Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

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 - Sanford Bernstein

Robin Shoemaker - Bear Stearns

Ian Macpherson - Simmons & Company

Transocean, Inc. (RIG) Q3 2007 Earnings Call October 31, 2007 10:00 AM ET

Operator

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

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

Gregory Panagos

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

A copy of the third quarter press release covering our financial results, along with supporting statements and schedules is posted on the company's website at www.deepwater.com. We have also posted a file containing four charts that will be discussed during this morning's call. That file 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 Executive Officer; Jean Cahuzac, President; Steven Newman, Executive Vice President and Chief Operating Officer; Greg Cauthen, Senior Vice President and Chief Financial Officer; David Mullen, Senior Vice President of Marketing and Planning; and David Tonnel, Vice President and Controller.

Before I turn the call over to Bob Long, I would like to point out that during the course of this conference call, participants may make certain forward looking statements regarding various matters related to our business and company that are not historical facts, including future financial performance, operating results and the prospects for the contract drilling business.

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

Also note that we will use various numerical measures in the call today which are, or may be, considered non-GAAP financial measures under Regulation G. 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. And for your convenience, non-GAAP financial measures and reconciliation tables are included with today's press release.

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

Bob Long

Thanks, Greg. Good morning, everyone, and thanks for joining us on the call. I'll start by giving a brief overview of the quarter and my sense of the current state of the market, and then Greg Cauthen will go into some detail on the numbers before David Mullen expands on some of the developments 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 of some maintenance projects. We got clearance from the Department of Justice on our 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 the first of the two deepwater Pacific rigs, and have exercised our option to purchase a 50% interest in the joint venture that will own those rigs once they're constructed.

We obtained a 4-year contract on the Polar Pioneer commencing in late 2010. I think that's the first commitment for a contract for an existing rig coming up in that timeframe. And finally, our backlog increased from $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 some things to do before we can close the merger with GlobalSantaFe. Our shareholder meetings 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 Florida market. While I would prefer not to see so many new builds ordered, the demand for deepwater new builds continues to surprise me on the upside. We have a lot of interest in the second deepwater Pacific new build and are very optimistic that we'll get a contract before yearend.

I'm also happy to see the developing interest in contracting existing deepwater rigs with availability out in 2010. I mentioned the Polar Pioneer contract already, and we have multiple customers interested in two of our ultra-deepwater rigs with availability in 2010. I do not expect this demand to manifest itself until next year, so the developing interest now is a nice positive sign.

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

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 $973 million, or $3.24 per diluted share, which includes $276 million of income recognized in the quarter from the TODCO tax sharing agreement; a $52 million reduction 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, which included $11 million of similar items.

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

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

Third quarter revenue efficiency of 96% remained in line with 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 to the remainder of 2007 and 2008, we expect revenue to continue to increase due to the commencement of higher day rate contracts, as shown on chart 1. We expect to experience approximately 89 out-of-service rig months in total for the year 2007, and approximately 68 out-of-service rig months in 2008, as shown on chart 2.

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

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

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

The actual amount of cost we incurred in the fourth quarter of this year will continue to be affected by the duration in the amount of shipyard and mobilization activities we performed and the timing of various maintenance projects we undertake.

Looking forward to 2008, we anticipate that our full year costs 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 in shipyard costs, additional investments in our people and the full year impact of the weaker US dollar, with the latter expected to be largely offset by revenue increases.

I would continue to caution you however that these projections 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 the performance of foreign currencies against the US dollar.

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

Capital expenditures in the third quarter of 2007 were $305 million 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, fleet spares and normal operations.

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

We expect capital expenditures for the full year 2007 to increase from $876 million in 2006 to roughly $1.5 billion, of which approximately $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 be approximately $1.7 billion, including approximately $310 million for the two deepwater Pacific rigs.

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

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

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

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

In addition, other net includes $2 million related to licensing income from our dual activity patent. We expect to receive and recognize roughly $2 million of other income during the fourth quarter 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 our annual effective tax rate to be 14.6% for the fourth quarter, which excludes the impact of any gains we may realize from the asset dispositions and other discreet tax items.

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

David Mullen

Thanks, Greg, and good morning to everybody.

We had an outstanding period in contract fixtures since the last earnings call, highlighted by the exercise our option to purchase a 50% interest in a joint venture with Pacific Drilling on the back of a firm commitment for one of the two ultra-deepwater drillships that are currently under construction. We paid approximately $238 million for our joint venture interest, which represents half of the documented 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 Reliance Industries 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 rate of $513,000 a day. The drilling contract is expected to commence in the third quarter of 2009, following shipyard construction, sea trials, mobilization to location and customer acceptance.

The second joint venture new build unit, Deepwater Pacific 2, is expected to be completed in the fourth quarter of 2009. We are currently in active discussions with several customers regarding the award of a long-term contract for that rig. As shown on chart 4, our total current contract backlog, including the Reliance contract for Deepwater Pacific 1, has increased by approximately $1.5 billion since the last earnings call to $22.9 billion as of today.

Turning to our existing fleet, I will start with the discussion of our high specification fleet, which includes our deepwater and harsh environment rigs. The Deepwater Pathfinder was awarded a three well contract, with an estimated duration of 120 to 160 days, at a rate of $600,000 per 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 in 2010.

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

We also continue to see strong demand in the other floater market sector. In the UK sector of the North Sea there is a lot of interest in the rigs with time available in 2008. Additionally, we had a three-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 number of fixtures which translate into approximately $400 million of the $1.5 billion in backlog growth that I referenced earlier. We continue to see growing demand for jackups particularly in the Middle East and India. While we remain cautious on supply additions in 2008, 2009, we anticipate that additional supply will be absorbed by incremental demand through the first half of 2008. Beyond that, we just don't have the visibility of the demand side.

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

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

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

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

Bob Long

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

Question-and-Answer Session

Operator

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

Roger Read - Natixis Bleichroeder

Yeah. Good morning, gentlemen.

Bob Long

Good morning.

Roger Read - Natixis Bleichroeder

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

Bob Long

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

Roger Read - Natixis Bleichroeder

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

Bob Long

Yes, all are chipping for that one. The Polar Pioneer was one 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 contracts starting in 2010.

Roger Read - Natixis Bleichroeder

Okay. And then my only other question for Greg, you mentioned in the operating cost expectations for '08 a little higher than what you had previously expected. Have you had any successes anywhere in terms of mitigating cost increases or is this -- I mean, it's what the industry is facing 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 a variety of supply chain initiatives that we have going. But those will really be multiyear 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 issues with.

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

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

Steven Newman

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

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

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

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

Roger Read - Natixis Bleichroeder

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&M shipyard type projects or is it, you know, different countries, different types of rigs and you haven't really identified a single issue yet?

Bob Long

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

Roger Read - Natixis Bleichroeder

Okay. Thank you.

Operator

And we'll take our next question from Geoff Kieburtz with Citi. 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 Polar Pioneer 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 $600,000 the 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 in the context of a new threshold for the fleet in general. I think this is an example 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 some very high day rates.

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

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

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

Geoff Kieburtz - Citigroup

How many rigs would you say are in the fleet today that have those 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, there is a very limited number. The Polar Pioneer is rather special. It has capability to work in the Barents Sea, and it's working in Barents Sea very successfully, especially from an environmental point of view.

There obviously are quite a few rigs under construction that can operate in that; namely, the harsh environment semis. Has it been a rough guess, I'd say you're talking about five rigs or six rigs. The demand is such that that will be more than absorbed, I mean if you look at what's happening on the Russian side of the Arctic, look at what's happening in the Norwegian side of 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 one source and expectation that there will be a new jackup ordered for every jackup delivered as we go over the next 18 months or so. I'd be interested in your thoughts on that subject, but my question is really, if that were to occur, do you 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 pleasantly surprised. We had a very good quarter on jackup fixtures. And if I look out towards what we're currently discussing with our customer base, I have every reason to believe we'll have another excellent quarter next quarter.

With respect to capacity additions, we are concerned of the amount of new bills. And I think the jackup market is such that you don't have a whole lot of visibility as you go out there. I mentioned in my comments that we have good visibility to the end of '08, but beyond that we don't really have very 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 that Saudi Aramco are looking for anything up to 20 more additional units over the next two years or three years. Other reports will come in and say that's more likely 10. But 10 to 20 is still a huge number India have a huge demand. ONGC has a big demand with their redevelopment of the Mumbai High. I don't know what the total 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 I think there is probably a mile positive in the US Gulf of Mexico. It's reached a low point where I think there is about 18 jackups, which you would say are internationally marketable jackups remaining in the US Gulf of Mexico, which is a 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 concerned on the supply side. How the two balance remains to be seen. And really, if we continue to add supply, I would get concerned.

Geoff Kieburtz - Citigroup

There was a little disappointment on the contracts you signed 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 are relatively low spec jackups. They've got two mud pumps. They are part of older set 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 got substantially a better rate. In the range, I think we're at a very healthy range.

Geoff Kieburtz - Citigroup

Great, thank you.

Operator

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

Dan Pickering - Tudor Pickering

Good morning, guys.

Bob Long

Hello, Dan

Dan Pickering - Tudor Pickering

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

Bob Long

Dan, I think that, if I'm not mistaken, we don't have any other high spec rigs available in 2009. We have a Nautilus which comes available 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 we would have time available on right now before 2010.

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

Dan Pickering - Tudor Pickering

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

Bob Long

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

Dan Pickering - Tudor Pickering

That's no fun. Then one other question if I might, as we look out there, we saw Diamond basically take an approach which looks like sort of a consistent special dividend, if you will, in terms of returning cash to shareholders. You've talked about your focus being finding rigs and then potentially debt. Has there anything changed post, I think, Pacific transaction?

Bob Long

No, I don't think anything has changed. Obviously, with the merger and the debt that will be incurred as part of that, our focus in terms of 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 amount of financial flexibility. And if there were opportunities to acquire additional rigs, particularly rigs that are already under construction, and if we could do that at a regional cost, we would certainly be interested. And we think we've got plenty of financial capacity to do it.

Dan Pickering - Tudor Pickering

Thanks. Thank you.

Operator

And we'll take our next question from Thomas Curran with Wachovia. 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 bit more detail. I was curious, you know, Diamond mentioned that they've been struggling with rising in efficiencies and go from the next Clear shipyards in particular. Could you speak to what you're seeing in the various shipyards you use around the world on a regional basis?

Bob Long

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

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

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

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

Thomas Curran - Wachovia

And so it sounds like, Bob, that you are not necessarily seeing any meaningful differences between certain regions that might lead you to 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 that are 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 time as the inefficiencies in the shipyard that you are closer to. So we look at that.

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

Thomas Curran - Wachovia

Yes. And on that topic, I was just thinking of something that's fairly proximal like sending the rig from the North Sea to Las Palmas or something like that. And then on the vendor side, you know, on average, how many different vendors you're dealing with for standard regulatory inspection or repair 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 you got to send electrical motors off the rig to be cleaned and rewound and you got to find an electrical shop to do that. If you are dealing with POP equipment or well control equipment, you got to deal with the vendor that does that.

If you are dealing with simple fabrication work, you've got to find a vendor that's capable of doing that. If you've got electronic equipment you need some help with, the list of vendors can be quite long depending on how much equipment you got to ship off and what type of equipment you'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, returning to the jackup outlook. You know, we saw over a month at downtime on the Shelf Explorer in Malaysia before its most recent contract was announced.

Could you provide some color on what happened there, and then looking out, whether or not there is the risk of the similar incurrence of downtime 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 which left a small gap and it was an opportunity to get caught up in some maintenance, so it actually stand out pretty well.

As I said for the first half of '08, we see that with the ongoing dialogue we've got with our customers, we can see that we're going to fill our gaps pretty smoothly and we'll see them rollover from one contract to another 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 it back.

Operator

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

Angie Sedita - Lehman Brothers

Thanks. Hi, guys

Bob Long

Hi, Angie?

Angie Sedita - Lehman Brothers

Hi. On the mid-water market, Bob, you stated on prior occasions that you thought that there potentially will be some upsides there in rates, and that was the one segment that there was still some potential movement. You have the Shaw and the Sedco 700 rolling over early 2008, both at good rates there. But is there some potential for those rates rolling higher, do you think we could still see some leading-edge rates that are a bit higher than where 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 be pretty much where we are today. If we go short, we will see some potential upside on the rates. The demand in the North Sea is still very, very strong. The current high commodity price is driving a huge amount of demand in the North Sea. And we are continuing to see growth areas in the mid-water sector. Libya and Italy and Mediterranean are prime growth areas. So the mid-water sector remains very, very strong.

Angie Sedita - Lehman Brothers

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

Bob Long

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

Angie Sedita - Lehman Brothers

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

Bob Long

Well, we would consider joint ventures although they're not our favorite mechanism. I think our Pacific Drilling joint venture is a unique situation with a very good partner there. I think that opportunities to do joint ventures on terms that we would find attractive are very limited and categorize that as unlikely.

Well, there is a lot of interest in new build still out there among customers. We are trying hard to interest the customers in looking at the existing capacity since any new build you order today probably couldn't be on location before the end of 2010 or even into 2011. And there will be capacity available by then.

Having said that, if the customer insists, and obviously we will 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 early 2011.

Angie Sedita - Lehman Brothers

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

Operator

And we'll take our next question from Mike Drickamer with Morgan 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. Is the guidance for integrated services that you've previously given so good $160 million 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 have several rigs that earn performance bonuses. Can you quantify what the impact was 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 JP Morgan. Please, go ahead.

David Smith - JP Morgan

Hi. Good morning.

Bob Long

Good morning.

David Smith - JP Morgan

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

David Mullen

No. In fact, on the contrary, I'd say that the deepwater development programs are seeing accelerated demand. I haven't seen that report you are referring to on the subsea trees, but I suspect that so far out in time that it may not be that meaningful, because what I've seen is that up till 2010, subsea tree demand was beyond the capacity to deliver.

David Smith - JP Morgan

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

Bob Long

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

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

David Smith - JP Morgan

And none of you're seeing maybe any other players that might accelerate 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 oil companies coming into play. I don't know particularly about the two you just mentioned, 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 in Southeast Asia, you are seeing more and more active participation amongst national oil companies in that space.

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

David Mullen

And I think it is a little bit difficult to comment too precisely on a lot of the NOCs that don't have big established production basins, you know, like CNOOC and KNOC and Petronas. Well, Petronas is expanding outside of Malaysia very aggressively.

Clearly, when you talk to them, they've got aggressive exploration plans, but it's tough to be as precise on the long term as you can with 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 are going to be much bigger and more active in the future. The others, it's a little bit tougher to be precise on their activity if you go out a couple of years.

David Smith - JP Morgan

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

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

Bob Long

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

David Smith - JP Morgan

Yes. Well, thank you very much.

Operator

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

Ole Kjerkreit - SEB Securities

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

Bob Long

In the UK sector, there is always been a reasonable amount of sublet activity, especially for 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 seen that there have been a number of fixtures from operator-to-operator.

We did a regional survey of all the operators' activity in the UK and we see that most of that demand has been absorbed. And I think you're always 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 Norway is on a much more long-term visibility basis and larger development projects. A lot of the demand in the UK is driven by relatively short-term programs and redevelopment more than development.

Ole Kjerkreit - SEB Securities

And what about sublet activity outside North Sea?

Bob Long

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

Ole Kjerkreit - SEB Securities

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

You mentioned in your presentation that you are maybe interested to acquire new build companies with assets under construction. Is this point getting closer and closer that we could expect the industry to be more active or would you still like to see the asset being delivered to the market before you dare to do something?

Bob Long

Well, I wouldn't say that I'd consider us any closure today than we were three months or six months ago. We're interested, but we've never been able to make the economics work based on where the valuations for the new builds speculators are. And I think we're still in that mode.

Ole Kjerkreit - SEB Securities

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

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

Bob Long

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

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

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

In the category of rigs that we have, and you have to be careful with jackups because there is such a range of capabilities, you know, ranging from the capabilities of our rigs in Egypt which 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 better 300 foot jackups that we have.

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

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

Ole Kjerkreit - SEB Securities

Thank you very much and good luck.

Bob Long

Thank you.

Operator

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

Waqar Syed - Tristone Capital

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

Greg Cauthen

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

And so, you'll see from time to time as the dollar changes against those currencies that we'll adjust the day rates we show in our fleet status report. Now, we are not going to get into all the details, exactly what those changes are. But when you see those day rate changes, they are just offsetting cost changes. So economically, there is little impact on the bottomline.

Waqar Syed - Tristone Capital

Okay, great. And then, on your joint ventures with Pacific Drilling, 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 October of, 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's already agreed. So it's not a step-price, but there is a process and a formula that's already agreed.

Bob Long

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

Waqar Syed - Tristone Capital

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

Greg Cauthen

You mean the bill price?

Waqar Syed - Tristone Capital

No. The total cost to you for those rigs.

Bob Long

You mean if they exercise that put right.

Waqar Syed - Tristone Capital

That's correct, yes.

Bob Long

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

Waqar Syed - Tristone Capital

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

Operator

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

Ben Dell - Sanford Bernstein

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

Bob Long

I am not sure how to answer a hypothetical question like that. 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 with Bear 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's cost escalation guidance for '08. You know, we continue to hear anecdotes about the lowering the way of key rig personnel from Transocean by the Norwegian contractors. And you are obviously in a much better position to asses how serious 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 the new builds that are coming out in '09 and '10?

Bob Long

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

We have got a lot of opportunities for our people with all of the new builds and upgrades that we have in the fleet, and we've got a significant number of programs going on right now. So the compensation part is only one aspect. And we think with all of the efforts that we are undertaking here that we offer some pretty attractive opportunities for our people. And we have 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 very good people and we've got more of the people experienced in deepwater. So we are a natural target. But we are doing everything we can to make sure that we retain 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 from Simmons & Company. Please, go ahead.

Ian Macpherson - Simmons & Company

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

Bob Long

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

My sense would be without knowing the capabilities of their rigs that there is not going to be much of a difference in the rate structure for all of the existing new build capacities coming out with sixth-generation rigs, if you will, unless there is some specific requirements that the customer wants you to build into the rig. And then that becomes something that you get additional compensation for. But we are just not in a position to make any specific 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 you quantify or could you, the component of the incremental cost also in your '08 cost items that is offset by revenues?

Greg Cauthen

It's probably about a third of the increase. And you look at the midpoint there is a one percentage point increase. And about a third of that is offset by revenue, another third is actually related to additional investment and people development that we decided to make proactively during our budget profits and the other third is to adjust our shipyard inflation assumptions.

Ian Macpherson - Simmons & Company

Very helpful. Thank you very much.

Gregory Panagos

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

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Transocean Q3 2007 Earnings Call Transcript
This Transcript
All Transcripts