scenarioon the demand you have for the 2010 for the two high spec deepwater rigs giventhe timeline and I would assume term that it would be a leading-edge rateversus being able to push rates whatsoever.

Bob Long

Well, since we're in negotiations and discussions, Angie, Ithink it's better if we don't comment too much on that.

Angie Sedita - LehmanBrothers

Okay. Finally, you spoke about uses of cash in buyingpotentially existing rigs. Are you still looking at or are there any jointventure opportunities or would you even consider that at this point, and do youhave a slot or an option for another new building, is that still aconsideration?

Bob Long

Well, we would consider joint ventures although they're notour favorite mechanism. I think our Pacific Drilling joint venture is a uniquesituation with a very good partner there. I think that opportunities to dojoint ventures on terms that we would find attractive are very limited andcategorize that as unlikely.

Well, there is a lot of interest in new build still outthere among customers. We are trying hard to interest the customers in lookingat the existing capacity since any new build you order today probably couldn'tbe on location before the end of 2010 or even into 2011. And there will becapacity available by then.

Having said that, if the customer insists, and obviously wewill talk with them, we don't have a firm slot or option available right now.But we think that we could get a new build delivered in late 2010 or early2011.

Angie Sedita - LehmanBrothers

Okay, great. That's all I have. Thanks, guys.

Operator

And we'll take our next question from Mike Drickamer withMorgan Keegan. Please, go ahead.

Mike Drickamer -Morgan Keegan

Hi. Good morning, guys.

Bob Long

Good morning.

Mike Drickamer -Morgan Keegan

Greg, I want to follow-up a little bit on your guidance. Isthe guidance for integrated services that you've previously given so good $160million or $190 million in '08?

Greg Cauthen

Yes.

Mike Drickamer -Morgan Keegan

How about some guidance for D&A in the fourth quarter?

Greg Cauthen

Flat with the third quarter is reasonable.

Mike Drickamer -Morgan Keegan

Okay, and then, Greg, one more for you. You guys haveseveral rigs that earn performance bonuses. Can you quantify what the impactwas in the third quarter from the performance bonuses?

Greg Cauthen

You know, I don't have that number off the top of my head.Well, we'll give that to Greg Penagos and he can get back to you later.

Mike Drickamer -Morgan Keegan

Okay, great, guys. That's all for me.

Operator

And we'll take our next question from David Smith with JPMorgan. Please, go ahead.

David Smith - JPMorgan

Hi. Good morning.

Bob Long

Good morning.

David Smith - JPMorgan

Saw somewhere that Quest have revised its five-year demandforecast for the subsea tree downward by about 12.5%. And I recognize how tightthe market is for the deepwater fleet. But I'm wondering at the margin you'reseeing any issues that are pushing back the deepwater development programs thatyou're tracking?

David Mullen

No. In fact, on the contrary, I'd say that the deepwaterdevelopment programs are seeing accelerated demand. I haven't seen that reportyou are referring to on the subsea trees, but I suspect that so far out in timethat it may not be that meaningful, because what I've seen is that up till2010, subsea tree demand was beyond the capacity to deliver.

David Smith - JPMorgan

Okay, I'll appreciate that color. Also wondering if youcould just discuss what you are seeing in terms of maybe out-year demand growthfrom the majors relative to the NOCs.

Bob Long

What we are seeing is that there is a shift in the out-yeardemand growth. We are seeing more and more of the out-year demand growth comingfrom the national oil companies, Petrobras, Statoil, Enex. Enex has takencommitment on four units. And our stance is that won't be enough over the longterm.

So I think you are going to see a certain shift in thebalance between national oil companies and international integrated majors inthe ultra-deepwater market and the harsh environment market.

David Smith - JPMorgan

And none of you're seeing maybe any other players that mightaccelerate demand growth, looking at the KNOC maybe, Petronas, for example?They maybe aren't as aggressive as they might be a few years out?

Bob Long

Yes, I mean you are seeing more and more new national oilcompanies coming into play. I don't know particularly about the two you justmentioned, but certainly the Chinese players are becoming a significant element.And when you look at all the emerging players in deepwater, a lot of basins inSoutheast Asia, you are seeing more and more active participation amongstnational oil companies in that space.

Mediterranean and Libya will open up deepwater atsome time in the future. And Brazilremains extremely active as they expand their traditional basin of activity,the Campos Basin to the basin to the North and thebasin to the South. So yes, I would agree with your comment.

David Mullen

And I think it is a little bit difficult to comment tooprecisely on a lot of the NOCs that don't have big established productionbasins, you know, like CNOOC and KNOC and Petronas. Well, Petronas is expandingoutside of Malaysiavery aggressively.

Clearly, when you talk to them, they've got aggressiveexploration plans, but it's tough to be as precise on the long term as you canwith people like PEMEX and Petrobras and Statoil and ONGC, all of whom clearly,have very, very big programs now and are ramping those programs in the future.

So it's clear to say that those established players aregoing to be much bigger and more active in the future. The others, it's alittle bit tougher to be precise on their activity if you go out a couple ofyears.

David Smith - JPMorgan

Yes, agreed. And I just mentioned them, because I have thesense that they are ramping up discussions on the really ramping up theiractivity and trying to secure more resources abroad for themselves, KNOC inparticular we saw recently.

But I am only asking, because I have the sense that the NOCactivity is less than the commoditized fluctuation, at least, that'shistorically how it's been in the jackup market and didn't know if that matcheswith your experience.

Bob Long

I think that we would probably conclude that the statementis correct. The national oil companies tend to be somewhat less price-sensitivethan the international oil companies, but I wouldn't suggest that they are notsomewhat price sensitive.

David Smith - JPMorgan

Yes. Well, thank you very much.

Operator

And we'll take our next question from [Ole Kjerkreit] withSEB Securities. Please, go ahead.

Ole Kjerkreit - SEBSecurities

Good morning, gentlemen. I've got a couple of questions. Iwould like to start with the mid-water market, maybe looking on especially the UKsector, but we have seen recently a pretty much sublet activity. And I justwonder how you see this sublet activity? Why we are actually seeing so muchsublet activity these days? And what you project for, let's say, the second andthird-generation rigs on UKsector going forward?

Bob Long

In the UKsector, there is always been a reasonable amount of sublet activity, especiallyfor those operators who take a relatively long position. And it comes and goes,and the recent sublet activity has essentially dried up right now. We've seenthat there have been a number of fixtures from operator-to-operator.

We did a regional survey of all the operators' activity inthe UKand we see that most of that demand has been absorbed. And I think you'realways going to see a reasonable amount of sublet activity, especially in the UK sector in North Sea.You don't see it in Norway.Demand in Norwayis on a much more long-term visibility basis and larger development projects. Alot of the demand in the UKis driven by relatively short-term programs and redevelopment more thandevelopment.

Ole Kjerkreit - SEBSecurities

And what about sublet activity outside North Sea?

Bob Long

We see little sublet activity outside the North Sea and alittle bit in Africa, but really not material.And we're not seeing any evidence of sublet activity at this stage.

Ole Kjerkreit - SEBSecurities

One question regarding consolidation, it has been someconsolidation among the smaller companies, if you look on the guys building newassets, but not on the really big acquisition yet. Last few months, we haveseen that the UScompanies have seen share prices depreciate a lot and the Norwegian hasactually struggled a little bit.

You mentioned in your presentation that you are maybeinterested to acquire new build companies with assets under construction. Isthis point getting closer and closer that we could expect the industry to bemore active or would you still like to see the asset being delivered to themarket before you dare to do something?

Bob Long

Well, I wouldn't say that I'd consider us any closure todaythan we were three months or six months ago. We're interested, but we've neverbeen able to make the economics work based on where the valuations for the newbuilds speculators are. And I think we're still in that mode.

Ole Kjerkreit - SEBSecurities

My last question relates to the jackup market, because Itotally agree with you the deepwater market looks tremendously sound androbust, and to some extent also the mid-water market. But looking on the jackupmarket, the recent rates for premium jackup rigs as we see it, we see thatrates has come a little bit down the last few months. We are also seeing thatthe contract lengths are coming down, and also new build are being delivered tothe market and the actual award are getting smaller and smaller.

And looking on all the assets to be delivered in the nextcouple of years, are you saying that you are still very comfortable for thedevelopment in 2008 and do you agree that rates is somewhat coming down? I amjust a little bit puzzled about you being so comfortable for 2008?

Bob Long

I think what we said was we're comfortable for the firsthalf of 2008. We aren't comfortable with the amount of new build capacity thatis under construction without contracts, but I have been uncomfortable with thejackup market for two years because of the amount of capacity coming in. And Ihave been consistently wrong because we've underestimated the growth in demand.

Right now we see, as David said, a lot of growth in demandstill out there over the next six months or so, and we think that that is goingto be enough to meet the supply additions over that six months period. Beyondthat, as David said, it's a little bit tough to see, particularly on the demandside, while you can clearly see there is a lot of new capacity coming in. Sothat has to be a little bit worrisome.

On the rates, some of the big rates that were signed onjackup market over the last year or so have been new builds, and we haven'tbeen in that market. So it's tough for us to comment on the high end of therange whether or not that has mitigated.

In the category of rigs that we have, and you have to becareful with jackups because there is such a range of capabilities, you know,ranging from the capabilities of our rigs in Egyptwhich are four-legged jackups which generally don't compete outside of Egypt.So those are older limited capability rigs in one market to some of the better300 foot jackups that we have.

But you look at our standard 300 foot jackups, those ratesas David said, we're looking at rates in the 170-180 range, which I'd say isfairly consistent with what we've been seeing for the last six months or so. Sobased on our fleet, it is tough to say that we're seeing any significantpullback in rates.

We have been saying for a long time now we've not been ableto push rates any higher, and I think that that continues to be true. Whetheror not with all our new builds coming in over the next six months we start tosee some impact on the rates, it is tough to say.

Ole Kjerkreit - SEBSecurities

Thank you very much and good luck.

Bob Long

Thank you.

Operator

And we'll take our next question from Waqar Syed withTristone Capital. Please, go ahead.

Waqar Syed - TristoneCapital

Hi. Good morning. My question is on some of your contractsyou cannot see where you have some arrangement on foreign currency that the dayrate gets adjusted. Could you shed some light on how those contracts work? Andif the US dollar continues to depreciate, what impact does that have on the dayrates that you deployed?

Greg Cauthen

Well, it varies from contract to contract, customer tocustomer. In general, we structure our contract both in the UK and Norway, so that in aggregate we'rereceiving foreign currency that covers our foreign currency cost in thosemarkets. And so, we create a natural hedge.

And so, you'll see from time to time as the dollar changesagainst those currencies that we'll adjust the day rates we show in our fleetstatus report. Now, we are not going to get into all the details, exactly whatthose changes are. But when you see those day rate changes, they are justoffsetting cost changes. So economically, there is little impact on thebottomline.

Waqar Syed - TristoneCapital

Okay, great. And then, on your joint ventures with PacificDrilling, my understanding is that -- well, I want to understand how does the-- they have the option to sell the remaining 50% that they own until Octoberof, let's say, 2010. Has the price already been decided for that remaining 50%or is that going to be decided in later stage. How does that work?

Greg Cauthen

There is a formula that's a function of market price that'salready agreed. So it's not a step-price, but there is a process and a formulathat's already agreed.

Bob Long

It's a function of the value of the rigs due to time.

Waqar Syed - TristoneCapital

Okay. But could you give us any idea on, you know, what youthink that -- right now what you're thinking is the final price for those rigswould be?

Greg Cauthen

You mean the bill price?

Waqar Syed - TristoneCapital

No. The total cost to you for those rigs.

Bob Long

You mean if they exercise that put right.

Waqar Syed - TristoneCapital

That's correct, yes.

Bob Long

We're not prepared to talk about that right now.

Waqar Syed - TristoneCapital

Okay. Thank you very much. That's all I have.

Operator

And we'll take our next question form Ben Dell with SanfordBernstein. Please, go ahead.

Ben Dell - Sanford Bernstein

Hi, guys. I just had sort of a hypothetical question. If in 2008, after the GlobalSantaFemerger is complete, if you saw thejackup day rates going down and deepwater rates staying where they are oraccelerating up, would that make the proposition of an IPO of the jackupbusiness appealing?

Bob Long

I am not sure how to answer a hypothetical question likethat. So I think we'll just stay away from it.

Ben Dell - Sanford Bernstein

Okay. That's all right. Thank you.

Operator

And we'll take our next question from Robin Shoemaker withBear Stearns. Please, go ahead.

Robin Shoemaker -Bear Stearns

Yes. Good morning, Bob.

Bob Long

Good morning.

Robin Shoemaker -Bear Stearns

I wanted to ask you just one question relating to Greg'scost escalation guidance for '08. You know, we continue to hear anecdotes aboutthe lowering the way of key rig personnel from Transocean by the Norwegiancontractors. And you are obviously in a much better position to asses howserious an issue that is?

But when I look at the 11% to 13% cost escalation guidance,I wonder if there -- is that sufficient to fend off the poachers, so to speak,and to retain the key people that Transocean needs for its own rigs and for thenew builds that are coming out in '09 and '10?

Bob Long

Robin, we are doing a lot. I just have to say that Greg'sestimate is right now is our best guess and that we hope that that is enough toretain the talent that we need. We are doing a tremendous number of things andputting a lot of cost into hiring and training our people and developing ourpeople.

We have got a lot of opportunities for our people with allof the new builds and upgrades that we have in the fleet, and we've got asignificant number of programs going on right now. So the compensation part isonly one aspect. And we think with all of the efforts that we are undertakinghere that we offer some pretty attractive opportunities for our people. And wehave seen some of our people that have gone to the competition come back to us.

So we are going to loose some people, because we have verygood people and we've got more of the people experienced in deepwater. So weare a natural target. But we are doing everything we can to make sure that weretain our good people, and I think that we are going successful.

Robin Shoemaker -Bear Stearns

Okay. That's all I have got, Bob. Thanks.

Bob Long

I think that we have time for just one more question here.

Operator

And we will take our final question from Ian Macpherson fromSimmons & Company. Please, go ahead.

Ian Macpherson -Simmons & Company

Good morning. David, could you maybe compare your new builddrillships with what GlobalSantaFe is doing. They've sort of described theirsas a notch above typical sixth-generation, if you will, drillships. Are wegoing to see different types of rates for different types of new generationrigs or do you see them as being fairly comparable?

Bob Long

This is Bob Long. We haven't been able to discuss anythingwith GlobalSantaFe in terms of the market. So I am not sure that we are in aposition to make much of a comparison of the capabilities between the rigs.

My sense would be without knowing the capabilities of theirrigs that there is not going to be much of a difference in the rate structurefor all of the existing new build capacities coming out with sixth-generationrigs, if you will, unless there is some specific requirements that the customerwants you to build into the rig. And then that becomes something that you getadditional compensation for. But we are just not in a position to make anyspecific comparisons, since we don't really know much about their rig.

Ian Macpherson -Simmons & Company

Okay and then just a quick follow-up for Greg. Did youquantify or could you, the component of the incremental cost also in your '08cost items that is offset by revenues?

Greg Cauthen

It's probably about a third of the increase. And you look atthe midpoint there is a one percentage point increase. And about a third ofthat is offset by revenue, another third is actually related to additionalinvestment and people development that we decided to make proactively duringour budget profits and the other third is to adjust our shipyard inflationassumptions.

Ian Macpherson -Simmons & Company

Very helpful. Thank you very much.

Gregory Panagos

Okay. Thank you everybody. We appreciate you joining us onthe call and we'll look forward to doing it again next quarter.

Operator

Thank you. That concludes today's conference. We appreciateyour participation. You may now disconnect.

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Source: Transocean Q3 2007 Earnings Call Transcript

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