Transocean Inc. Q1 2008 Earnings Call Transcript

May. 7.08 | About: Transocean Ltd. (RIG)

Transocean Inc. (NYSE:RIG)

Q1 2008 Earnings Call

May 7, 2008 10:00 am ET

Executives

Gregory Panagos - VP IR and Communications

Bob Long - CEO

Steven Newman - COO

Greg Cauthen - SVP and CFO

Terry Bonno - SVP, Marketing and Planning

Analysts

Kurt Hallead - RBC Capital Markets

Ian MacPherson - Simmons & Company

Judd Bailey - Jefferies & Company

Tom Curran - Wachovia

Roger Read - Natixis Bleichroeder

Douglas Clifford - Omega Advisors

Dan Pickering - Tudor Pickering & Holt

Waqar Syed - Tristone Capital

Harry Mateer with Lehman Brothers

Andreas Stubsrud - Kaupthing Research

Alan Laws - Merrill Lynch

Operator

Good day everyone, and welcome to the first quarter 2008 results conference call for Transocean Inc. Today's conference is being recorded. At this time for opening remarks and introductions, I would like to turn the conference over to Mr. Gregory Panagos, Vice President of Investor Relations and Communications.

Gregory Panagos

Thank you, Enola. Good morning and welcome to Transocean's first-quarter 2008 Earnings Call. A copy of the first quarter press release covering our financial results, along with supporting statements and schedules, is posted on the company's website at 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 on the company's website by selecting Investor Relations, followed by news and events and then webcasts and presentations. With me on this morning's call are Bob Long, our Chief Executive Officer; Steven Newman, our Chief Operating Officer; Greg Cauthen, Senior Vice President and Chief Financial Officer; Terry Bonno, Senior Vice President, Marketing & Planning; and Rob Saltiel, Executive Vice President, Assets.

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 certainties involved in these forward-looking statements include the level of crude oil and natural gas prices, rig demand, and operational and other risks, which are described in the company's most recent Form 10-K and other filings with the US Securities 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 on the call today that 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 at www.deepwater.com, under Investor Relations, Non-GAAP Financial Measures and Reconciliations. And for your convenience, non-GAAP financial measures and reconciliation tables are included with today's press release.

Our website also includes schedules detailing operating and maintenance costs, other revenue, deferred revenue, and revenue efficiency at Investor Relations Financial Reports. Finally under news and events and webcasts and presentations, we posted slides detailing average contracted day rate by rig type, out of service rig months operating and maintenance cost trends and contract backlog. That concludes the preliminary details. I will now turn the call over to Bob.

Bob Long

Thanks, Greg. Good morning, everyone, and thanks for joining us for our first-quarter call. As you saw from the press release, we had a good first quarter, with earnings coming in above what most analysts were projecting. Greg will take you through the numbers in some detail, and I am sure he is going to caution you that first-quarter operating costs were lower than we originally expected due to the postponements of some shipyards and some delayed maintenance. So we do expect operating costs to increase in the upcoming quarters, and our full-year costs are still expected to be within the guidance that we gave you in our last earnings call.

I want all of you to know how comfortable I am with our merger integration progress, and how our people are handling the many challenges and opportunities that we have today.

Our integration efforts are pretty much on target, including substantial progress on implementing new or modifying existing IT systems, all of which seem to be on time and within budget. And I think that's a huge testimony to our people and how they are working together to get things done across all functions of the company.

We have had some significant changes in the senior management of the company as result of the departure of Jean Cahuzac, our former Executive Vice President of Assets; David Mullen, Senior Vice President of Marketing & Planning; and most recently, Jon Marshall, our former President and Chief Operating Officer and the CEO of GlobalSantaFe before our merger.

Jean Cahuzac and David both left for excellent opportunities as CEOs of other companies, and Jon has decided to spend more time with his family. I think the fact that we had outstanding people ready to step into leadership roles created by those departures is an excellent indication of the depth of talent that we have and the quality of our training, development, and succession planning efforts.

Steven Newman, our recently appointed President and Chief Operating Officer is with us today and can answer any questions you might have on operations or on our construction programs. Terry Bonno, our new Vice President of Marketing, will expand upon our market views as soon as Greg finishes taking you through the numbers.

Before I do turn it over to Greg, I wanted to just comment briefly on my views of what is going on in the market. The deepwater market continues to be very good with near-term demand clearly in excess of supply, and new highs being established for day rates and long-term contracts. Since our last earnings call, we succeeded in contracting our second Pacific drilling rig and secured a long-term contract for another deepwater drillship with 12,000 foot water depth capability.

The new drillship that GlobalSantaFe had ordered prior to the merger is still under construction. It does not yet have a contract, but we do have interest from four or five different operators and continue to be very optimistic about the prospects for contracting that rig. We have also had discussions with several other operators for additional new builds, which may or may not come to fruition.

The midwater floater market continues to be excellent also. We've had a number of signings in the first quarter at very nice rates, with the market staying in the high $300,000 to high $400,000 range depending on the rig's capability and on the locations of the rigs. Lastly, the jackup market remains very strong. Demand continues to increase in many different areas of the world, effectively absorbing the new supply that has been entering the market. We still feel comfortable that the market is going to remain solid for the remainder of the year, but with something like 60 new rigs coming out of the shipyard between now and the end of 2009 it is difficult to say where the market will go beyond that. With that, I will turn it over to Greg to take you through the numbers in some detail.

Greg Cauthen

Thanks Bob, and good morning to everyone. In the first quarter of 2008 we had net income of $1.189 billion or $3.71 per diluted share. This compares to net income of $1.056 billion or $4.17 per diluted share in the fourth quarter of 2007. On November 27 2007, we closed our merger with GlobalSantaFe. Our results for the first quarter of 2008 include a full quarter of activity of GlobalSantaFe operations versus only one month of GlobalSantaFe operations in the fourth quarter of 2007.

Our first quarter 2008 earnings per share is based on a post merger diluted share count of 321 million shares, while our fourth quarter 2007 earnings per share was based on a weighted average diluted share count of 254 million shares, which includes the effect of restating the premerger share count for the reclassification. Our results for the first quarter of 2008 include after-tax charges of $30 million, or $0.09 per diluted share related to $27 million of discrete tax items; $1 million of merger-related costs; and a $2 million loss resulting from the retirement of debt.

Our results for the fourth quarter of 2007 included $194 million of income related to gains from asset sales, merger-related costs, and similar items. Contract drilling revenue for the first quarter improved to $2.640 billion from $1.860 billion in the fourth quarter. $663 million of the increase was due to a full quarter of revenues from GlobalSantaFe operations versus only one month in the fourth quarter.

The remainder of the increase was composed of $118 million from the commencement of higher day rate legacy Transocean contracts, and roughly $50 million related to less out-of-service time, primarily on the Goodrich Shelf Explorer and D534. These increases were partially offset by $33 million of decreased activity on the Expedition and decreased mob and demob revenue on the 534, $13 million related to exceptional downtime, primarily on the John Shaw, and $11 million due to fewer days in the quarter.

First-quarter revenues benefited from the postponement or delayed start of shipyards on the Galaxy II, the Expedition, Sedco 711, and the Amirante. Our revenue efficiency for the first quarter at 95.8% was slightly better than our fourth quarter efficiency of 95.3%. Contract intangible revenues for the first quarter were $224 million as compared to $88 million in the fourth quarter. This increase in non-cash revenue amortization related solely to the inclusion of three months of amortization in the first quarter versus only one month in the fourth quarter.

Other revenues increased to $246 million from $129 million in the fourth quarter. This increase is also primarily related to the inclusion of three months of GlobalSantaFe drilling management services and oil and gas operations, versus only one month in the fourth quarter. In total, revenues increased to $3.110 billion for the first quarter compared to $2.77 billion for the fourth quarter, with $919 million of this increase again related to the inclusion of a full quarter of GlobalSantaFe operations versus only one month in the fourth quarter.

As we look forward to the remainder of 2008, we expect day rate revenue increases from the commencement of higher day rate contracts to continue as shown on chart 1. However, in the second quarter of 2008, we expect that this increase will be more than offset by an increase in out-of-service times as shown on chart 2, with some of the increase in out-of-service time attributable to the shipyard projects postponed from the first quarter. We believe that contract intangible revenue in the future quarters of 2008 should decline each quarter with the fourth quarter of 2008 expected to be $132 million and the total for 2008 expected to be approximately $711 million.

We have included on our website a schedule showing the expected quarterly amortization of contract intangible revenues. We expect other revenues in 2008 to be roughly $1 billion with approximately $600 million related to the noncontract drilling segment, net of eliminations, approximately $200 million related integrated services, and the remainder related to recharge revenues.

Operating and maintenance expenses in the first quarter were approximately $1.157 billion versus $923 million in the fourth quarter as shown on chart 3. Operating and maintenance expenses in the first quarter increased by $332 million related to the inclusion of a full quarter of GlobalSantaFe operations, and benefited from reduced downtime on the M.G. Hulme, reduced operating costs from the sale of the Peregrine I, and the postponement or delayed start of several shipyard and major maintenance projects.

We continue to expect our total operating and maintenance costs for 2008 to be between approximately $5.150 billion and $5.300 billion. This includes over $900 million of costs related to our low margin other revenue items, including drilling management services, oil and gas, integrated services and recharges, all net of eliminations.

We expect our operating and maintenance costs in the second quarter of 2008 to be significantly higher than the first quarter of 2008, as well as the third and fourth quarters of 2008 primarily due to an increase in shipyard and major maintenance projects, including projects postponed from the first quarter.

We expect our operating and maintenance costs will vary each quarter for the remainder of the year, driven primarily by the amount of shipyard and mobilization activities in the given quarter, and the timing of various maintenance projects on our rigs.

General and administrative expenses were $49 million in the first quarter compared to $60 million in the fourth quarter of 2007, or $37 million in the fourth quarter after excluding $23 million of merger-related compensation costs. The increase versus the adjusted fourth quarter is primarily related to a full quarter's inclusion of GlobalSantaFe-related costs versus only one month in the fourth quarter. We expect general and administrative costs for the remainder of 2008 to be roughly $50 million per quarter.

Depreciation expense was $367 million in the first quarter compared to $195 million in the fourth quarter, with the full-quarter inclusion of GlobalSantaFe operations accounting for all of the increase. For the remainder of 2008, we expect depreciation expense to average roughly $345 million per quarter, with the reduction compared to the first quarter resulting from depreciation discontinued on rigs sold or held for sale.

Capital expenditures in the first quarter of 2008 were $769 million versus $320 million in the fourth quarter. First-quarter capital expenditures include approximately $570 million related to our ultra deepwater floaters under construction during the period, roughly $50 million related to the two 700 series upgrades, and the remainder related to contractually required upgrades, fleet spares, sustaining capital equipment, non-drilling segment capital, facilities and information technology.

We expect capital expenditures for the full year 2008 to be roughly $3 billion. We expect that approximately $2 billion will relate to our non-new builds and roughly $200 million will relate to our two upgrades, all including capitalized interest. The remaining $800 million relates to contractually required upgrades, fleet spares, sustaining capital equipment, non-drilling segment capital, facilities, and information technologies.

Our capital expenditure guidance has increased since the previous call, primarily due to the ninth newbuild that we just announced. Interest expense, net of interest income, increased to $124 million in the first quarter versus $66 million in the fourth quarter. This included $30 million of capitalized interest in the first quarter.

The $58 million increase primarily related to a full quarter of borrowings used to fund the roughly $15 billion in cash payments related to the Merger and Reclassification on November 27, 2007. We expect our interest expense, net of interest income, to decrease each quarter in 2008 as we continue to repay our debt and should fall to roughly $80 million in the fourth quarter of 2008, which is net of an estimated $40 million of capitalized interest. This assumes no additional new build commitments or asset sales.

For the first quarter of 2008, our reported effective tax rate was 15.5%, and after excluding various discrete items, our annual effective tax rate for the quarter was 13.5%. We expect our annual effective tax rate for the remainder of 2008 to be between 13% and 14%. Finally, I would like to highlight our record $34.2 billion of revenue backlog based on yesterday's fleet status report, as shown on chart 4. This represents roughly $15.5 billion in free cash flow of backlog versus our roughly $15 billion in net debt at the end of the quarter. With that, I will turn it over to Terry for the marketing outlook.

Terry Bonno

Thanks, Greg, and good morning to everyone. Once again, we had a very busy period in contract activity since the last earnings call, with a number of contract commitments on the existing fleet, with start dates in 2009 and 2010, while also securing a contract for one of our previously announced new builds, in addition to growing our ultra-deepwater fleet with a recently announced contract for one additional new build drillship. I'd like to start with a discussion of our most recent new build contract.

The Dhirubhai Deepwater KG2, formerly known as the Deepwater Pacific 2, was awarded a five-year contract in India at $510,000 per day, commencing Q2 2010. This was combined with a contract for the Dhirubhai Deepwater KG1, formerly known as the Deepwater Pacific I, which was extended to five years at the same rates with both rigs working for the same client. These rigs are owned and operated as part of our previously announced Pacific Drilling JV.

Furthermore, we announced yesterday that we were awarded a five-year contract for an additional enhanced Enterprise-class vessel with the same client in India at $556,500 a day with a contract commencement in Q4 2010. This contract can also be extended by the client to seven or ten years.

Moving next to our existing high-specification fleet, which includes our deepwater and harsh environment rigs, we also experienced significant contract activity with the Deepwater Nautilus contract extended in the Gulf of Mexico with Shell by three years at $535,000 a day, with the option to convert this to a four year commitment at $520,000 a day by June 30, 2008. This extension is expected to commence in Q4 2008 and keep the rig busy at least until late 2011. This represents a strong fixture for a moored rig in the Gulf of Mexico.

The Deepwater Pathfinder was also awarded a one well contract in West Africa at $630,000 a day with a start date estimated to be Q4 2009. The fixtures I've just highlighted continue to support the view of an extended up-cycle for the high-specification units, with continued upward movement of day rates for these class of rigs, as we foresee a supply shortage in this segment through at least 2010.

We also continue to see substantial incremental demand for appraisal and subsequent development in traditional deepwater provinces like Brazil, Gulf of Mexico and West Africa. We are experiencing growing demand in the emerging deepwater areas, as evidenced by the placement of our three new builds and the recent outstanding tender for additional deepwater capacity in India.

Brazil continues to create excitement around the anticipated incremental demand generated by the prolific light oil and non-associated gas discoveries in the Santos Basin in Tupi, Jupiter, and now Carioca. As Bob indicated earlier, we are in discussion with several clients regarding our latest newbuild ultra-deepwater drillship being built at HHI Korea, and the existing fleet for the client's growing demand for additional capacity offshore Angola, Nigeria, Gulf of Mexico, and Brazil.

Turning to the midwater floater market sector, we continue to experience strong demand. In the UK sector of the North Sea as well as Norway, we recently contracted some of our midwater fleet at very favorable rates and terms. In Norway, the Transocean Winner was awarded a three-year contract by a consortium of operators at $460,000 a day commencing Q3 2009. In the UK North Sea, the Sedco 711 was awarded a contract extension of two years at $385,000, commencing Q1 2009.

Also in the UK North Sea, the Sedco 704 was awarded a one-year contract at $370,000 a day, commencing Q4 2008. And finally, the J.W. McLean in the UK North Sea was just awarded a six-month contract at $400,000 a day, starting Q3 2008.

Moving to the jackup sector, we've experienced another active quarter with a number of fixtures at attractive rates. For example, some record short-term jackup fixtures include the Labrador one well in the North Sea for E.ON Ruhrgas at $208,000 a day; the High Island V in Gabon with total for three months at $175,000 a day; the Adriatic VI with Forest Oil in Gabon for two wells at $225,000 a day and finally, the Trident 4 with Noble Energy in Equatorial Guinea for one well at $244,000 a day.

Our recent jackup fixtures for term include the G.H. Galloway with ENI in Italy for three years at $170,000 a day, and the Rig 141 with Petrogulf in the Gulf of Suez for one year at $120,000 a day. Overall, we continue to see jackup demand remaining strong through the end of 2008 while additional supply is absorbed into the market. As visibility and demand dims beyond 2008, coupled with increased supply, we remain cautious about the jackup market beyond early 2009. That concludes my discussion on the market, so I will turn it back to you, Bob.

Bob Long

Thanks, Terry. I think with that we're ready to entertain some questions.

Question-and-Answer-Session

Operator

(Operator Instructions) And we will take our first question from Kurt Hallead with RBC Capital Markets.

Kurt Hallead - RBC Capital Markets.

Hey good morning.

Greg Cauthen

Good morning, Kurt.

Kurt Hallead - RBC Capital Markets.

Just on the operating cost front Greg, you kind of walked through the process. You have your chart here and your presentation, so if I just and the nature of the chart obviously, the second quarter will be the highest operating cost quarter of the year. It looks like the third quarter should be above the first and then the fourth quarter should be significantly below the first. If I read those out-of-service rig months correctly, is that kind of the progression that you're looking at for your operating costs ?

Greg Cauthen

I think that is fair. Now, realize there's a trend, an inflationary trend that is running through that. So on a noninflationary basis that would be exactly right, with a slight adjustment for the inflationary trend.

Kurt Hallead - RBC Capital Markets.

Right. And Bob, I want to come back to the comment you made about demand exceeding supply for the Deepwater Fleet. You said on a near-term basis. If you look out, obviously with some of these new contract extensions out to 2015, is demand exceeding supply now out to 2015?

Bob Long

Kurt it is a little bit tough to say what demand is going to be in 2010, '11, '12, and beyond. But right now, if you look at the amount of unsatisfied demand I think it clearly exceeds the capacity today and the capacity that has been announced. So if you make the assumption that all of that unsatisfied demand is going to be pushed forward and will ultimately be drilled, then I think that we are very optimistic about the supply demand situation out for four or five years. But there's always the issue about how many more rigs are going to be ordered here, and there's a lot of things that could happen over the next 3 years, 4years or 5 years that might impact the demand that we currently see.

Kurt Hallead - RBC Capital Markets.

Okay. And then do you think on the jackup side, it seems like this is almost lack of visibility in perpetuity. Do you think that changes at some point here or are you just going to get continue of influx of jackup rigs that kind of fogs the outlook?

Bob Long

Well, it's always a little bit difficult to have clarity in the outlook for the jackup market because there’s so many shorter term contracts, so there is a continual new supply effectively coming in the market as rigs roll off their existing contracts. However, I think we have been continued to be surprised by the growing demand and we see increased demand coming from a lot of different areas in the world not big chunks of five or ten or 15 rigs in any one area, but two rigs here, four rigs there, one rig someplace else and frankly it just continues to grow.

So we are pretty comfortable for this year. Beyond this year, it is just tough to say with the nature of the contracts and all the new supply that is coming in. But I would've said the same thing to you a year ago and would've been worried about what was going to happen in 2008, and additional demand has come up to absorb it. So I continue to be optimistic about the market near-term and just uncertain longer-term.

Kurt Hallead - RBC Capital Markets.

All right. And then there has been a lot of chatter here in recent calls about delays in deliveries on deepwater fleet. Can you give us an update on timing of the stuff you have?

Bob Long

I will let Steven comment on that.

Steven Newman

Our fleet status report yesterday reflected our continuing belief that the rigs are essentially on schedule with respect to the construction projects. The clear leader which is the first of the enhanced Enterprise-class series is floating alongside the dock. We have turned the engines on that rig and we've started some of the commissioning using shoreside power. We won't really get into commissioning in earnest until we get rig power going, but we will have that in the next several weeks.

So that project is proceeding really well. The first of the Samsung ships, the KG1 she is also floating, and we've started some preliminary commissioning there. The DD3 in Keppel FELS we have turned the engines on that rig, and so we will start commissioning in earnest later this month. And those three sets of projects are all proceeding essentially on time.

Kurt Hallead - RBC Capital Markets.

Okay, thank you.

Operator

We’ll take our next question from Ian MacPherson with Simmons & Company.

Ian MacPherson - Simmons & Company

Hi, good morning. My first question Bob, I guess would be with the new drillship announced yesterday. Was the GSF drillship not appropriate for what Reliance was looking for had added since, or what was the reason for going with a new order as opposed to what you already have in the queue?

Bob Long

It was exactly what you mentioned. The technical specifications that Reliance had in a number of different areas were not satisfied by the HHI rig. So we have a lot of interest in the HHI rig, but Reliance had several specific requirements the rig just didn't meet.

Ian MacPherson - Simmons & Company

Okay. Sounds like you have a lot of irons in the fire for more newbuilds. Would subsequent newbuilds more likely look like your enhanced Enterprise-class going forward, as opposed to the GSF design?

Bob Long

Well, there are a number of different opportunities out there for different parts of the world and different technical capabilities. So I would not say that it would necessarily be exactly what we have under construction today, whether it is the HHI rig or the Samsung or Daewoo rigs. We are trying to interest our customers in renewing contracts or looking at our existing capability that is coming available in 2011, because you order a newbuild rig today you can't get it before then.

Although there are a number of opportunities out there that have particular technical requirements that were not satisfied by the existing fleet, so there's where I think the opportunities for additional newbuilds might come.

Ian MacPherson - Simmons & Company

Okay, one more quick one if I can, and then I will hand it over. Now we're seeing contract terms for this newbuild going out as far as ten years. Do you think it is possible that the next leg up in pricing, if you will, might be that you give less of a day rate discount on these out years six through ten and than what you have been sort of forced to offer in contracts up until now? Or do you think we'll see more of the same?

Bob Long

My guess is while we are seeing some interest from a few customers on ten-year contracts, I think that the majority of the demand out there is going to continue to be in the three to five year type range. And the next leg up on day rates, if we do get a next leg up is going to come from prompt availability. That is what has recently driven the new highs that we've seen now, is if you have a rig that you can get to a customer in the relatively near-term, that being much shorter than one you can deliver a newbuild, then there is the possibility of getting a significant prompt premium. That I think is going to continue to be the primary driver of any substantial increase in rates.

Ian MacPherson - Simmons & Company

Okay, I appreciate your perspectives. Thanks.

Operator

We’ll take our next question from Robin Shoemaker with Bear Stearns.

Robin Shoemaker - Bear Stearns

Good morning, Bob and Greg. I was wondering if you could just update us on the cost saving goal in the merger that you had where it stands now, whether we are likely to exceed that goal or cost savings plus synergies?

Gregory Cauthen

Right now, the original plan where we said by 2010 we should be on a run rate of about $150 million, we think we are still on that plan. So I wouldn't say we expect to exceed it, but we think we are still on it. We are our cost guidance for '08 hasn't changed, so we had talked about last quarter that we should have about $60 million or $70 million of that actually achieved this year, although this year that is going to be netted by about $30 million of various integration costs related to software and training our crews and everything. So right now we are still on track.

Robin Shoemaker - Bear Stearns

Okay. And Bob, on the jackup front, I wonder if you could comment on opportunities for the sale of additional assets beyond what you've already done and in small packages or one-off opportunities. Is that a clear part of your jackup strategy?

Bob Long

I think Robin, that our approach to the jackup fleet is pretty much the same as what we had done four, five years ago on our midwater fleet. We are interested in potentially upgrading our fleet over time, which means we entertain opportunities to sell some of the older, less competitive parts of our fleet as and when opportunities arise. So we will continue to monitor that, and you could see us sell one-offs.

I'm not sure there are a lot of packages out there that might necessarily make sense, but there could be. So right now, I think you just should expect that we will just continue to monitor opportunities and don't be surprised if there's a jackup sale here or a couple there but don't anticipate any significant major divestitures.

Robin Shoemaker - Bear Stearns

Okay, one last less question from me. Based on the revenue you reported for drilling management services, it looks like compared to the prior run rate of that business, it has been scaled back a little bit. And I am not sure whether it was a profitable business in the first quarter. Can you comment on your strategy regarding drilling management? It historically was mostly a Gulf of Mexico focused business, although a few other opportunities would arise in the North Sea and elsewhere. But has it been scaled back and what is the future of that business?

Bob Long

Robin, it has not been scaled back. In fact, we consider the skill set we have there to be a differentiator and we are trying to expand that business and take advantage of the skill set we have to provide additional services to our customers. But let me let Steven comment a little bit more on that.

Steven Newman

Yeah I think the management over at ADTI and CMI would tell you it's been anything but scaled back. And in fact I think those folks are really taking full advantage of the international presence and the client relationships that the combined company has around the world. They've spent a lot of time over the last several weeks meeting with clients around the world. And as Bob mentioned, the quality and the breadth of offerings that the company has now as a result of our ADTI and CMI competency and skill set is just tremendous, and I think we're going to be able to take real advantage of that.

Gregory Cauthen

Robin, what did change is in the last call we reported those numbers gross without the cost and revenue eliminations, which are close to the decrease that you saw. But going forward we're going to be reporting them net, and that is how they are reflected in our financial statements, with the eliminations all down in other revenues. So that is really the change in guidance, but that is revenue and cost eliminations, so it has no impact on the bottom line.

Robin Shoemaker - Bear Stearns

Okay. Good to hear. Thank you.

Operator

We’ll take our next question from Judd Bailey with Jefferies & Company.

Judd Bailey - Jefferies & Company

Thanks actually Judd Bailey. Bob, a follow-up question to one of your answers regarding the jackup market a little while ago. You had mentioned you are starting to see some pockets of demand, smaller rig sizes, two to four rigs. Could you maybe expand on that and kind of tell us where you're seeing that incremental demand coming from?

Bob Long

We see really incremental demand coming from quite a few different places. As I mentioned, anywhere from one or two rigs to four or five rigs. Egypt is one area where we've seen demand for potentially additional four or five rigs. West Africa, we see a couple of areas where one or two additional rigs are needed. Libya has got a requirement for an additional rig, and there are some places in the Far East that have some requirements for additional rigs.

Of course there is continuing thought that the Persian Gulf and Ramco could take any number of rigs. So you hear numbers that range anywhere from four to 10 or more rigs there. So there is quite a few different areas around the world that have increasing demand for jackups at the present time.

Judd Bailey - Jefferies & Company

Any sense on the timing of some of those incremental requirements? Are they this year or are they stretching into early 2009?

Bob Long

Most of them I think, are this year although the Saudi Aramco requirements I think would stretch into 2009.

Judd Bailey - Jefferies & Company

Okay. And just one quick follow-up. You mentioned asset sales a little while ago. Can you comment on the status of the two semisubmersibles that you are selling in the North Sea?

Bob Long

Yes, we have all of our agreements with the government with the government the OFT in the UK, worked out where we have engaged Simmons & Company to help us run a process. We have received indications from quite a few people. We have short-listed a number of people and are in the process of inspection and hope to have something concluded here in the next couple of months.

Judd Bailey - Jefferies & Company

Great, I will turn it back. Thank you.

Operator

We’ll go next to Tom Curran with Wachovia.

Tom Curran - Wachovia

Good morning guys.

Bob Long

Good morning.

Tom Curran - Wachovia

Bob, recently in the industry press there has been talk that Petrobras as it moves forward with its expected significant expansion of its floater feet in Brazil may be deliberately pursuing a strategy of diversifying the number of contractors it is using as well as maybe even where it can afford to wait several years trying to add newbuilds to the market.

Could you speak to what you're seeing there on both fronts, and then how your ongoing discussions with them are progressing and what you think it will mean for your market share there over the next several years?

Bob Long

Well, that is a pretty broad question, but let me take a stab at. First, I am not aware of any specific goal of Petrobras to diversify the number of contractors it is using. They have requirements with so many rigs that they are going to be taking rigs from pretty much anywhere they can get them. So by nature of that, there are going to be more contractors potentially down there. There is, I think, some effort to on the part of Brazilian contractors to take advantage of the increasing demand.

So I think you're going to see some more local contractors down there. I do think that Petrobras would like to see additional new capacity brought into the business, and they are interested in a lot of newbuilds. At the same time, they are also interested in contracting a lot of capacity today. They have renewed most, I think of the fleet that they already have down there. We are in discussions with them for renewal of our rigs, which do not actually come off contract down there to 2009 to 2011. So that discussion is ongoing. But Petrobras has a tremendous requirement for rigs and I think they're looking to satisfy that from a lot of different places.

Tom Curran - Wachovia

That makes sense. And as you look out over the next several years to the extent you have any indications thus far of those incremental needs, do you expect to at least maintain your current market share, grow it, perhaps see it shrink some? What is your best read on that at the moment?

Bob Long

My guess would be realistically that it is going to be difficult for us to maintain our market share, simply because we don't have a lot of availability. Our existing fleet is tied up, and it's difficult to contemplate that we could capture a majority of the newbuilds that Petrobras is looking at. But I am not quite sure how many newbuilds they have already contracted, but clearly with the ones they have already contracted, after those get delivered, our market share is going to be diluted.

Tom Curran - Wachovia

Okay, that's helpful. Just wondering returning to the earlier line of questioning about potential future jackup divestitures, in terms of the Egyptian Red Sea fleet in particular I am thinking of the six jackup fleet there comprised of the three Transocean legacy rigs and the three GlobalSantaFe rigs, are there any outstanding tax structure or legal obstacles that you would need to resolve before they would be eligible candidates for disposal?

Bob Long

We don't like to comment on our tax structures around the world, so I think that I will pass on that question. I would tell you that we have had some interest in those rigs from some potential buyers, but frankly, the cash flow and the earnings that those rigs generate is pretty significant, so at the present time we haven't seen any opportunities that make economic sense to us.

Tom Curran - Wachovia

Okay. Thanks Bob. That's helpful and I will pass it back.

Operator

We’ll take our next question from Roger Read with Natixis Bleichroeder.

Roger Read - Natixis Bleichroeder

Good morning, gentlemen. A quick question for you, on DD3, which is one of a few rigs available deepwater rigs available for the end of this year, if I remember correctly there is a excuse me, DD2 option that has to be exercised in May or the rig can be marketed. Can you give us an update on where that stands?

Bob Long

Terry will answer that.

Terry Bonno

Yes, we are currently in discussions now with BP, and we're certainly hopeful to get it concluded soon. And other than that we really can't comment much more about the particular discussion.

Roger Read - Natixis Bleichroeder

Okay. Then as we look at this question is for you, Greg. The operating cost assumptions in Q2 based of shipyard days, other types of downtime, clearly Q1 surprised you with less time. How firm are the Q2/Q3 numbers in terms of out-of-services? We're almost halfway through the quarter, so should it be what we see? What's the chance for things to defer? Just in general, how have your shipyard projects been going in terms of actual versus budgeted costs and time over the last say, six months?

Bob Long

I think Steven is probably in a better position to answer that, so let him take a stab.

Steven Newman

Roger, I will give you some indication on the projects we've completed through the end of April this year. We are running roughly in line with our expectations. We are about 5% over on days and about 6% or 7% over on COGS. So in the context of traditional shipyard performance, I think that is pretty good. And the second quarter is shaping up the way we anticipated it would. The further out you get, the more things become subject to drilling programs and the particular performance of a rig on any one well as to when the rig will actually finish up and be available to hit its shipyard timing.

Greg Cauthen

Roger, I think the first quarter suffered a little bit from the merger activity as we were bringing together the two budgets and the new management teams. We are reviewing all both the shipyard plans as well as the major maintenance plans, so some things got put off on the major maintenance that are now ongoing. And as Steven said, we are much more comfortable now with our shipyard plans.

Roger Read - Natixis Bleichroeder

Okay, that's helpful. Thank you.

Operator

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

Douglas Clifford - Omega Advisors

Good morning. This is a question on use of free cash flow. Bob, you had said earlier that Transocean's goal was to use cash flow to pay down debt, and until your debt was about the level of the cash margin in your backlog less $5 billion. With your backlog now $34.2 billion and your debt $16.6 billion, are you within the couple of billion dollars of your goal there; and once you reach the goal, what do you think the uses of the free cash flow might be?

Bob Long

I think first where we are versus the goal, with the build and backlog offset by the increased capital requirements from our additional amigos, our cash flow backlog has actually grown just a bit. And I think Greg had indicated our cash flow backlog is just about $0.5 billion above our debt.

Greg Cauthen

Our net debt.

Bob Long

So we've got a ways to go to meet our goal, and depending on what you think our cash flow forecast would be, I think that our prior statements that we are going to continue to pay down debt through ’08 and probably into ’09 remains valid. What we will do with the cash after we meet that goal, as we've said before depends on a lot of things, including what the outlook for the business is at the time and what our new board is going to preferably would be the best thing to do in terms of returning cash to shareholders if we decide that is the right time to do it.

We will go back and look at opportunities, all aspects, whether it is going to be a dividend or whether we reinstitute a stock repurchase program, but we'll make those decisions at the time.

Douglas Clifford - Omega Advisors

Okay, but the goal is the cash margin less $5 billion is still the goal?

Bob Long

Yes.

Greg Cauthen

Yes.

Douglas Clifford - Omega Advisors

Thank you.

Operator

We’ll go next to Dan Pickering with Tudor, Pickering & Holt.

Dan Pickering - Tudor Pickering & Holt

Good morning. Another question generally I guess, balancing the balance sheet and the new build opportunity. Bob, let's assume that Transocean was presented with you were awarded 10 newbuilds tomorrow. That would be, $7 billion or something like that. How much money would you spend building out the fleet if those opportunities met the contract criteria that you have?

Bob Long

Dan, I'm not sure how to answer a hypothetical question like that. There are so many different variables there and timing. If we were building clear leader class rigs in Daewoo and delivering one every four months from a standpoint of technically being able to manage that project and improve the rigs, I think that we could easily do that. And that would spread the investment out over a long period of time. And if we got the right financials in terms of the contract, putting yourself in that hypothetical world, you'd have to think pretty hard about it. But I'm not sure what other aspects would be worth considering in that hypothetical world. So I guess I can't really give you a very crisp answer.

Dan Pickering - Tudor Pickering & Holt

I guess really all I'm trying to assess is how you price place your priorities over reinvesting in the business versus paying down debt. Maybe I should've asked it that way.

Bob Long

Well, in the context of opportunities that we see, which are generally fairly limited in one or two rigs, I think that we clearly would take advantage of the reinvestment opportunity as opposed to paying down the debt.

Dan Pickering - Tudor Pickering & Holt

Okay, that answers my question. And then as a part of the GlobalSantaFe transaction, you agreed to sell the two floaters that you talked about earlier in the call. I guess my question is given how strong the deepwater market is, is there not a way to basically just promise you won't bring them back to the North Sea and move them elsewhere?

Bob Long

In fact, that would be counter to what the government would like to see. They want the competition to stay in the North Sea. So promising to take them out of the North Sea would not get us anywhere. But we have done all the negotiation we could with the government and we are pretty much required to proceed with the sale as we have indicated.

Dan Pickering - Tudor Pickering & Holt

Okay, all right. Then a question for Greg. As we look to 2009, what can you tell us about shipyard visibility at this point? Is it higher or lower? I realize it is choppy, but directionally, are we going to do more or less next year?

Greg Cauthen

Frankly, we're still working through that process trying to understand the condition of the new fleet and our shipyard strategy. Our asset management team that works for Steven will be working through that and we hope to be able to start giving guidance on shipyard activity probably on the next earnings call later this summer. But right now, I don't want to make any speculation.

Dan Pickering - Tudor Pickering & Holt

Okay, last question. On the newbuild with Reliance, you have a ten year contract option there that is linked to oil prices. Did you ask for that or did they?

Bob Long

They asked for it, Dan.

Dan Pickering - Tudor Pickering & Holt

Thank you.

Operator

We’ll take our next question from Waqar Syed with Tristone Capital.

Waqar Syed - Tristone Capital

My question relates to the Galaxy II jackup in the North Sea. The rates for that class of rig has been close to the $300,000 range; we now see $220,000 rates for some time through April. Could you comment on that, that particular contract?

Terry Bonno

Yes, we can. We were maintaining the capacity of the fleet in the North Sea, and we had a gap in that particular program, and this was a good opportunity for us to fill it with the Galaxy 2. We do have other clients that we are in discussions with for follow-on work, and we don't believe that this is any indication that the rates are going anywhere but staying steady. So we are fully comfortable with the follow-on work and the discussions that are going on, and we see that the market remains a good market in the North Sea.

Waqar Syed - Tristone Capital

Okay, great. Bob, a number of newbuild rigs are coming out this year on the deepwater side. What are you seeing on the employee turnover side?

Bob Long

I think our employee turnover is pretty much running about the same this year as it was last year. It varies by position fairly significantly, but I think that our rate is somewhere in around the 8% or so turnover range. And that has been pretty consistent now for a year and a half or so.

Waqar Syed - Tristone Capital

Now is that I think that it is a little bit higher than what you are seeing for some other of your competitors. What programs do you have in place to keep it at that and maybe not let it go up or even reduce that?

Bob Long

Well, we're doing a lot of different things, but I think I'll ask Steven to comment on some of those.

Steven Newman

When you drill into that 8% statistic, I think what you see is as Bob says it varies by position, it varies by employee demographics and it varies by locale. So our attrition amongst our senior supervisors a little bit lower than that, and it's more in line with what I think you might be hearing from some of our competitors; so we are really comfortable with that.

It is a little bit higher among entry-level staff, and that is just a reflection of bringing a lot of new people into the organization. We have got a lot of programs around the world aimed at recruitment; development, training, and retention that I think are having some impact on our ability to retain the talent we have and find the new talent we need to staff our growth.

Waqar Syed - Tristone Capital

Great. Then you've got Express Class rig with some availability in '09. How do you compare that rig with the DD2 in terms of capabilities and what kind of rate could that get relative to the DD2?

Steven Newman

The DD2 is a true, full, dual-activity rig. The Express Class rigs have a tremendous amount of off-line capability, so they don't have full dual activity. You might get a little bit of a distinction in terms of performance between the two rigs, but they are essentially comparable.

Waqar Syed - Tristone Capital

Okay, great. And you mentioned that in terms of your rigs under construction, they seem to be on schedule. What are you hearing about your competitors and for other yards, Chinese yards and other yards, in terms of rig deliveries or any delays?

Steven Newman

We hear a lot of things. We are present in shipyards right next to our competitors. We see a lot of things, but it is probably not appropriate for us to comment on their performance.

Waqar Syed - Tristone Capital

Okay, great. Thank you very much.

Operator

We’ll take our next question from Harry Mateer with Lehman Brothers.

Harry Mateer - Lehman Brothers

Hi, guys. Just a couple of data points. I was wondering if you can tell us what the current amount outstanding on your British facility was, the amount outstanding on your revolver, and how much CP you currently have?

Greg Cauthen

I'll give you some rough numbers. Our British facility is down around $750 million. We paid off some since the end of the quarter. We don't have anything on our revolver. And our CP outstanding is around $1.4 billion. Those are all rough numbers.

Harry Mateer - Lehman Brothers

Okay. And so the debt reduction during the quarter, that was split between the bridge and the revolver?

Greg Cauthen

Yes.

Harry Mateer - Lehman Brothers

Great, thank you.

Operator

We’ll take our next question from Andreas Stubsrud with Kaupthing Research.

Andreas Stubsrud - Kaupthing Research

Good morning. I just have a quick question. When did you initially order the Enterprise drillship?

Steven Newman

We've been in ongoing discussions with DSME about the slot. The firm order was only placed very recently in conjunction with the signature of the contract with our client.

Andreas Stubsrud - Kaupthing Research

Okay, so you closed that order just a couple of months back. Is that correct?

Bob Long

I would say a couple of weeks back.

Steven Newman

Yes, very recently.

Bob Long

As soon as we signed the contract, we announced very quickly after that. And we signed the shipyard contract the same time that we signed the drilling contract.

Andreas Stubsrud - Kaupthing Research

But initially, you had discussions with them about this drillship. And do you have more discussions like this about further drillships at Daewoo?

Steven Newman

We maintain an ongoing dialogue with all of our shipyard partners.

Andreas Stubsrud - Kaupthing Research

So if you order another one at Daewoo, when is the earliest you can get that drillship?

Steven Newman

If we committed to one today, we're probably looking at a delivery in 2011.

Andreas Stubsrud - Kaupthing Research

In 2011 or beginning?

Steven Newman

Beginning.

Andreas Stubsrud - Kaupthing Research

Thank you.

Operator

And we’ll take our next question from Alan Laws with Merrill Lynch.

Alan Laws - Merrill Lynch

Good morning. I wonder, do you anticipate any other management changes or is your succession or succession moves here over for the next year? Is this the long-term crew that you're going to go with?

Bob Long

Well, I hope that it is the long-term crew that we're going to go with, but I was surprised by the recent departures that we had because of the opportunities that came up for people and because of Jon's decision to spend more time with his family. So I can't tell you that more of those won't happen, but right now I don't anticipate them.

Alan Laws - Merrill Lynch

Okay. Second question is just on the classic M&A question, is what are you seeing out there as far as acquisitions or deal flow that you would be interested in?

Bob Long

Well I'm not sure what is actually going on out in the market. I don't sense the same level of interest in M&A today as it was say, a year ago. But I do think that over time and I am not sure whether I'm talking about 2, 3, 4 years this industry will go through another consolidation phase, and we have always been big proponents of consolidation.

So hopefully, we would participate. But in the near term, I don't see a lot of key drivers. Everybody is so busy and has so many opportunities; it is difficult to imagine that there's going to be a lot of consolidation near term.

Alan Laws - Merrill Lynch

Okay, thank you. Thanks for the answers. That all I've got.

Gregory Panagos

Enola, I think we need to go ahead and end the call at this point.

Operator

Yeah, at this time we have no further questions.

Gregory Panagos

Excellent.

Bob Long

Perfect timing. Okay, well thank you everybody, for joining us and we'll look forward to talking to you again next quarter.

Operator

All right thank you, ladies and gentlemen. Once again, that does conclude today's conference. We thank you for your participation.

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