Transocean (RIG) Q2 2016 Results - Earnings Call Transcript

| About: Transocean Ltd. (RIG)
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Transocean Ltd. (NYSE:RIG) Q2 2016 Earnings Call August 4, 2016 9:00 AM ET

Executives

Bradley Alexander - Transocean Ltd.

Jeremy D. Thigpen - Transocean Ltd.

Mark Mey - Transocean Ltd.

Terry B. Bonno - Transocean Ltd.

Analysts

Gregory Lewis - Credit Suisse Securities (NYSE:USA) LLC (Broker)

Sean C. Meakim - JPMorgan Securities LLC

Haithum Nokta - Clarksons Platou Securities, Inc.

Timna B. Tanners - Bank of America Merrill Lynch

Ian Macpherson - Simmons & Company International

Robin E. Shoemaker - KeyBanc Capital Markets, Inc.

Jacob Ng - Morgan Stanley & Co. LLC

Scott A. Gruber - Citigroup Global Markets, Inc. (Broker)

Praveen Narra - Raymond James & Associates, Inc.

Operator

Good day, everyone, and welcome to the Transocean Ltd. Q2 2016 earnings call. [audio skip] (0:04) is being recorded. I'll turn the conference over to Mr. Brad Alexander.

Bradley Alexander - Transocean Ltd.

Thank you, Felicia. Good day, and welcome to Transocean's second quarter 2016 earnings conference call. A copy of the press release covering our financial results, along with supporting statements and schedules, including reconciliations and disclosures regarding non-GAAP financial measures, are posted on the company's website at deepwater.com.

Joining me on this morning's call are Jeremy Thigpen, President and Chief Executive Officer; Mark Mey, Executive Vice President and Chief Financial Officer; and Terry Bonno, Senior Vice President, Marketing.

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. Such statements are based upon the current expectations and certain assumptions of management and are therefore subject to certain risks and uncertainties. Many factors could cause actual results to differ materially. Please refer to our SEC filings for more information regarding our forward-looking statements, including the risks and uncertainties that could impact our future results. Also, please note that the company undertakes no duty to update or revise forward-looking statements.

Finally, to give more of our participants an opportunity to speak on this call, please limit your questions to one initial question and one follow-up question. Thank you very much, and now I'll turn the call over to Jeremy Thigpen.

Jeremy D. Thigpen - Transocean Ltd.

Thank you, Brad, and a warm welcome to our employees, customers, investors, and analysts participating in today's call. Following my prepared remarks, Mark Mey will recap the quarterly financial performance and provide a perspective for the second half of the year, and then Terry Bonno will provide an overview of the market.

As reported in yesterday's earnings release, the company generated adjusted net income of $64 million in the second quarter, or $0.17 per diluted share, on $943 million in revenues. We are very pleased with our second quarter results, as they reflect the organization's unrelenting commitment to delivering incident-free operations, maximizing uptime and performance for our customers, and simultaneously streamlining and optimizing every facet of our business.

For the quarter, revenue efficiency increased to 96.5% from 95% in the prior quarter. I would like to thank our crews and our shore-based support personnel for delivering another strong quarter. Through to the consistent delivery of 95% or better uptime, we continue to effectively monetize our backlog while further differentiating Transocean in the eyes of our customers.

I am especially proud of this quarter's performance, as it included strong contributions from both our latest newbuild drillship, the Deepwater Proteus, which commenced its 10-year contract with Shell in the Gulf of Mexico, and the harsh environment semi-submersible Henry Goodrich, which commenced its two-year contract in Canada with Husky following a successful reactivation after being cold stacked.

As such, I would like to recognize both our newbuild team for its effort to prepare the Deepwater Proteus for its inaugural campaign and our reactivation team, which successfully reactivated the Henry Goodrich within budget and in fewer than 90 days. While future rig reactivations will have different requirements, I have every confidence that we will continue to learn and improve with each project, ultimately resulting in lower cost and a more compressed shipyard schedule. Our quarterly results also included exemplary performance from our high-specification jackups in Thailand. These three rigs achieved average revenue efficiency of 99% while successfully drilling wells in fewer than five days.

In addition to the strong uptime performance, our continued focus on organizational and operational efficiencies enabled us to maintain very strong margins in the quarter. As many of you know, Transocean has long been recognized throughout the industry for its technical leadership and its innovative approach to addressing industry challenges. Over the past 12 months, the organization has applied that same innovative approach to identify opportunities to improve efficiencies across the enterprise and drive cost out of the value chain.

On past calls, we've talked about streamlining the organization, removing layers, and closing and consolidating offices. We've also talked about optimizing our maintenance processes, more closely collaborating with suppliers of critical and costly components, and reducing our daily stacking costs. This quarter, we recognized a step change in the number of days between the moment that one of our dynamically positioned rigs rolls off of contract and the moment that it's preserved in a cold-stacked position. This, as you might expect, has significantly reduced the overall costs associated with stacking.

It's important to note that this compressed timeframe is primarily the result of improved planning and the application of lessons learned. Our approach to the preservation of critical components and control systems has not changed. Therefore, we remain supremely confident that these assets are being well-maintained for future operations and can be quickly and cost-effectively reactivated when market conditions improve.

Because we continue to find innovative ways to drive costs out of our business, and because we continue to consistently deliver high levels of operating performance, we have better positioned Transocean to work with our customers on contracting solutions that are more aligned with their interests. In the second quarter, we secured a two-year contract for the Jack Bates with ONGC, enhancing our market position in India. The Bates (5:20) the Actinia, which recently returned to work on a three-year contract. Our longtime presence in the Indian offshore market, coupled with our history of performance, provides us with a stronger position for future opportunities in this market. And our scale, combined with our recent effort to drive cost out of the business, provide us with a decided cost advantage in this as well as other markets.

We also recently commenced a new contract in the North Sea with an independent E&P. Within this contract, we offered a very competitive base day rate that included performance incentives that will be realized upon the success of the overall drilling program. Candidly, this project may have never been sanctioned without Transocean's willingness, and the willingness of other service providers, to consider such performance-driven models. But, because our historical performance give us confidence that our crews and our assets can deliver, we are willing to engage in such contracts and support our customers as they strive to deliver wells safer and faster than previously envisioned.

Speaking of our assets, during the quarter we continued to high-grade fleet through both the announced retirement of the deepwater floater Sedco 702 and the addition of the Deepwater Proteus. Since the start of the downturn, we have identified 26 rigs to be retired and recycled, but on a more positive note, since 2008 we have added 16 new high-specification ultra-deepwater floaters to our fleet. And, with the Deepwater Conqueror joining the fleet later this year, the Deepwater Pontus and the Deepwater Poseidon joining the fleet over the next two years, and our two new state-of-the-art rigs being constructed at the Jurong Shipyard joining the fleet in 2020, that number will grow to 21, further solidifying Transocean's position as the leading provider of high-specification ultra-deepwater drillships. This focus on renewing the fleet through both our newbuild program and the ongoing scrapping of less capable and less marketable assets continues to enhance our overall high-specification rig composition.

Turning to the macro environment, following a precipitous decline in oil prices in January this year, oil prices rebounded strongly in the second quarter, ultimately exceeding $50 a barrel for the first time this year. While this led to more interest and inquiries from numerous independents and national oil companies, we expect most operators to remain cautious until oil prices are sustained at higher levels.

Unfortunately, the recent pullback in oil prices could hinder the likelihood of any meaningful market recovery over the next year. Having said that, we're encouraged by the continued decline in much of the global oil supply and believe that it will ultimately lead to increased oil prices. We are also encouraged by the actions taken by the industry in recent months to drive cost out of the value chain, making deepwater projects economically viable at lower commodity prices. We thus remain very confident in the long-term fundamentals of offshore exploration and development and the drilling industry's inevitable recovery.

Supporting this position, our largest customers have significant deepwater reserves, and they recognize that without increased activity they will face production declines and reserve replacement challenges that will be difficult and costly to reverse and overcome. So while we are still not expecting to experience a meaningful uptick in demand in 2016, we are becoming more hopeful that we could begin to see an increase in both interest and activity as we move through 2017 and into 2018.

However, since we are unable to predict the precise timing of that eventual recovery, we continue to take the necessary steps to successfully navigate the downturn regardless of its duration and position Transocean to remain the undisputed leader in the space. In support of that effort, in early July we closed an important transaction, a $1.25 billion senior unsecured bond offering, and launched a simultaneous tender offer to purchase up to $1 billion of our outstanding debt. And, earlier this week, we announced that we've agreed to acquire Transocean Partners. The combination of these actions continues to strengthen Transocean's balance sheet and improves our liquidity position as we look into the next decade. These actions also provide greater strategic optionality when the right opportunities materialize.

In conclusion, by continuing to strengthen our balance sheet, deliver incident-free operations, maximize uptime and performance for our customers, streamline and optimize our business, better align with our customers, and high-grade our fleet, we remain confident that we are best positioned to take advantage of the inevitable upturn in offshore activity.

I will now hand the call over to Mark.

Mark Mey - Transocean Ltd.

Thank you, Jeremy, and good day to all. During today's call, I'll recap the second quarter results, provide an update to our 2016 guidance. I will also expand on our recent senior unsecured notes offering and tender offer and Monday's announcement regarding the pending acquisition of Transocean Partners. I also plan to present our end-of-year 2018 liquidity forecast.

For the second quarter 2016, we reported net income attributable to controlling interest of $77 million, or $0.21 per diluted share. These results included $13 million or $0.04 per diluted share in net favorable items that are detailed in our press release. Excluding these items, adjusted net income was $64 million or $0.17 per diluted share.

Contract drilling revenue for the second quarter decreased by $193 million sequentially to $918 million, due primarily to reduced activity and lower day rates. The second quarter had 214 fewer operating days sequentially, largely attributable to limited recontracting opportunities. Partially (10:43) offsetting this reduced activity were the contributions from our newbuild ultra-deepwater drillships, the Deepwater Proteus and Deepwater Thalassa, and the reactivation on the Henry Goodrich.

We achieved another quarter of outstanding revenue efficiency at 96.5%, up from 95% in the first quarter. Our strong revenue efficiency performance continues to have a favorable effect on our financial performance by sustaining margins during these very challenging market conditions.

Second quarter operating and maintenance expense was $500 million, down from $665 million in the prior quarter. In addition to reduced activity, the second quarter O&M expense was lower than our guidance due primarily to lower stacking costs, including accelerated de-manning of idle rigs, and the company's successful action in sustainably reducing both operating and shore-based expenses.

Our adjusted normalized EBITDA margin was approximately 43% for the second quarter, up from 38% in the prior quarter due to the aforementioned successful cost-management efforts. We ended the quarter with $2.2 billion in cash and cash equivalents, reflecting cash flow from operations for the second quarter of just over $200 million. Capital expenditures for the second quarter totaled $458 million and were related largely to installments on the newbuilds the Deepwater Pontus and the Deepwater Conqueror. The Deepwater Conqueror is currently mobilized into the Gulf of Mexico and is scheduled to commence its five-year contract with Chevron later this year.

During the quarter, we opportunistically repurchased $228 million of debt at a cost of $189 million. This includes the $100 million of debt repurchases discussed during last quarter's conference call that settled after the end of the first quarter. Cash interest savings to maturity of the repurchased debt is approximately $55 million. Over the last four quarters, we opportunistically repurchased debt with a principal amount of $751 million for $657 million, saving (12:52) approximately $140 million in interest expense through the maturity of this debt.

I will now provide an update on our financial expectations for 2016. Our 2016 revenue efficiency guidance remains at 95%. Other revenue for 2016 is unchanged from our prior guidance and is expected to be between $265 million and $275 million. This includes customer reimbursables and the early contract termination fees recognized to date in 2016. We expect full-year operating and maintenance expense to be approximately $2 billion. The 9% decrease from our previous guidance is due to reduced activity, lower stacking costs, and the continued benefits of the company's actions to reduce both onshore and offshore expenses.

Third quarter O&M expense is expected to range between $425 million and $445 million. Consistent with activity, O&M costs will trend lower over the next two quarters as the number of active rigs decline. We continue to expect full-year G&A expenses to be approximately $160 million. There is no change to our full-year 2016 net interest expense, which is expected to be between $360 million and $370 million. Net interest expense includes capitalized interest and interest income of $185 million and $20 million, respectively.

The annual effective tax rate for 2016 is expected to be between 25% and 27%. This lower updated full-year range incorporates the second quarter results and considers the changes in jurisdictional mix of operating results. Full-year 2016 depreciation expense is expected to be approximately $900 million.

Capital expenditures, including capitalized interest for the second half of 2016, are expected to be approximately $600 million, mainly associated with the contracted newbuilds. We expect maintenance CapEx to be approximately $50 million for the remainder 2016.

Turning now to our financial position. In early July, we accessed debt capital markets successfully, issuing $1.25 billion of senior unsecured notes with a 2023 maturity, receiving net proceeds of $1.21 billion. $886 million of these net proceeds were deployed to repurchase existing senior notes with an aggregate face value of $981 million, with maturities ranging between 2020 and 2022. All excess proceeds from this offering will be added to our liquidity position to meet future commitments. These new unsecured notes are senior to the company's existing debt and constitute a new currency, which, along with our substantial existing secured debt capacity, further enhances our financial flexibility and access to debt capital markets.

Regarding the aforementioned tender and consistent with our open market repurchase program, we targeted bond maturities that afforded us both economic and strategic benefits. We successfully repurchased debt at significant discount to face value and furthered the company's overall ability management objectives. As mentioned in our earnings press release, this transaction enhances our liquidity runway and increases our optionality as the industry recovers. We will continue to take advantage of opportunities to enhance our liquidity and strategically address our debt maturities. As you are aware, we have both unsecured and secured debt options available to us, in addition to our currently undrawn, unsecured $3 billion revolving credit facility that does not mature until mid-2019.

Turning now to our liquidity forecast, which is now updated through 2018. We project liquidity at December 31, 2018, in the range of $3 billion to $3.5 billion. This assumes a cash balance of approximately $500 million. This forecast factors in the recent unsecured senior notes issuance and related tender, plus any open market repurchase of debt made with the excess issuance proceeds. Additionally, the forecast assumes the merger with Transocean Partners closes in the fourth quarter of this year. Other operating assumptions include revenue efficiency of 95% through 2018, limited new contract awards with day rates assumed to be at or near cash breakeven levels through the end of 2017, with a marginal day rate improvement in 2018.

In 2017, we expect total CapEx of approximately $600 million. This includes $400 million in newbuild CapEx and $200 million for maintenance CapEx. In 2018, we expect total CapEx of $375 million. This includes $150 million in newbuild CapEx and $245 million for maintenance CapEx. This obviously translates into a very strong liquidity position, which, combined with our significant contract backlog, positions us to thrive as the market recovers.

Now I'd like to take a moment to comment on Monday's announcement regarding the acquisition of Transocean Partners. We have agreed to acquire the outstanding common units of Transocean Partners in a share-for-unit exchange of 1.1427 Transocean shares for each Transocean Partners unit. The price represents a 15% premium to Partners' closing price as of July 29. As part of this transaction, we expect to issue approximately 22.7 million new Transocean shares. This acquisition provides significant benefits to Transocean in the form of cost savings, simplified governance, and enhanced liquidity. Following the completion of this transaction, the Discoverer Inspiration, Discoverer Clear Leader, and Development Driller III will be 100% owned by Transocean.

The merger agreement has been approved by a special committee of our board of directors and Transocean Partners' Conflicts Committee and their board of directors. The Transocean Partners Conflicts Committee is comprised of three independent members, whom are unaffiliated with Transocean. This transaction remains subject to approval by a majority of Transocean Partners' unitholders. We anticipate filing the S-4 in mid-August with the Transocean Partners unitholder votes scheduled to accommodate an early fourth-quarter closing.

To conclude today's call, we are very pleased with our strong operational performance, continued cost control, and successful liquidity enhancing transactions. We will continue to manage Transocean prudently and target opportunities to improve our fleet and simplify our processes. The quality of our rig fleet and Transocean's alignment with our customers' interests better positions us to win more than our fair share of future drilling contracts. As we have demonstrated throughout this downturn, we continue to add contracts and bolster our contract backlog, further strengthening our financial position.

This concludes my prepared comments. I'll now turn the call over to Terry.

Terry B. Bonno - Transocean Ltd.

Thanks, Mark, and good day to everyone. Transocean continues to be very busy on the marketing front, despite the most recent dip in commodity pricing. We executed several new contracts since the last earnings call, resulting in the addition of $117 million of contract backlog, bringing our 2016 total to $301 million. Year to date, we've announced 13 floater contracts thus far, representing 39% of the global fixtures contracted to date.

As Jeremy stated, the ONGC's exploration tender was awarded to our Deepwater semi, the Jack Bates. This two-year contact will add approximately $93 million of backlog in India. The rig finished its job in Australia in May, and after a brief contract preparation period, the rig will mobilize to India and is expected to commence ONG's contract in early October 2016. Recently, we've increased our presence in India by returning two rigs to work for ONGC and two other rigs to work with the independents. We will continue to pursue opportunities to grow our market presence in this country.

In the UK North Sea, we secured two contracts for the Transocean Spitsbergen. The first is a one-well contract with Hurricane Energy, where we and other service providers aligned with our customer to support the launch of the program in 2016 by providing a flexible commercial solution for their drilling program. This contract also includes additional performance incentives that reward us for achieving agreed metrics. This is consistent with our ongoing focus to align with our customer's goal of delivering wells ahead of their planned drilling curves. The second contract on the Spitsbergen is a one-well contract in the Norwegian North Sea with Repsol. This contract will begin in March of next year.

We also added a one-well contract for the midwater floater Sedco 704 in the UK North Sea with Independent Oil & Gas, where we again facilitated a flexible commercial solution, providing our customer the ability to execute their program successfully. We are also happy to announce another UK program with an unnamed customer that will commence early 2017 for up to 18 months utilizing the Sedco 712. The backlog is not included in the reported number above.

This was a very competitive tender with 16 rigs offered, demonstrating the availability in this market and our ability to successfully execute against our competition. Our Transocean teams are fighting for every opportunity in this challenged market as we are delivering consistent performance and creative flexible commercial solutions, resulting in a winning combination.

As a result, our backlog as of July 21 is an industry-leading $13.7 billion. This continues to provide for solid future cash flow generation, with 78% of revenues contracted with the IOCs, 13% contracted with the independents, and 8% contracted with the NOCs. And, further, we do not have contracts in our current backlog that permit cancellation for convenience without some compensation. Although the market remains challenging, oil prices have increased to levels that have increased customer inquiries and inspired many in the industry to call the bottom, only to see oil retreat in the past few weeks.

Nevertheless, we have experienced an increase in activity and more productive conversations than in the last few quarters. We are fast approaching our customers' 2017 budget season, which should provide further clarity on next year's opportunities. Our customers remain firmly committed to their deepwater assets, as they view these as a necessary source of future reserves. The pace with which operators will ultimately add rigs to replace both reserves and production is not clear, but our customers realize that the reduction in offshore drilling is not sustainable.

A great example of the commitment to increase exposure to deepwater is the recently announced Statoil purchase of the 66% share of Petrobras's BMS-8 block in the Santos Basin in Brazil. This is a historical event and clearly demonstrates a positive shift to opening the basin to allow international oil companies' development of these important projects. While the increase in activity is not imminent, we know the potential of this significant play in the Golden Triangle.

Longer-term continued price recovery with a stable outlook bodes very well for significant activity improvements in 2018. As the floater market stands today, marketed utilization is down to 73% with 59 rigs idle and 56 cold stacked. Year to date, 33 floater fixtures have been announced, mostly in Asia, India, and the UK/Norway, with the majority being short term work except for India. As the market challenges persist, we will see more stacking and retirements of the floater fleet. Under these conditions, we expect reactivations will become economically challenging and lengthy, meaning the real marketed supply, rigs ready to work, could be below 200 floaters. And, as we know, the demand over the past five years well exceeded 200 rigs.

As in the past, access to the right hot rig may become challenging. We are encouraged by the upcoming development work requiring 1,500-meter DP rigs for almost three years per rig, commencing in 2017 in India. Additionally, we see other customers are taking advantage of the lower pricing environment to proceed with their projects. We are participating in multiple tenders in Nigeria, Mexico, Myanmar, Canada, Norway, and are in advanced discussion on direct-award opportunities where we are very excited to be able to announce in the future.

In conclusion, we will continue to position Transocean to increase our market-leading position as we progress through the downturn. This concludes my overview of the market, so I will turn it over to you, Brad.

Bradley Alexander - Transocean Ltd.

Thank you, Terry. Felicia, we're ready to take questions now. And as a reminder to all of our call participants, please limit your questions to one initial question and one follow-up question.

Question-and-Answer Session

Operator

Thank you. We'll go first to Gregory Lewis of Credit Suisse.

Gregory Lewis - Credit Suisse Securities (USA) LLC (Broker)

Yes. Thank you, and good morning.

Jeremy D. Thigpen - Transocean Ltd.

Morning, Greg.

Gregory Lewis - Credit Suisse Securities (USA) LLC (Broker)

Jeremy, could you talk a little bit about the decision as to – why now does it make the decision to acquire RIG.P? And just if you could provide a little bit on how you backed into the value that was offered?

Jeremy D. Thigpen - Transocean Ltd.

Well, I can talk a little bit on the why now, and then I'll turn it over to Mark to talk a little bit more about the value. The why now – essentially, we've talked for the last year, year and a half that Mark and I have been on board. We fully understood the intent of RIG.P, but as we look at the horizon, and it's so uncertain, we didn't have any real certainty around the recovery in the marketplace. And so it's not delivering the value that it was originally intended. And so we did see an immediate opportunity to reduce our costs, to streamline our organization, to eliminate complexity, to improve our liquidity position. And so when you have a good idea, right, and you know it's immediately actionable, why wait? And so that was the really the reason for the timing. And I'll turn it over to Mark for additional comments.

Mark Mey - Transocean Ltd.

Thanks, Jeremy. Greg, as you know, we're filing our S-4 in about two weeks in mid-August, so until that's been filed, really can't speak about valuation very much, as you know. So let's pick it up after that, and we can talk about it in detail.

Gregory Lewis - Credit Suisse Securities (USA) LLC (Broker)

Okay, great. Thanks. And then just, Mark, congratulations on this rolling out of the debt and positioning the company the way you have. Just prior to this, there's been a lot of talk about potentially wanting to do secured financing. And with this, given the recent structuring of the balance sheet with the new debt, is secured financing still an objective in the near-medium term? Or is that something now that can be sort of pushed out longer term?

Mark Mey - Transocean Ltd.

So, Greg, as you know, we're uniquely positioned to access the market of both secured and unsecured debt. So with those four Shell contracts of 10 years each and that contract with Chevron for five years, those give us the opportunity to go out and access the market and put secured debt on those. This new currency which we established – what is it, last month – by issuing the priority guaranteed notes, gives us more options. So with this flexibility we're going to be very diligent and disciplined in our approach with regard to adding additional debt to the balance sheet. So if secured debt is cost-effective, we'll absolutely put it on. If it's not, we'll look at other options that are available to us.

Gregory Lewis - Credit Suisse Securities (USA) LLC (Broker)

Okay, guys. Hey, thank you very much for the time.

Jeremy D. Thigpen - Transocean Ltd.

Thanks, Greg.

Operator

We'll go next to Sean Meakim of JPMorgan.

Sean C. Meakim - JPMorgan Securities LLC

Hey, good morning.

Jeremy D. Thigpen - Transocean Ltd.

Morning, Sean.

Sean C. Meakim - JPMorgan Securities LLC

So you guys had a nice quarter on the cost side, certainly, and from Mark's guidance, sounds like there's more room to go in the third quarter. That seems to be in contrast to a lot of what your peers have been saying, as it's getting harder to keep up with the revenue declines. Just – can you help us maybe understand how much you would attribute to the better stacking costs that you're talking about versus how much is coming from additional same-rig savings?

Mark Mey - Transocean Ltd.

Yes. Thanks, Sean. Those are very kind comments. I don't want to overlook the fantastic revenue efficiency as well. Getting a fleet of ours, which is heavily weighted towards the ultra-deepwater, more complicated assets, to be able to deliver 96.5%, that is a fantastic quarter. So putting that in the rearview mirror, our cost-out – I would say probably about half-half. Half's from the stacking. As Jeremy mentioned in his prepared comments, we're getting better at it. We've only been doing this now for about a year. So as we get better at doing this, we can shave a little more cost out of that.

And then the other is around looking at doing things differently, given the fact that we're faced with a very challenging down cycle. So we're looking at different ways of performing our maintenance, different intervals, with the key point being we're not going to jeopardize any kind of safety or operational efficiency whatsoever. So I think we have a little more room to improve over time, and you have seen from my guidance that we've set some pretty tough targets out there.

Sean C. Meakim - JPMorgan Securities LLC

Okay. Thank you for that. That makes sense. And then just maybe for Terry. Congrats on the win in the UK. You noted that you don't have any contracts without some compensation for cancellation for convenience. And so just given how competitive the environment is, clearly as you indicated with that win, is it fair for us to assume there's just a broader trend towards a weakening of terms? Or how should we think about how customer demands are changing around contract terms at this point in the cycle?

Terry B. Bonno - Transocean Ltd.

Yeah, Sean. I think we've seen this in every downturn, and certainly quite a few of us have been there since the early 1980s. So every time we have a significant downturn, the contractual terms and conditions do weaken for the contract driller. And then when we go back to the tightened markets, we are able to improve the contract terms and conditions. So it's happened every cycle, and it's certainly going to happen this cycle. So we'll do our best to keep our rigs working and work with our customers to get their projects launched. And we're going to have to give up a bit on the contract terms and conditions.

Operator

We'll go next to Haithum Nokta of Clarksons Platou Securities.

Haithum Nokta - Clarksons Platou Securities, Inc.

Hey. Good morning. Congratulations again on the nice quarter, recent transactions, and the new win. You mentioned that part of the cost beat was kind of being able to crew down quickly and put rigs into cold stack. I was hoping you can flesh out that a little bit more. And I guess kind of in a similar vein, how could we be thinking about rigs that are maybe a little bit more warm stacked, like for instance the Spitsbergen that'll have a gap between contracts? How will your kind of OpEx levels fluctuate between working and nonworking for that?

Jeremy D. Thigpen - Transocean Ltd.

Thanks, Haithum. This is Jeremy. I'll take the first part of that. With respect to our process to stack a rig, I don't want to disclose too much because we actually think it could be a competitive advantage for us. I will say that most of it is in the upfront planning. So we're taking a more proactive approach. We're looking at when rigs are coming off campaign, when they're rolling off contract, and we've got an approach where we get all the interested parties out there and involved early so that we know as soon as the rig rolls off contract what we're going to do with it. And I will leave it at that in terms of the planning piece.

And then the rest, unfortunately, is just in lessons learned. As we do more of these, we get more efficient, and so we're identifying opportunities to streamline the process and drive cost out of it, and I think I'll leave it at that for now.

And, Mark, do you have any comments on the Spitsbergen and the warm-stack costs?

Mark Mey - Transocean Ltd.

With regard to how we're going to account for it, Haithum?

Haithum Nokta - Clarksons Platou Securities, Inc.

Oh, no, just curious about like, when you have kind of well to well (34:50) contracts that have space in between them, I mean, will you guys be able to crew down and crew up kind of quickly as well? Or will those kind of be more stable because you want to keep the rig hot and that type of thing?

Mark Mey - Transocean Ltd.

Well, one of the key benefits to a customer taking a hot rig is having a crew that's familiar with that rig. So what you can do is you can reduce some of the junior crew, but for the most part you're keeping the senior crew intact. You're able to provide the hot rig to the customer, which is the marketing appeal. So, as you are well aware, warm-stacking costs are not much lower than operating costs.

Haithum Nokta - Clarksons Platou Securities, Inc.

Right. Okay. And then if I could just ask a follow-up, I guess, on the marketing side. We've heard quite a bit about how operators want to keep – they only want to contract hot rigs and rigs that haven't been cold-stacked for too long. I'm curious if kind of in that vein if you see a strategic value for keeping your higher-end rigs contracted over your older rigs. And, to that point, are there any kind of rig-swapping opportunities, for instance like the Sedco 706 for the KG2 in Brazil or something like that? Is that something you've explored?

Terry B. Bonno - Transocean Ltd.

Yeah, hi, Haithum. Yeah, we look at a lot of the opportunities certainly to get higher-spec rigs up and reactivated, but it's just not time for that right now. We need to get some clear visibility. We work on prioritizing those rigs that are going to come out of stack as we work through this down cycle. And we have a couple of ultra-deepwater rigs that are going roll off contract, so we're well-positioned to use those rigs for follow-on work. More specifically, you asked about the 706 and the KG2 in Brazil. Those are both on long-term contracts, so we – the KG2 is rolling off, I think, next year, but we're fully confident that'll have an opportunity to keep her in-country, so that's really not necessary at this point.

Jeremy D. Thigpen - Transocean Ltd.

One thing I'd add to that is, you're right, I mean, customers will typically prefer a hot rig to a cold rig. But I will say, and as evidenced by the fact that we returned the Henry Goodrich -

Terry B. Bonno - Transocean Ltd.

Right.

Jeremy D. Thigpen - Transocean Ltd.

– to the fleet and to active duty from a cold-stack condition, our customers are actually visiting our cold-stack rigs, and they're unbelievably impressed with the preservation that's going on. And so those are still marketable rigs for us as well.

Haithum Nokta - Clarksons Platou Securities, Inc.

Got it. Thank you.

Operator

We'll go next to Timna Tanners of Bank of America.

Timna B. Tanners - Bank of America Merrill Lynch

Yeah, hey. Good morning.

Mark Mey - Transocean Ltd.

Good morning.

Timna B. Tanners - Bank of America Merrill Lynch

Wanted to just clarify a couple of comments. So one was when you talked about your liquidity and your progress there, you talked about some of the recent actions helping your strategic optionality. I just wondered if that – what you were hinting at there, if there was something more that you were alluding to.

Jeremy D. Thigpen - Transocean Ltd.

Not alluding to anything imminent. Just – I mean, we've said on past calls, and we said on this call, we continue to high-grade our fleet. So to the extent an opportunity materializes out there where we can high-grade our fleet and still maintain our near-term liquidity, then we will certainly pursue it. Obviously that's a challenge for us in the current market, but we're keeping our ear to the ground, and we're in multiple conversations. And so if such an opportunity materializes, we'd hope to capitalize on it.

Timna B. Tanners - Bank of America Merrill Lynch

Got it. Okay, and then along those same lines, with regard to liquidity guidance for year-end 2018, does that still assume the revolver stays at the same size, about $3 billion, and did you still have the same working capital guidance of $500 million released over the next two years? Thanks.

Mark Mey - Transocean Ltd.

Well, as you know, the revolver does not mature until June of 2019. So whether we have a little more cash on the balance sheet and some drawn on the revolver or the revolver undrawn and the rest being cash on the balance sheet, it's really – I'd say it's a wash to us, because that's all considered liquidity from our perspective.

Timna B. Tanners - Bank of America Merrill Lynch

Okay.

Operator

And we'll go next to Ian Macpherson of Simmons.

Ian Macpherson - Simmons & Company International

Hey, thanks. Good morning, and again, good job with the quarter, with the costs, et cetera.

Jeremy D. Thigpen - Transocean Ltd.

Thanks, Ian.

Ian Macpherson - Simmons & Company International

I also wanted to follow up on the working capital question, since it did move in the opposite direction in the second quarter. Mark, if you wouldn't mind, if you could provide some color on your working capital movements in Q2, and what your updated expectation is for the balance of the year.

Mark Mey - Transocean Ltd.

Yes. Thanks, Ian. Obviously in the first quarter we had several rigs that had early termination payments, which gave us a big working capital boost.

Ian Macpherson - Simmons & Company International

Yeah.

Mark Mey - Transocean Ltd.

In the second quarter, we had a few one-offs, really quarterly timing incidents associated with interest payments, payroll retentions, corporate tax payments, all of which ended up having a – you could put it as a negative working capital impact in that quarter. As we look out to the rest of the year, we see – obviously as we see revenues come down, AUR comes down. We'll see more working capital released, and that should continue through 2017 as well, but to much smaller amount. In 2018, once again, we start consuming our working capital. So I think if you look at it in the context of the liquidity forecast through the end of 2018, you'll see a more moderate impact on the liquidity from working capital.

Ian Macpherson - Simmons & Company International

Okay, okay. Thanks. The follow-up question, Terry, you mentioned with some of your recent North Sea contract successes that you've been able to innovate more flexible commercial solutions, I think you said. Could you describe that more? Are you talking about more innovative payment terms? Or is it all just sort of incentives on beating the drilling curve? Or are there other innovations with regard to how you're being paid by the customer, or what?

Terry B. Bonno - Transocean Ltd.

Well, it's what you describe, but it's some innovations that we have come up with. And we think that it is a competitive advantage, and we really don't want to get into it too deeply. But the customers have been very pleased with the flexibility. And, in fact, it's helped launch some 2016 opportunities that may not have even hit the launch pad but certainly would've been delayed until 2017. And I think that we're making long-term relationships with these customers, and we wish them all the success. And I think we're certainly going to have some good opportunities there just because we were able to do the things that we're doing in the creative side of being able to help our customers and align with them.

Jeremy D. Thigpen - Transocean Ltd.

And the positive of that is not only is it business near term, but rigs can be sticky, and especially high-performing rigs. And so as the market picks up, we feel confident that we're going to keep that customer and that business.

Terry B. Bonno - Transocean Ltd.

Absolutely.

Ian Macpherson - Simmons & Company International

Yeah. Okay. Thank you.

Operator

We'll go next to Robin Shoemaker of KeyBanc Capital Markets.

Robin E. Shoemaker - KeyBanc Capital Markets, Inc.

Thank you. Good morning. I wanted to, Terry, ask you if you could comment about the blend-and-extend idea that everybody's working on, and have you seen any change in your customers overall – it's a broad statement – about their interest in doing that? Extending contract terms in return for a short-term reduction in rate? Or are we moving beyond that in terms of where the market is today?

Terry B. Bonno - Transocean Ltd.

Robin, I think you're going to see a few more, but our customers – some of the most recent discussions have been around right now, they just are not able to either add the debt onto their balance sheet or they just can't get the programs approved. So I think we might see a pause in the activity. We have one that we're currently discussing, but I haven't seen a lot more opportunities there, and I haven't really seen a lot more in the market.

Robin E. Shoemaker - KeyBanc Capital Markets, Inc.

Okay. Interesting. So I also wanted to ask about – in these situations that you described earlier, one had 16 bids for a particular contract. In those kind of situations, how often is it that the lowest bid wins the work? Are your customers – are they accepting bids that are below the cash costs of operations? Or are they – how would you describe the way they look at these situations in terms of the low bid versus the résumé of the contractor and so forth?

Terry B. Bonno - Transocean Ltd.

Okay, Robin. Good question. So what we are seeing is where there's not a tendering protocol required to accept the lowest bidder, in some of the countries where our NOC tendering prohibits them to pick perhaps a more efficient solution. So outside of that environment, we're seeing our customers evaluating it a bit differently. So now they're taking a look at the efficiency of the rig and the financial wherewithal of the contract driller to stand up to their obligations and looking for the long-term financial situation. So we're seeing a bit different view. So in the last couple of tenders, I don't know what our competitors are doing as far as their bidding and their cash breakeven. You would assume some of it has happened, but we're not doing that. And, again, we believe that we're putting forth great opportunities. The performance – they know the performance is great, and they know that we have got a solid technical and engineering team to be able to quickly solve their problems should anything occur. And I think that gives the customer incredible confidence and comfort.

Robin E. Shoemaker - KeyBanc Capital Markets, Inc.

Interesting. Thank you.

Jeremy D. Thigpen - Transocean Ltd.

Thanks, Robin.

Operator

We'll go next to Jacob Ng of Morgan Stanley.

Jacob Ng - Morgan Stanley & Co. LLC

Morning. Congrats on the outstanding quarter. I was wondering if you could share more granularity as to what you see as necessary, cost-wise and timing-wise, in order to reactivate your stacked fifth generation assets. And perhaps tie that back into maybe if you're factoring for that in what seems like a rising maintenance CapEx guidance into 2017 and 2018?

Jeremy D. Thigpen - Transocean Ltd.

Yeah, unfortunately, you can't take just one number and apply it to all of those rigs. I mean, we've taken a good, hard look at it. We have the same team that's going to reactivate the rig that is responsible for stacking it, so they're intimately familiar with all the equipment, all the preservation, and everything that needs to happen to bring that rig back into service. As we look at our ultra-deepwater fleet, we think at a minimum you're looking at about a 60-day reactivation, and the cost could range anywhere between $20 million and, say, $75 million if it extends beyond the 60 days, and maybe even a maximum of, say, 120 days. But we think somewhere in that 60- to 90-day range is probably appropriate for the reactivation, and somewhere in probably the $20 million to $40 million range is the investment required.

Jacob Ng - Morgan Stanley & Co. LLC

Got it. Thank you. My follow-up question is for – yeah.

Mark Mey - Transocean Ltd.

And Jacob, the second half of the question, as it relates to CapEx in 2017 and 2018, as I've mentioned before, it's directly related to the number of rigs that are coming in for their five-year surveys. So if you look at our fleet and you look at over time – I often get the question asked, Can you give us an average? And it's very hard to do an average when your fleet is a lot smaller. It's really around which rigs are coming in, what year survey – is it the five-year or the 25-year? And you've got to build it up by rig, because I don't think using an average is going to give you a good estimate going forward.

Jacob Ng - Morgan Stanley & Co. LLC

Understood; thank you. My follow-up question is for Terry, just honing in on Brazil, where you've seen developments of late that you've alluded to. I was just wondering, in your conversations with customers, are you sensing perhaps a renewed interest in the clients like Statoil in returning to Brazil to fill this gap left by Petrobras? And if that's the case, what could timing look like on that sort of non-Petrobras activity ramp-up?

Terry B. Bonno - Transocean Ltd.

Yeah, we are seeing increasing interest in activity. I think the interest has always been there, since it's such a prolific basin. So our customers are actively engaged with Petrobras, looking at their opportunities. We know there's a lot of interest from certainly the majors and the independents. We expect that there'll be more opportunities for them in the future. How quickly that will translate into more rig activity, it's difficult to say, because the independents and majors already have some form of portfolio there. So as soon as we see some significant stability – not significant, but some stability – in the oil price, I think that we'll start seeing some activity within the next 18 to 24 months.

Jacob Ng - Morgan Stanley & Co. LLC

Thank you.

Operator

We'll go next to Scott Gruber of Citi.

Scott A. Gruber - Citigroup Global Markets, Inc. (Broker)

Good morning.

Jeremy D. Thigpen - Transocean Ltd.

Morning, Scott.

Scott A. Gruber - Citigroup Global Markets, Inc. (Broker)

Jeremy and Mark, I don't think a simple congrats on this quarter's cost beat is really sufficient to acknowledge the materiality of the efficiency improvements that you guys have achieved at Transocean. So a big kudos to all of you.

Jeremy D. Thigpen - Transocean Ltd.

Thanks, Scott.

Scott A. Gruber - Citigroup Global Markets, Inc. (Broker)

Jeremy, if we go back to the mid-2000s, rig reactivations occur when a contract was secured to pay for that reactivation, which is fairly easy to obtain given the pace of the recovery. Given the deeper downturn currently and what could be a more modest recovery coming out, would you still demand full payback on the reactivation from that initial contract? Or are there other factors we should be thinking about, such as pulling some of these fifth gens out and seeing them utilized over what should be many years of remaining useful life? Or seeing better fixed-cost absorption in places like West Africa, securing the best crews, coming out first? I mean, are you going to still demand the same kind of economic threshold to pull rigs out?

Jeremy D. Thigpen - Transocean Ltd.

Scott, it's difficult to say at this point in time. My guess is the answer's no, that we may not, at least for a couple, and it's going to be based on the customer. It's going to be based on the application and what we see as the future for that particular rig and with that particular customer. I will say that we're also currently exploring the possibility of looking at some of the rigs we've cold stacked, or at least one, and kind of seeing if there's a hybrid over time where maybe we can get that rig ready to go. But now's not the time. We're going to have to see some improvement in the marketplace first and then kind of pursue how can we get some of these cold-stacked rigs back and running even more quickly and more cost-effectively then we have historically. But, again, we need to see some light on the horizon before entering into such a process.

Scott A. Gruber - Citigroup Global Markets, Inc. (Broker)

Got it. I know it's down the road, but it sounds like there could be of couple of the best rigs that are stacked right now that may come out for something less than full payback.

Jeremy D. Thigpen - Transocean Ltd.

Yeah, thanks.

Scott A. Gruber - Citigroup Global Markets, Inc. (Broker)

(50:56) And then a follow-up on the Transocean Partners. Mark, is there a lock-up period post-close for the equity holders in Transocean Partners?

Mark Mey - Transocean Ltd.

There is not.

Scott A. Gruber - Citigroup Global Markets, Inc. (Broker)

Okay. Okay; thanks.

Operator

And our final question comes from Praveen Narra of Raymond James.

Praveen Narra - Raymond James & Associates, Inc.

Hey. Good morning, guys, and I just want to echo the congratulations on the quarter.

Jeremy D. Thigpen - Transocean Ltd.

Thank you.

Praveen Narra - Raymond James & Associates, Inc.

In terms of the new contract – commercial terms that you guys are offering, it's obviously working really well, with – Terry, you mentioned the 40% of contract wins. Can you give us a sense of kind of the magnitude of your revenue expectations that you're getting from the base day rate or the performance incentives? Understanding you're limited in what you can disclose.

Mark Mey - Transocean Ltd.

Praveen, let me take a shot at that. I think the way to look at this is that we have to beat the competing rigs on a day rate basis to be able to win the work. But as Terry mentioned previously, we're not willing to bid rigs at below cash break even. So we look at making sure we cover our cash costs firstly. And then our upside, in some cases where it is beneficial to us and to the customer to drill the well in that time period, we will take our upside in the form of performance bonuses.

Now, bear in mind, we have a database of wells which we've drilled around the world, which is extensive. It is by far the biggest in the industry – in fact, probably bigger than anybody else there put together. So we have this information available to us, which we can extrapolate in order make sure that we minimize our risk on taking these performance bonus opportunities.

Praveen Narra - Raymond James & Associates, Inc.

Okay. That's very helpful. And then, Mark, I think in the past we've talked about kind of a working capital to fund the fleet – working cash balance to fund the fleet, about $1 billion to $1.5 billion. I just wanted to make sure, on your clarification on liquidity at the end of 2018 of $500 million in cash, is that the new rate in which it's capable of funding the new fleet?

Mark Mey - Transocean Ltd.

Yeah, bear in mind, Praveen, as you go back over time, that Transocean was involved in a significant event -

Praveen Narra - Raymond James & Associates, Inc.

Right.

Mark Mey - Transocean Ltd.

– the Macondo event. So there's a lot of uncertainty and risk around that. So at that time too much cash was not a concept which you had at Transocean. You wanted as much as possible. So coming out of that, the company was focused on having a much bigger cash balance, obviously also operating a much bigger fleet. As you are well aware now, our number of operating rigs are coming down dramatically. So as a result, the amount of cash we need to support that comes down dramatically as well. So I'm very comfortable in saying that in a 2018 timeframe, even a 2017 timeframe, we'll be able to drop cash balances down into the mid, call it, $500 million area, and perhaps lower than that. So I would try to indicate that to hold $1.5 billion cash is no longer a goal of Transocean.

Praveen Narra - Raymond James & Associates, Inc.

Right, perfect. If I could ask one follow-up, just quick question on the Goodrich, how much cost carry-through from the reactivation was there in this quarter?

Mark Mey - Transocean Ltd.

Oh, it's not much at all.

Praveen Narra - Raymond James & Associates, Inc.

Okay, perfect.

Mark Mey - Transocean Ltd.

I can get you the exact number, but I don't think it's much at all. Certainly well less than $10 million.

Praveen Narra - Raymond James & Associates, Inc.

Okay, perfect. Thank you very much, guys. Great quarter.

Jeremy D. Thigpen - Transocean Ltd.

Thank you.

Operator

And I'll turn the conference back to management for any additional remarks.

Bradley Alexander - Transocean Ltd.

Yes, I would like to thank everyone for your participation and questions today on our call. If you have any further questions, please feel free to contact me. We will look forward to talking to you again when we report our third quarter 2016 results. Have a good day.

Operator

That does conclude today's event. Thank you for your participation. You may now disconnect.

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