Transocean Ltd., Shelf Drilling International Holdings, Ltd. - M&A Call

| About: Transocean Ltd. (RIG)

Transocean Ltd. (NYSE:RIG)

September 12, 2012 10:00 am ET

Executives

R. Thaddeus Vayda - Vice President of Investor Relations & Communications

Steven L. Newman - Chief Executive Officer, President, Director and Member of Executive Risk Management Committee

Gregory L. Cauthen - Interim Chief Financial Officer and Executive Vice President

Terry B. Bonno - Senior Vice President of Marketing

Analysts

Ian Macpherson - Simmons & Company International, Research Division

Matt Conlan

Michael W. Urban - Deutsche Bank AG, Research Division

David C. Smith - Johnson Rice & Company, L.L.C., Research Division

Justin Sander - RBC Capital Markets, LLC, Research Division

Kurt Hallead - RBC Capital Markets, LLC, Research Division

Truls Olsen - Fearnley Fonds ASA, Research Division

Alan D. Laws - BMO Capital Markets U.S.

Todd P. Scholl - Clarkson Capital Markets, Research Division

Operator

Good day, everyone, and welcome to the Transocean Update Call. Today's call is being recorded. At this time, I would like to turn the conference over to Mr. Thad Vayda. Please go ahead, sir.

R. Thaddeus Vayda

Thank you, Rebecca. Good day, and thank you for joining us on this update call to discuss and respond to your questions regarding several recent events, including a sale of our standard jackup fleet to Shelf Drilling International, our disclosure of an opportunity to build 4 ultra-deepwater drillships to firm 10-year contracts and associated $1.5 billion public debt offering.

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

Before I turn the call over to Steven, I'd like to point out that during the course of this call, participants may make certain forward-looking statements regarding various matters related to our business and company that are not historical facts, including future financial performance, operating results, estimated loss contingencies associated with the Macondo well incident, the Frade field incident in Brazil, the sale of our standard jackup fleet, the newbuild and potential contract associated therewith, the use of proceeds of our recent debt offering and the prospects for the contract drilling business in general. Such statements are based on the current expectations and certain assumptions of management and are therefore subject to certain risks and uncertainties. As you know, it's inherently difficult to make projections or other forward-looking statements in a cyclical industry since the risks, assumptions and uncertainties involved in these forward-looking statements include the level of crude oil and natural gas prices, rig demand, the effects and results of litigation, assessment and contingencies, closing conditions for the sale of our jackup fleet, entering to a binding agreement regarding the newbuild and operational and other risks, which are described in the company's most recent Form 10-K and other filings with the U.S. 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. Transocean neither intends to nor assumes any obligation to update or revise these forward-looking statements in light of developments, which differ from those anticipated. [Operator Instructions]

Thanks very much. And I'll now turn the call over to Steven Newman. Steven?

Steven L. Newman

Hello, and thank you for joining us today. Travel schedules and the uncertainty of the timing of the debt offering necessitated that we schedule this call a little later than we would have preferred.

I'd like to take this opportunity to welcome Esa Ikäheimonen, who will assume the CFO responsibilities on November 15. Esa's extensive experience and industry knowledge make him a great fit for this key role at Transocean. Although it's a bit premature as he will be here until the end of the year to help with Esa's transition, I'd like to thank Greg for his dedication and extraordinary efforts.

As you can see from our many filings and press releases this week, we have made significant progress executing on our asset strategy. First of all, we are pleased to announce that we reached the definitive agreement to sell 38 shallow water drilling rigs to Shelf Drilling International for $1.05 billion. This marks a major milestone in our asset strategy and a significant step to increase our focus on High-Specification Floaters and Jackups, improving our long-term competitiveness by reducing the diversity of our fleet. We have made measurable progress on this important goal, and this is extremely encouraging.

Let me give you a few key highlights of the transaction. The $1.05 billion sales price comprises $855 million in cash and $195 million in seller financing. The seller financing will be in the form of preference shares issued by the parent company of Shelf Drilling to Transocean. And we expect the transaction to close in the fourth quarter of this year.

As part of this transaction and to provide as seamless a transition as possible for our customers and for our employees joining the new company, we've agreed to provide various support services to Shelf Drilling for a period of time following closing.

We also announced our discussions with a major oil company for the potential construction of 4 ultra-deepwater newbuild drillships, which we would expect to be backed by 10-year drilling contracts. We currently have a nonbinding letter of intent that outlines most of the commercial terms associated with this project, including an estimated capital investment of $3 billion or about $750 million per rig. Contract backlog associated with this newbuild opportunity is expected to be approximately $7.6 billion, representing 40 rig years of work. The implied day rate for each rig is $520,000.

These newbuilds will be state-of-the-art, having capabilities beyond those of the existing worldwide fleet or the newbuilds currently under construction. The ships will be in enhanced DSME 12,000 design and will feature Transocean's patented dual activity drilling technology and an industry-leading hoisting capacity. They will also be equipped with a second BOP, and each rig will be outfitted to accommodate a future upgrade to a 20,000 psi BOP system once such a system is available from the pressure control OEMs.

I think Terry and the worldwide marketing teams have done an excellent job in improving the terms and conditions in our contracts, and these newbuild contracts will be no different. We expect them to include cost escalation provisions, which are important in the context of the long-term nature of these contracts, and enhanced provisions related to the maintenance and repair of subsea equipment. The timing and term of these contracts would be an excellent complement to our existing portfolio of ultra-deepwater rig commitments. As contemplated in our letter of intent, these agreements would begin to build backlog for the second half of this decade, providing unusually long-dated visibility in revenue and cash flow and importantly, permit us to deepen our relationships and collaboration with our customer. The 4-rig opportunity would provide profitable growth in a notoriously cyclical industry. This investment opportunity would support our asset strategy to expand and upgrade our ultra-deepwater fleet, improve the fleet mix and provide growth opportunities for the company. We would expect rig delivery to occur at approximately 6-month intervals beginning in late 2015.

To support the financing of these potential newbuilds, on Monday we took advantage of extremely favorable market conditions and issued debt in the amount of $1.5 billion. In the unlikely event that we are unable to reach a final agreement with the customer, we will use these funds to pay down existing debt and for general corporate purposes.

In the past, I have laid out our key areas of focus: first, to deliver improved operating performance; second, to execute on our asset strategy; and third, to seek a resolution of Macondo. As evidenced by our improved revenue efficiency, in the second quarter of 2012, we achieved 92.5%, the highest since the second quarter of 2010. You are beginning to see the results of our efforts. The series of recent announcements earlier this week highlight the execution of our asset strategy. And as you have seen with our recent disclosures, we continue to work towards a resolution at Macondo.

In summary, this week we have provided evidence that we are delivering on our commitment to reposition the company, reducing our exposure to low specification assets and increasing our exposure to differentiated high-specification drilling rigs.

Before I conclude my prepared remarks, I would like to provide a brief update on the Brazil Frade field incident. You will likely hear in the news that the Superior Court of Justice in Brazil denied the ANP's request to suspend a preliminary injunction. This is very disappointing. As we believe the injunction order is unwarranted and is flawed legally and procedurally. Let me assure you that the technical merits of our case are strong, and we are pursuing the many avenues available to us to appeal the preliminary injunction and have it suspended. We have been receiving unprecedented support from our customers in Brazil and from the ANP in challenging the injunction.

Finally, as you recall, the terms of the preliminary injunction require ceasing activity in Brazil within 30 calendar days from the date of service. As of today, Transocean has not yet been served with the preliminary injunction, and as such, the 30 calendar days from the date of service have not yet started. All of the rigs in Brazil remain on contract, generating revenue.

I will now turn the call over to Greg to take you through some additional details. Greg?

Gregory L. Cauthen

Thank you, Steven, and good morning or good afternoon to everyone. As Steven mentioned, the Shelf Drilling sales price of $1.05 billion is comprised of approximately $855 million in cash and $195 million in seller financing. The final sales price is subject to working capital and other adjustments. The sales price also includes approximately $200 million in net current assets, primarily associated with working capital.

The seller financing consists of $195 million of preference shares in the parent company of Shelf Drilling. The shares will be entitled to dividends payable in kind, semiannually, adjusted over time and will be subject to mandatory redemption upon certain events like an IPO. We intend to use the cash proceeds from the transaction for general corporate purposes in the context of maintaining our liquidity targets of between $5 billion and $6 billion.

The transaction is expected to close in the fourth quarter, at which time Shelf Drilling will own the rigs. However, as Shelf Drilling is a newly formed organization, Transocean will continue to provide various transition and other support services, including operating many of the rigs for a period of time following the closing. It is possible that some of these services will be performed for Shelf Drilling for more than 12 months following the closing of the transaction.

We expect to be reimbursed by Shelf Drilling for the cost of these services, although initially our overhead related support services, the reimbursement amounts are likely to not fully offset the cost of providing these services. Generally over time, the amount of services we provide is expected to decrease and the reimbursement rates we charge are expected to increase.

Under certain conditions in which the transaction does not close, the agreements called for a termination fee payment by us and by Shelf Drilling.

We estimate that we will incur between $120 million and $140 million of tax, personnel and other transaction costs associated with the Shelf Drilling transaction. Some of these costs will be reflected in the third quarter results and some in the fourth quarter, when we expect to close the transactions. Others will be reflected during the period of time we provide the transition and operating support services. We have not yet completed our analysis of the proper accounting treatment of all these costs under U.S. GAAP, so we are unable to provide more precise guidance at this time.

We also expect our third quarter 2012 results to include a significant noncash charge, primarily associated with the impairment of long-life assets and goodwill allocable to the standard jackup business. We are currently in the process of determining the charge. In determining the impairment of long-life assets and goodwill, we will take into account the total sales price as compared to the aggregate of the net current assets, the carrying value of the long-life assets and the amount of allocated goodwill. A portion of our aggregate, consolidated goodwill of $3.1 billion will be allocated to the standard jackup business, based upon their fair market value relative to our aggregate consolidated fair market value.

Additionally, in the third quarter, we have committed to a plan to sell 7 remaining stacked standard jackups within 12 months in unrelated individual transactions, effectively exiting the standard jackup market. As a result, in the third quarter, we will classify all of the standard jackups in the swamp barge as discontinued operations, and we will immediately stop depreciating them. Accordingly, we expect our third and fourth quarter 2012 depreciation expense to be $14 million and $65 million, respectively, lower than previously expected.

Assuming we close the sales of Shelf Drilling at December 31, 2012, we forecast our 2013 revenues to be approximately $1.15 billion to $1.2 billion, lower than previously expected. Additionally, our 2013 normalized operating maintenance costs will be lower than previously expected. We anticipate that costs will be reduced by between $750 million and $825 million. This cost saving range assumes no speculative standard jackup rig reactivations. In addition, the low end of the cost saving range assumes that we have been unable to reduce any of our shorebase overhead support cost. The high end of the cost savings range assumes that all of the overhead support costs associated or allocated to the standard jackup business have been eliminated.

Transocean will be providing operational and support services to Shelf Drilling for all of 2013. It is unlikely that we will be able to eliminate all of the associated and allocated overhead costs in 2013 and may have reduced but not have eliminated all of them by the end of 2014. However, our goal is to achieve the high end of the cost savings range, when we are no longer providing operational and transition support services to Shelf Drilling.

In addition, we forecast our depreciation expense for 2013 to be between $260 million and $280 million, lower than previously expected. Consequently, we currently expect this transaction to be modestly dilutive to 2013 earnings per share.

Turning to our newbuild opportunity. The construction cost for the 4 state-of-the-art newbuilds that Steven has described is expected to be about $3 billion in aggregate, excluding capitalized interest. The construction cost includes shipyard construction, owner-furnished equipment, capital spares, inventory, shipyard management costs and all other operating costs to be incurred prior to the start of the contract other than the cost covered under the contract by the initial mobilization payment.

The shipyard payment terms are expected to be favorable. The 5-year construction schedule is expected to necessitate a smaller cash outlay in the first 3 years, with a significant portion of the construction cost to be paid in 2015 and 2016. As Steven indicated, we expect our investment in these 4 newbuilds to yield a simple rate of return on investment of approximately 14% during the initial 10-year contract and a 12% internal rate of return over the life of the contract, assuming the same contractual day rate after the initial contract. These returns are fully burdened by all direct associated costs, incremental indirect cost, income taxes and expected maintenance capital expenditures as well as lost revenue due to planned shipyards and normal unplanned downtime. Considering the decreased risk due to the 10-year contract coverage, this expected return significantly exceeds our normal cost of capital.

As you saw on Monday, we issued $750 million of 2.5% senior notes due 2017 and $750 million of 3.8% senior notes due 2022, which are intended to provide funding for the newbuilds while maintaining balance sheet flexibility. If we do not need all the proceeds of these offerings to fund the newbuilds we, will use the funds to pay down existing debt and for general corporate purposes.

We continue to target liquidity levels of $5 billion to $6 billion until significant exposures are resolved. Liquidity includes consolidated cash and our undrawn $2 billion revolver capacity. We are also in discussions with banks and other financial institutions regarding a secured credit facility of up to $1 billion to supplement our liquidity targets. This secured facility will not be a permanent part of our capital structure and is expected to be eliminated after significant exposures are resolved.

Over the midterm, we remain committed to reducing our overall total adjusted debt down to between $7 billion and $9 billion. And investment grade rating is important to Transocean from both an operating and financial perspective, and we are committed to returning our investment grade to a solid BBB level.

This concludes our prepared remarks, and I will now turn the call over to questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question will come from Ian McPherson with Simmons.

Ian Macpherson - Simmons & Company International, Research Division

Steven, with this jackup sale, you immediately exceeded your targeted range for disposals for the year. Does that bias your thinking with regard to the mid-water or other noncore assets? Does this make you less inclined to sell those soon, or are you still interested in prosecuting the spirit of the asset strategy in the most expedient path?

Steven L. Newman

Ian, we're still focused on executing the asset strategy. So we are committed to returning this company to a focused, high spec driller with an industry-leading position in high-spec ultra-deepwater, harsh environment, competitive position in premium jackups. And we will have a core component of our fleet that will be, what I call, long-term workhorse assets. You can think about mid-water rigs in the North Sea falling into that kind of a category. But we're focused on executing the asset strategy. So we still have -- even after the definitive agreement with Shelf Drilling that comprises 38 rigs and plans to sell 7 other stacked standard jackups, we still have other rigs in our fleet that are considered divestiture candidates. So we will continue to look for opportunities to reduce our exposure to commodity class assets.

Ian Macpherson - Simmons & Company International, Research Division

On the floater side, do you think it's as likely or less likely that a significant package could be put together for a company that might be a new entrant?

Steven L. Newman

I think it's a little bit tougher with a floater kind of a package. We'll continue to look for opportunities like that. It's just that operating a floater is a little bit more complicated than operating a jackup. So finding somebody that could take on that kind of a business in a significant way I think is just an incremental challenge.

Operator

From Wells Fargo, we'll hear from Matt Conlan.

Matt Conlan

I was just curious. Why didn't Shelf Drilling take all of the rigs? What's special about the 7 rigs that are left behind? Do they need too much CapEx to be reactivated profitably?

Steven L. Newman

No, Matt. It's just an outcome of the ongoing discussions we had with Shelf over the course of negotiating the deal. The 38-rig package is...

[Technical Difficulty]

Operator

And ladies and gentlemen, please remain on the line. [Operator Instructions]

R. Thaddeus Vayda

Okay, so we can proceed with the questions and answers. I'm sorry for the technical glitch. I didn't know I apparently dropped off somehow.

Steven L. Newman

Matt, are you still on? Do you have a follow-up, Matt?

Matt Conlan

Yes. Actually, I've never really heard the end to the question of what in the negotiations with Shelf made them not want those other 7 rigs?

Steven L. Newman

I don't think there's anything unique to those 7. It's just an outcome of the ongoing dialogue we had with Shelf throughout the negotiations about the package that I think was most supportive of their business model and reflective of our ability to sell individual assets and single asset transactions. So they ended up with the 38, and we took responsibility for selling the remaining 7.

Matt Conlan

Okay. And then the follow-up is, within the same parameters of your revenue and operating cost estimates for 2013, what type of CapEx would be associated with those jackups that now you won't have to spend?

Gregory L. Cauthen

The normalized CapEx is about $50 million. If there is reactivation, it could be more than that. But just sort of the maintenance CapEx is $50 million a year.

Operator

And from Deutsche Bank, we'll move on to Mike Urban.

Michael W. Urban - Deutsche Bank AG, Research Division

So on the newbuild front, you've done a great job in sticking to your guns in terms of being able to secure contracts against any newbuilds out there. Given the change in the landscape, and it seems like there are a lot of speculative rigs being built. Is that something that you feel like you can continue to do going forward as you continue to high-grade the fleet here? Or are you going to think -- or do you think you might have to amend that view at some point?

Steven L. Newman

Yes. It's part of our fundamental philosophy about how to deploy capital in this business, recognizing that it's a supply-demand business and it's fundamentally a cyclical business. We think there is -- we think that it's more appropriate to force the customers to pay for incremental capacity rather than allowing capacity to grow unconstrained, which has -- it has an impact on the supply-demand dynamic.

Michael W. Urban - Deutsche Bank AG, Research Division

Which makes sense. I mean, is that still a line in the sand? It sounds like there might be a little bit of wiggle room there, where as you may consider it under certain circumstances? Or am I reading too much into that?

Steven L. Newman

Our preference is for contract-backed newbuilds.

Michael W. Urban - Deutsche Bank AG, Research Division

Okay. In terms of G&A, will that stay about the same in the short term, just given the support agreement there? Or are there some savings even in the current scenario?

Steven L. Newman

Certainly, in the near term, G&A will stay the same because of all the transition and operating support that we'll have to provide. Long term, there would be a little bit of a reduction in G&A as well.

Operator

[Operator Instructions] From Johnson Rice, we'll move on to David Smith.

David C. Smith - Johnson Rice & Company, L.L.C., Research Division

Regarding Brazil, if the preliminary injunction is served in 30 days go by without a successful appeal or other invention -- I'm sorry, intervention, what remedies do you have to limit the financial impact of the Brazil floaters going idle, for example, is a force majeure a possibility?

Steven L. Newman

Well, I think under that kind of a scenario, David, it's safe to assume that we would go to a 0 day rate. We would be in technical breach of our contracts because of our inability to perform. Under that kind of a scenario, the customers would have a right to terminate the contract, though I think you'd have to ask yourself whether or not they would exercise that right, given that there is no readily available capacity that could replace us. And some of those contracts we’re operating under in Brazil are dated contracts with below-market rates. So I think the worst-case scenario is that we go to a 0 rate environment and the customers don't terminate the contract. I don't think it's a reasonable assumption to assume that force majeure would apply. So there is a kind of a worst-case scenario that doesn't look very pretty. But as I said, David, we believe strongly in the merits of our case, and I'm confident we will ultimately prevail.

David C. Smith - Johnson Rice & Company, L.L.C., Research Division

Understood and agreed. Just curious, thinking through that worst-case scenario, would you have the potential to rapidly reduce costs? Or would you need to keep the full crew contingent if that injunction were overturned?

Steven L. Newman

Well, we will do some things to reduce costs. But we would have -- in order for us to maintain the contract coverage and the ability to respond, we have to be ready to go back to work at essentially a moment's notice. So I wouldn't anticipate a significant decrease in our cost. We'll do whatever we can, but I wouldn't imagine that to be meaningful.

Operator

[Operator Instructions] From SEB, we'll hear from Lucas Dahl [ph].

Unknown Analyst

[ph]

I was wondering on the newbuilds, you are sort of quoting a price of $750 million per rig. And I was wondering how much of that would you accommodate for the ability to handle a second BOP and the announced new drilling technology? How much would that...

Steven L. Newman

Yes, the cost of an incremental BOP that we've seen in terms of discussions with the OEMs is somewhere between $25 million and $35 million. So there is the cost of that second BOP that's included in the $750 million.

Unknown Analyst

Okay. So that takes it down to maybe $720 million. And if you were to compare the $720 million against some of the recent industry fixtures, is that difference your drilling technology?

Steven L. Newman

No, it's not necessarily related to dual activity because most people in the industry today recognize the value of Transocean's patent. And so they are building rigs and vessels that incorporate Transocean's patented dual activities. So there's no real difference there. I can tell you that if you look at some of the recent announcements, first of all, when you compare the numbers we quote with the numbers that some of our peer group quotes, you have to make sure that everybody is reporting the same thing. So what we include in our number is the shipyard construction costs, the project management cost, the inventory and capital spares, all of the commissioning, all of the labor cost in terms of preparing the crew to take on the rig and building up the crew complement on the rig. It includes everything to get the rig ready to go to work. And Sometimes, when I read some of the peer group announcements, they leave some things out of their numbers. So you've got to make sure you're comparing apples and apples. Secondly, the vessels we're building are state-of-the-art. They will have industry-leading hoisting capacity. They will have the ability to accommodate a 20,000 psi BOP. They are larger ships than some of the other ships that folks are building. So there is a difference in the size and the displacement of the vessels. And all that relates to -- all that results in incremental cost.

Operator

From RBC Capital Markets, we'll hear from Justin Sander.

Justin Sander - RBC Capital Markets, LLC, Research Division

I just wanted to follow up on the last comment there. Can you kind of talk a little bit more as to what goes into the accommodations of the 20,000 psi BOP system when you're talking about constructing the ship? And then secondly, why the operator would want to construct a larger ship than what we're seeing commonly on the market right now?

Steven L. Newman

So in order for the vessel to accommodate a 20,000 psi BOP, from the ship's perspective, you've got to have 20,000 psi piping. So most of the vessels -- in fact, all the vessels that are out in the industry, they're only 15k capable, which means all the choke and kill piping on the rig is only 15,000 psi piping. We'll have 20,000 psi piping. So we'll be waiting for the pressure control OEMs to actually deliver a 20,000 psi subsea BOP. But when that's available, we'll be ready to accommodate it. The reasons that an operator would want a larger vessel is for the flexibility and the capability that kind of vessel provides. If you think about some of the areas where our customers are drilling in remote areas, they want to be less dependent on the supply chain. And so the ability to put more material on the rig is an important feature of a large vessel. And similarly, with some of the completion programs our customers are running, some of the complex well designs our customers are running, some of the challenging casing designs our customers are running, the ability to put more of that equipment on the rig and have access to it at the rig site rather than be dependent on the supply chain is an important component of having a larger vessel.

Justin Sander - RBC Capital Markets, LLC, Research Division

And then secondly, unrelated, just on the disclosure around Macondo, can you clarify, of the $2 billion reserve, is that related entirely to the DOJ alone and nothing related to the PSC? Or is there some PSC related reserve as well? I just -- I was a little confused by the disclosure.

Gregory L. Cauthen

No. The reserve is technically $1.950 billion. It just gets rounded in our disclosure. But only $1.5 billion of that reserve relates to the Department of Justice's potential settlement discussions. A couple hundred million relates to various crew and related settlement, and the remainder relates to discussions with the PSC.

Operator

[Operator Instructions] We do have a follow-up question from Ian McPherson with Simmons.

Ian Macpherson - Simmons & Company International, Research Division

Greg, if you don't mind, just one more modeling question. Is there any discernible impact on your pro forma tax rate without the jackups next year?

Gregory L. Cauthen

At the margin, no. I don't think, Ian, as you can see you when you calculate the numbers, the incremental impact on net income is very small, and so the incremental impact on the effective tax rate will be small as well.

Operator

From RBC, we'll hear from Kurt Hallead.

Kurt Hallead - RBC Capital Markets, LLC, Research Division

I just have a quick follow-up question for you on Brazil. I know it's something that’s probably difficult for anybody here to handicap. You said, Steven, that you think your case is that strong and that you would ultimately prevail. New estimation that it does ultimately prevail, mean that there is going to be some financial pain that's going to be endured until you ultimately prevail? And do you think that you could have -- is there a possibility that Petrobras could help you out and maybe cover your operating costs until this thing gets resolved?

Steven L. Newman

I think your question about the quantum of financial pain we might endure is too difficult to answer at this point in time. The Brazil fleet, our Brazil division accounts for about 11% of our revenue. And so if we have to shut down for any period of time to comply with the injunction, that'll be a significant hit to our revenues.

Kurt Hallead - RBC Capital Markets, LLC, Research Division

Do you think with Petrobras in your camp, that they may be well in the work with you and help you cover your operating costs until this gets resolved? Is that a possibility?

Steven L. Newman

That's a tough question. Yes, that's a tough ask, I think. I have been really pleased with the support we're getting from Petrobras and from Chevron and from the ANP. They all have been very public in their support for the company. They have been -- particularly ANP and Chevron have publicly commented that this incident is not a Transocean issue. So they are certainly vocally supportive. I think asking them to be financially supportive, asking Petrobras to be financially supportive would be a tough ask.

Operator

From Fearnley Securities, we'll hear from Truls Olsen.

Truls Olsen - Fearnley Fonds ASA, Research Division

Just sort of circling back to the drillships and the 20k BOP system as such. In terms of, I guess, that's going to be a pretty expensive BOP in itself, given the new technology on that. Is there something you have to do when that technology is ready, and would that be covered through the affidavit [ph] and will you then sort of run one 15K and one 20K stack on a rig? Or will you have to do two 20ks on the rig? Can you just give us a bit more color on that part of it?

Steven L. Newman

Yes. Because as part of our commitment to the customer, if the contract is ultimately finalized, we will provide two 15k stacks. We've agreed to equip the rigs with the capability to carry a 20,000 psi BOP. Ultimately it's going to be the customer's need that drives that. And so when that time comes, once the pressure control OEMs have a 20k stack available, because it would be a customer need that would drive that, our anticipation would be that the customers would underwrite that. Question about whether or not you would have to have two 20k BOPs or one 10 -- one 20 and one 15, we just -- we haven't even started to think about crossing that bridge yet.

Operator

And next we'll hear from Alan Laws of BMO Capital Markets.

Alan D. Laws - BMO Capital Markets U.S.

A couple of quick ones here, more high level. I think given that the stray asset sales don't entail the entire effort in your targeted transformation, how far along do you think you are at reaching your goals? Do you think you're on, ahead or behind the schedule?

Steven L. Newman

Well, I think the deal with Shelf Drilling certainly accelerates the progress. I'm not sure, Alan, that this is ever really a destination as much as it is a process. Ever since I've been working for this company, we have taken advantage of opportunities to sell older assets at the same time that we're investing in new assets. So this is another step in that process. I'm not sure it will ever be done. But I think going forward in the years to come, you'll be able to clearly identify and recognize Transocean as an industry leader in high-spec drilling, high-spec floaters and high-spec jackups.

Alan D. Laws - BMO Capital Markets U.S.

I guess, just to ask it in a different way. In baseball terms, maybe going into the end of the season, you were back, say 20 games. Now it looks like you are kind of in the hunt. Is that a fair way to think about how much success you've had in getting towards the goals in the process, at least?

Steven L. Newman

Yes. Yes, I think the 38-rig deal with Shelf Drilling significantly accelerates this. So this puts us clearly back in a position to demonstrate the company's ability to lead the industry.

Alan D. Laws - BMO Capital Markets U.S.

Excellent. And then on Brazil, can you perhaps frame the surrounding issues here? Maybe you'd prefer not to comment on it. But I guess, is this an event or game that's being sort of exploited for external political purposes and you just following yourself as sort of a ball? Or is there something more here?

Steven L. Newman

Well, there's no denying that there was an incident back in November. And I think we're in the midst of the Brazilian regulator and the judicial system responding to that incident. I thank the regulator. I've been pleased with the regulator's response, a thorough investigation that completely exonerated the rig. Now we're having to work through a similar process with the judicial system, where I think ultimately we will be able to completely exonerate the company.

Operator

And we have one question left in the queue, and that will come from Todd Scholl with Clarkson Capital Markets.

Todd P. Scholl - Clarkson Capital Markets, Research Division

I just was wondering if you could maybe give us a little more color on the contract provision that you guys mentioned for enhanced subsea equipment maintenance? And then also on your 14% IRR assumption, I just wanted to get a little bit of clarity. Do you assume that the rigs go to work in a certain region? And if not, I mean, is there a particular cost escalation built into the contracts on a regional basis?

Terry B. Bonno

This is Terry. We've been working with our customers on trying to come to some mutually beneficial -- that's what we like to think about it -- mutually beneficial provisions that help them and help us in being able to return our BOPs back to service in an efficient manner. So that we are not rushing to get the maintenance done and to get the BOP down on bottom. And some of our customers agree with that merit. Let's get it right, let's be proactive, let's have some additional time to ensure that we've got the preventative maintenance right, that we've got this BOP ready to go. So again, it's mutually beneficial time allotted to making sure that we've got it right. On talking about cost escalations, most of our ultra-deepwater and deepwater fleet with term contract, do have standards escalation provisions. When you're talking about escalation provisions based on the regional areas, the answer is yes. What we do typically in a contract, whenever we start the contract, we take a look at what the majority of the costs are for that particular rig operating in that particular area. And then that's our base case. And then we escalate from that base case to what the actual increase is per rig. And this is the kind of been a standard process for Transocean over the years, and it's been an acceptable type provision -- how we manage our business from that perspective. And then if you start a rig in one area, as an example, Gulf of Mexico, and then you transfer that rig to another area, where the cost may be a bit higher than we have, what we call "a change of locale," so those incremental costs are captured. Does that answer your question?

Todd P. Scholl - Clarkson Capital Markets, Research Division

I think so. So basically what you're saying is if these rigs move into a higher cost environment, then you will be compensated?

Terry B. Bonno

We're protected. We're protected.

Gregory L. Cauthen

And Todd, just one clarification, though. We see a 14% simple rate of return. The internal rate of return over the life of the asset, assuming the same day rate is about 12%, so when IRR is 12%. 14% is more of a payback simple return.

Todd P. Scholl - Clarkson Capital Markets, Research Division

Okay. And just one other question is, have you had any success in terms of the provisions you talked about with the subsidy equipment? Have you had any success in other contract negotiations? Or is this kind of a one-off that you had success with Shell on this particular contract?

Terry B. Bonno

No, we're having these discussions with all of our contracts in our newbuild discussions and then also on existing fleet, rollovers, we’re having these discussions with all of our customers.

Operator

And there are no further questions at this time.

Steven L. Newman

All right. Thank you very much for participating in today's call. We're available if you have any follow-up questions. We look forward to talking to you on our third conference call. Have a good day.

Operator

Ladies and gentlemen, that does conclude today's presentation. We do thank everyone for your participation.

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