Transocean Ltd (Switzerland)

Ladies and gentlemen, good day and welcome to the second quarter 2020 Transocean earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Brad Alexander, Vice President, Investor Relations.

Please go ahead, sir. Thank you, David. Good morning and welcome to Transocean second quarter 2020 earnings conference call. Copy of our press release covering financial results along with supporting statements and schedules including reconciliations and disclosures regarding non-GAAP financial measures are posted on our website at deepwater.com. Joining me on this morning's call are Jeremy Thigpen, President and Chief Executive Officer, Mark May, Executive Vice President and Chief Financial Officer, and Roddy Mackenzie, Senior Vice President of Marketing and Contracts. During the course of this call, Transition Management 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 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. Following Jeremy and Mark's prepared comments, we will conduct a question and answer session. During this time, to give more participants an opportunity to speak, please limit yourself to one initial question and one follow-up. Thank you very much. I'll now turn the call over to Jeremy.

As we have since the beginning of the pandemic, we are continuing to work safely and remotely to do our part to prevent the spread of COVID-19. Therefore, please forgive any challenges associated with maintaining audio quality from speaker to speaker during this call. As reported in yesterday's earnings release, for the second quarter, Transocean delivered adjusted EBITDA margins of 42.5% by generating $418 million of adjusted EBITDA on $983 million in adjusted revenue. Despite the unprecedented challenges associated with COVID-19, our experienced and committed teams delivered outstanding operating performance, driving a sequential improvement in our revenue efficiency to 97%, resulting in better than forecast revenue and EBITDA. I want to take a moment to express my deepest gratitude to all of the men and women of Transocean who are working through these most difficult times. Our crews have shown tremendous strength and resilience throughout this pandemic. and I would like to acknowledge the personal sacrifices that they continue to make each and every day to keep our crew operating safely and efficiently to support our customers. Additionally, I would like to recognize and thank our shore-based teammates who have adapted well to working remotely and despite the inconvenience and distractions associated with working from home, they have not missed a beat in supporting our operations and our customers. As we move through the third quarter and the balance of the year, we will continue to take every precaution to keep our crews In addition to keeping our pre-use of active fleet operational, we also initiated a number of new programs that contribute to our almost $9 billion of backlog. In Canada, the Transocean Barons kicked off a multi-year program with Equinox. We expect to run through the third quarter. In Trinidad, the DD3 commenced her one-year contract with Shell in May. This was her successful campaign in Equatorial Guinea with ExxonMobil. And, depending on the success of this program, we are hopeful we can keep the DD-3 working in-country beyond this current term. For its 10-month drilling campaign. Last quarter, In addition to the success of the drilling program and the improvement in oil prices, Borealis changed course and exercised an option for an additional well, which kept the India drilling into July. Unfortunately, despite the success of the campaign, we see no near-term prospects for the India and are therefore in the process of cold stacking the rig. Moving to Asia, the DD-1 completed her first full quarter of work on her campaign with Chevron in Australia and is expected to remain into the fourth quarter. In Malaysia, the Nautilus commenced activity with Petronas that is scheduled to continue into the first quarter of next year. Turning to the contracting front, with the continued uncertainty regarding global energy demand and correspondingly challenged oil prices, contracting activity has been predictably disappointing. However, we are very encouraged to have executed a drilling contract for the industry's second ultra-deepwater 20,000 PSI-capable drill ship, the Deepwater Atlas, with Beacon Offshore Energy, for the highly anticipated Shenandoah project in the Gulf of Mexico. The Atlas will be the industry's most capable ultradeepwater drill ship when delivered and will include, among other upgrades, a 3 million pound hoisting system. The Shenandoah project is subject to a final investment decision by Beacon, which we expect by March of next year. Prior to that time, we do not expect to incur any additional material expenditures for equipment purchases associated with the program. Conditioned upon sanction, the program and services would include the drilling and completion of four wells, which would involve commencing drilling operations in the first quarter of 2022 and should keep the rig under contract into the third quarter of 2023, resulting in a total contract value of approximately $250 million. Beyond the Shenandoah project, we are actively engaged in conversations with customers for additional opportunities in the lower tertiary of the Gulf of Mexico, That will require a ship with the Atlas's enhanced capabilities. Importantly, these projects have expected start dates that should closely follow Shenandoah. And since Transocean will be the only drilling contractor with the assets and experience to successfully execute in this most challenging of ultra deep water environments, we will be very well positioned to secure future contracts for the Atlas. Looking now at upcoming market opportunities. The contracting environment has improved marginally from when we last spoke three months ago, and oil prices were largely at or even below $20 per barrel. While oil prices are still not where we want or need them to drive demand we saw emerging as we exited 2019, the recent recovery in oil prices to approximately $40 per barrel has encouraged our customers to begin revisiting the projects that we initially expected to start in 2020, but are now likely pushed into 2021. In the U.S. Gulf of Mexico, a tin well project starting in 2021 was just awarded by an independent producer. In Brazil, Petrobras has recently requested bids for two rigs, both with terms of approximately three years, for activity kicking off early next year in the Campos and Santos basins. Additionally, we could see some further movement from IOCs in-country following ExxonMobil's recent contracting of a drill ship for initial drilling in the Santos basin. Furthermore, we believe Equinor is considering awarding a four-year contract in Brazil in the coming months, which could begin operations at the end of 2021. Speaking of Equinor, you will know that they recently awarded a multi-year fixture for a high-specification harsh environment semi in Norway. While the contract day rate was a step down from recently awarded fixtures, given the drop in oil prices and continued market uncertainty, we were encouraged to see base day rates remaining near $300,000 a day. with fairly significant upside opportunity tied to performance bonuses. Additionally, with the Norwegian government's recent enactment of favorable tax incentives for oil and gas operators related to offshore investments, we anticipate this market will stabilize and respond favorably to the investment incentives. In Africa, we soon expect to see the first multi-year ultra-deepwater drill ship award in Mozambique. We also think it is very likely we will see an 18-month award in Angola this year. Activity for both of these awards would begin in 2021. In Asia Pacific, we anticipate a five-well contract will be awarded this year for Work Offshore Australia, with activity commencing in 2021. Additionally, we have been pleasantly surprised to see the emergence of a few opportunities for shorter-duration work in other countries throughout the region. So, while we are certainly disappointed that the ultra-deepwater recovery has been once again delayed, We take comfort in our almost $9 billion backlog, and we are becoming encouraged by various opportunities we see emerging in 2021. Looking at our rigs, we continue to see the benefits of maintaining a young, high-specification fleet as we continue to operate significantly more floaters than any other contractor. Consistent with our well-defined asset strategy, we have recently taken action to responsibly retire the semi-submersibles Development Driller 2 and the SEDCO 712. Beyond the asset's ages, we continue to employ an objective criteria focused on cash flows when evaluating our fleet's composition. When the costs associated with maintaining, reactivating, and or operating an asset outweigh our view of its cash flow potential, we take prudent actions to remove the asset from our fleet. Despite our increased optimism, we remain pragmatic and recognize the challenges the industry, and more specifically Transocean, will continue to face in the near to medium term. As we entered the year, we were optimistic that the ultra-deepwater offshore recovery was beginning to take shape. However, as a result of the pandemic, the current demand for hydrocarbons has fallen significantly, thus impacting offshore contracting activity. As a result, after thoughtful consideration, we recently took the difficult decision to once again materially reduce our shore-based support costs, which Mark will address in his comments, to more closely reflect what we anticipate being our contracted rig fleet over the coming months. I would like to stress that personnel reductions are without question the most difficult decisions we make as an organization as our team is irrefutably the most qualified and capable group of people within the industry. We embarked on this global reduction in force purely as a result of the unprecedented and unforeseen circumstances. We hope that we will be in a position to welcome many of these teammates back to Transocean as the offshore market recovers and we have solid visibility to sustainable growth. I'd now like to provide a few comments regarding the state of the market from our perspective as the leading offshore drilling contractor. As you know, a number of other contractors have either formally started the restructuring process or taken steps that indicate that they are likely to do so in the near term. Given our strong backlog, strong operating performance, and timely balance sheet transactions over the past several years, Transocean is not facing the distractions and challenges associated with the restructuring. As he does every quarter, Mark will provide an update on our liquidity runway and expectations in a few minutes. As we watch the transformation of our industry unfold, we think that there are some very favorable data points in relation to Transocean, which I would like to detail. When the downturn began almost six years ago, and many of our competitors went through their first restructurings, our customers, as you might expect, became more focused on the financial stability of drilling contractors and their other service providers. During this time, Transocean was able to further its position as the undisputed leader in ultra-deep water and harsh environment drilling. As the second phase of contractor restructuring is now beginning to occur, we anticipate our position will continue to serve us well on the contracting front, with the more active IOCs and NOCs preferring strong counterparties to safely, reliably, and efficiently deliver their projects. Thank you for joining us. An inflection in rig contracting should have an almost immediate and positive impact on day rates due to the shortage of marketable rigs and the significant expense associated with reactivating stacked assets. At Transocean, we have strategically assembled the largest and most competitive floating fleet in the industry with the industry's most experienced crews. We maintain the most contracted rig fleet with the strongest and most lucrative backlog, providing us with the visibility to future cash flow that we need to continue to invest in the training of our crews and the maintenance of our assets. As such, we are best positioned to survive this latest challenge and benefit from the eventual market recovery. In conclusion, we have accepted that a full-scale recovery in the deepwater offshore market will not begin before 2021. However, as the recent increase in oil prices has brought projects back into the fold, it has given us confidence that our customers will be ready to increase their offshore activity as oil prices continue to stabilize and become more supportive. In the interim, we are committed to our customers, to working with them to find the right contractual solution to enable their drilling programs, while operating safely at the highest performance levels with the industry's most capable assets. We are proud to have positioned ourselves as the clear leader in our environment in the Thank you, Jeremy, and good day to all. During today's call, I will briefly recap our second quarter results and then provide guidance for the third quarter. Lastly, I will provide an update to our liquidity forecast through 2021.

As reported in our detailed press release, for the second quarter of 2020, we reported a net loss attributable to controlling interest of $497 million, or 81 cents per diluted share. After adjusting for unfavorable items associated with the impairment charges related to previously announced further retirements, we reported an adjusted net loss of $1 million. Further details are included in our press release. Highlights for the second quarter include adjusted EBITDA of $418 million, reflecting strong fleet-wide revenue efficiency, accelerated cost control actions, and a legal settlement. Also, due to early discussions with customers, agreements were reached regarding responsibility for costs related to COVID-19. As a result of these arrangements, we mitigated what could have been a more negative impact on our quarterly financial performance. Fleet-wide revenue efficiency exceeded 97%, This represents a 3% increase from our first quarter results. We generated $41 million of free cash flow, which represents a sequential increase of $196 million. It should be noted that this does not include $46 million related to the legal settlement of a dispute that was paid in the first week of July. Consistent with our guidance, we generated approximately $87 million in cash from operations, an increase of $137 million quarter over quarter. During the second quarter, we generated adjusted contract early revenues of $983 million, driven primarily by strong revenue efficiency across the fleet and illegal settlements. Also in the quarter, the positive impact of early termination revenue from the Poor B. Lloyd was largely offset by the deported SCAROS remaining on standby rate for most of the quarter and delayed starts for the deported Nautilus, the DD3, due to COVID-19 travel restrictions. These delayed starts resulted in a lower and forecast number of operating days during the quarter. Regarding the previously mentioned settlement, we recognize the $177 million representing net present value of the $185 million settlement, paid in equal installments of $46 million on July 1, 2020, June 1, 2021, June 1, 2022, and January 15, 2023. Additionally, we recognize approximately $20 million in legal fees in the second quarter associated with the settlement. Operating and maintenance expense in the second quarter was $525 million, which is below our guidance due to the timing of certain shipyard projects and in-service maintenance, and lower than expected costs associated with COVID-19. In the quarter, we recognize approximately $30 million of expenses related to COVID-19, of which approximately $10 million of these costs are reimbursable by our customers. Turning to the statements of cash flows and balance sheet. We ended the second quarter with total liquidity of approximately $3 billion including unrestricted cash and cash equivalents of $1.5 billion and approximately $200 million of restricted cash for debt service and $1.3 billion from our ungrown revolving credit facility. Furthermore, we forecast positive operating cash flow for the remainder of the year As Jeremy mentioned during the quarter, we took a difficult decision to reduce our shore-based workforce to better reflect our expected operating activity for 2020 and 2021. As a result of these decisions, we will save approximately $80 million annually. Furthermore, we recognize severance charges of approximately $12 million in the quarter. Let me now provide an update on our third quarter financial expectations. For the third quarter of 2020, we expect our adjusted contract drilling revenues to be approximately $800 million, reflecting revenue efficiency of 95% fleet-wide. This reflects low activity and six rigs are expected to complete their drilling campaigns, including the KG2 finishing its contract with Chevron ahead of schedule and remaining warm-stacked until their next fixture plans to start in November, forward-side. Furthermore, the Discovery India, Discovery Inspiration, TransOcean Barons, TransOcean Leader, and TransOcean Arctic will be concluding their respective contracts during the quarter. Except for the Inspiration, which we will long-stack in the US Gulf of Mexico, we will cold-stack these regs. The Inspiration is well-positioned for further near-term work in the Gulf of Mexico. This activity reduction is offset by a full quarter of operations on the Seaboard Nautilus, the Leaf Ericsson, and the DD3. together with the SCAROS resuming operations at full day rate in July. We expect third quarter O&M expense to be approximately $500 million. The quarter over quarter decrease also relates to the level operating activity discussed above. Including my estimates, approximately $14 million related to COVID-19 expenses and $6 million related to severance costs. These COVID-19 costs include or are not limited to overtime pay, charter flights and boats for crew changes, and the quarantine prior to crew rotations and certain other logistical expenses. We expect G&A expense for the third quarter to be approximately $45 million. This includes approximately $1 million related to severance payments. Net interest expense for the third quarter is expected to be $150 million. This forecast includes capitalized interest of approximately $13 million, interest income of $1 million. Capital expenditures, including capitalized interest for the third quarter, are anticipated to be approximately $80 million. This includes approximately $50 million for our new-build drill strips under construction and $30 million of maintenance capex. Our cash taxes for the third quarter are expected to be approximately $12 million. Turning now to our projected liquidity at December 31, 2021. Including our ungrown revolving credit facility, and potential securitization of a deported Tysons contract with Chevron, our end of year 2021 liquidity is estimated to be between $1.2 and $1.4 billion. This liquidity forecast includes an estimated remaining 2020 capex of $170 million and a 2021 capex expectation of $1.5 billion. The 2021 capex includes $1.4 billion related to our new builds and $100 million for maintenance CapEx. Please note our CapEx guidance excludes any speculative rig reactivations or upgrades. In conclusion, while safety and operational excellence remain our primary areas of focus, we are acutely aware of the extreme dislocation in the energy business and especially all field services including offshore drilling. We recognize that our customers have significantly reduced their 2020 budgets, which eliminates the potential for recontracting rigs completing their contracts this year. However, the potential longer-term hydrocarbon supply constraints implied by our customers' exploration and development budgets encourages optimism and will remain constructive for 2021 and beyond in anticipation of a gradual increase in demand for energy and oil prices as the global conditions improve. Even so, we will continue to proactively manage our balance sheet and capital expenditure requirements by exploring all opportunities to reduce our costs. I'll now turn the call back over to Brad.

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

Thank you. Ladies and gentlemen, at this time, the floor is open for questions. If you would like to ask a question, you may do so by pressing star 1 now. If you are on a speakerphone, please make sure that your mute function is disabled to allow your signal to reach our equipment. Again, to ask a question, please press star 1 now. Our first question comes from Ian McPherson with Simmons.

Hey, thanks. Good morning, everybody. Jeremy, I wanted to see if I could dig in on a little more detail on the Atlas opportunity. You said the initial four-well program would be, I think you said Q2 of 22 through the middle of 23. Is the $250 million award to be finalized over an 18-month period? Robert Thaddeus Vayda, Robert Thaddeus Vayda, Robert Thaddeus Vayda, Robert Thaddeus Vayda, Robert Thaddeus Vayda, Robert Thaddeus

We're kind of not really going to talk about that until the FID is made. But yeah, it's certainly a very positive data point for us at the moment.

Absolutely. So congrats and good luck getting that over the finish line. And then I also wanted to see if you can speak to the remaining CapEx as the rig will be specced and how much of any of that is included in the 21 CapEx that Mark just described, the 1.4 billion new build CapEx that will fall next year.

I'll defer to Mark on that one. Thanks. Mark, you might be muted.

Can you answer that question again, please?

Yeah, so I wanted to see how much remaining CapEx for the final build out of the Atlas in total and then how much of that might be included in the $1.4 billion new build spending that you outlined for next year.

So the 1.4 is almost equally split between the two rigs. And except for some well control equipment, all of it is included in the 1.4.

So the rig will be effectively fully built out or budgeted for within next year's spending?

Correct. Yes.

Got it. Okay. Thanks, guys. Look forward to getting the update on that one.

Thank you. Thank you. Our next question comes from Connor Lenal with Morgan Stanley.

Yeah, thanks. Morning, guys.

Morning.

There's a lot of questions out there as to what the impact of these bankruptcies across the industry are going to be. Two sides of the question for you. Are you concerned about your competitive position as competitors reemerge with clean balance sheets? On one hand, It would argue for them having a lower cost structure. On the other hand, bids at sub $200,000 a day suggest interest expense and return on capital weren't really major factors in bidding behavior. So where do you think that shakes out?

Yeah, so it's interesting. And all I can do is look back at what we've seen recently and kind of walk through that and assume that that will replicate itself as we go through the second wave. So if you think back to the first wave, you had companies like Pacific and Sea Drill and Ocean Rig and Vantage go through restructuring. Out of all four of those, only Ocean Rig came out with a clean balance sheet. The rest came out with still pretty considerable debt. And so that'd be one piece of it. I don't expect these companies to come out completely clean. I think they're still going to have quite a bit of debt. It'll be pushed to the right and certainly be reduced from what it is today. and I doubt that they're going to come out with a lot of cash. And as you well know, it takes a lot of cash to operate and maintain these assets and certainly a lot of cash to reactivate them. So I'm not sure that they're going to be in a much better position than we are, first of all. So I'll just attack that one now. The other thing we saw was when these companies were going through the restructuring process, We increased our market share, and I can't tell you it was because our customers were definitely choosing the more financially stable, less distracted organization, but it sure showed up in the way that we won contracts because we were not below better during that time. So I think at least in the interim period, I think we have a decided advantage because we're not facing that uncertainty and those distractions. And then we'll just see how these companies come out of the restructuring process.

Got it. Thank you. You alluded to the second part of my question, which is everyone's in cash preservation mode right now. It seems like cold stacking is the obvious preferred option for most rigs that are going idle. How should we think through the cost of reactivating rigs that maybe really never came back this cycle or were cold stacked early in the cycle? And how do you think about how the cost curve of those idle assets is changing over time?

We've been on record saying this quite some time. No asset is the same and no preservation techniques are the same. We've looked at different rigs anywhere ranging from $20 to $25 million on the low end to an excess of $100 million on the high end. If you just wanted to take the midpoint of that, it's a really significant investment to bring one of these assets back online. If you look at the kind of contracts that have been awarded recently with respect to day rate and term, There aren't many that would justify it. As we said in the prepared comments, we see rigs roll off contract and I think over the course of this year and next we expect 89 to 90 rigs to roll off contract. Those rigs go to cold stack because people can't afford to keep them active and crude. It's a pretty big check that one has to write in order to reactivate those assets and the day rate today and the terms today won't support it. We think supply and real marketable supply and demand could come together pretty quickly.

I was just going to add to that. I think we saw in the bidding behavior that for rigs that were rolling off contract, some of our competitors bidding extremely low rates, but certainly in the public tenders where you can see what the rates were, Any of the rigs that did require reactivation or were being mobilized from a significant distance the numbers were quite different and of course with there being very little cash on hand amongst those that have and many more.

Got it. I was just going to sneak in one more. If you guys could look in your crystal ball, how many rigs would you guess leave the marketed floater supply over the next year or two here?

If you look at the 89 or so floaters that are rolling off contract over this year and next, there are, let me see here, 21 rigs that are over 30 years old. You would think and hope that at least those 21 never see the light of day again. I think there are another 20 or so that are between the ages of 11 and 22, 23. Those are probably at risk too. There could be a good 30, 40 rigs that don't ever see a contract again.

We've been in the downturn long enough that I think everybody has very solid experience of what it looks like to stack a rig and the condition that the rig is in. Thank you very much.

Thank you. Our next question comes from Taylor Zurcher with Tudor Pickering Holton Company.

Taylor Zurcher Hey, good morning and thank you. Jeremy, I wanted to touch on some of your comments on the marketing outlook. You ticked through a number of long-term contract opportunities in Brazil, Africa, and Australia. In this sort of market, all those opportunities are going to be fairly lucrative for not only you but for the rest of your peer group. Roddy, you touched on some of the pricing behavior right now. I'm curious if you could frame where you think maybe qualitatively pricing shakes out for that sort of work just given its real long-term work. If you think any of the T&Cs and some of these contracts as it relates to MOB payments and things like that might change a bit relative to where they were entering 2020. Thank you very much. Thank you.

It looks like they are going to contract four to five rigs out of the three tenders they have open at the moment. We actually expect that for starts in 2021 there could be as many as 12 rig years awarded fairly soon and that includes not just Petrobras but Caroon and Equinor and Total. That looks pretty interesting because there's a big push on things like the buzios field. There's a significant increase in orders of FPSOs. So that's going to drive rigged demand for sure. And how that relates to the pricing? As you point out, mobilizations and upgrades are very important considerations. I think what you'll see is that those that have assets in the region, very close, perhaps already up to the requirements that are in Brazil or have been outfitted specifically for the Petrobras specification, I think you may see some of them still being quite competitive. but after that it actually is driven by the necessity of spending money on the rigs and having to recover that and the interesting thing about those prospects is that they're all reasonably long term so to us it's a little counterintuitive to take your your asset and book it for you know two or three years without any return on investment so certainly we would expect that not only are the The activation costs and the mobilization costs covered in those contracts. But in addition to that, there should be a little bit of upside in it too. So in summary, really, I think you'll see that the rigs that are hot and ready on the spot may still go a little bit cheap. But after that supply is taken, we expect that to be soaked up in 2021, then it should be much more interesting towards the end of 2021 and into 2022.

Okay, that's helpful. And the one market I didn't hear much about is the North Sea. Could you just give us a flavor of where you see that market trending over the next 12 to 24 months? And maybe just kind of parse the market between the higher end six gen assets and some of the non six gen assets. I know you have a couple of those rigs rolling off in the next few months. And so just just curious what your take on that market is over the next one to two years.

Yeah, so let me deal with the UK side first. So a little bit lower specification on the assets. But really, the UK is dominated by the independents. And of course, the uncertainty brought by COVID and the oil price war, getting funding for them is tough, right? So certainly when they do have funding, they're going to be very cautious about how they spend that. So really what's happened in the UK side of things is that A lot of the stuff has been pushed out. So you're basically sitting on a significant number of prospects that are drill-ready but are struggling for lack of funding. So in the meantime, what's happened on that side of the North Sea is that a lot of rigs have been scrapped. We've seen some extensive cold stacking of rigs. So the active supply has basically been cut in half. So you're going from about 15 rigs down to 7 or 8 rigs. So, again, going through the reactivation costs and expectations of making some margin going forward, as COVID does subside, and we hope that happens sooner rather than later, you will see these guys being able to get some funding. And when that does happen, the number of available rigs for the North Sea is not going to be that many. And then when we think about Norway, which is the higher spec that you... As Jeremy mentioned, it's good to see fixtures being made. Equinor are pretty active. Norway has really moved beyond COVID now. They're really back up and running. Schools are all back in, people are back in offices, and Equinor is very active. and, you know, not just Equinor, but we're hearing that, you know, the likes of Lundin, Vintersal wants to get through the IPO, Neptune, etc. They have, you know, the better part of perhaps a dozen prospects that expect to move forward. And a lot of that's been driven by the tax breaks. So, again, great to see the Norwegian government essentially stimulating investment by, you Thank you for joining us today. and it could be a very tight market in 21.

All right, super helpful response. Thank you.

Thank you. Our next question comes from Greg Lewis with BPIG.

Yes, thank you and good morning everybody. I guess my first question is a follow-up to I think Connor's question around Some of the stress from some of your competitors in the market. Roddy, as you are out there realizing that there's not a lot of activity out there, but as it started to come up in conversations, given the fact that relationships matter, that we traditionally use Company A and we use you guys as well, but just given the fact that we don't know what Company A is going to look like in any fashion, whether it's going to be acquired, whether it's going to be unwound, Is there any sort of, you know, hey, we need to keep some viable companies up there and maybe that's going to drive a little bit more work through Transocean's doors?

Yeah, yeah, for sure. I mean, if we look back at the second half of 2019, we were actually very successful in breaking into several new customers. And, you know, we're very happy to report that our operations team have, you know, absolutely nailed it. The customers that are getting a taste of TransOcean for the first time are seeing that we really are delivering value, that the well times are tumbling and of course the return on investment for the operators is looking better and better. I'm not saying that's unique to us, but certainly we're able to demonstrate that we are right up there. So I think where you may have seen customers that hadn't used us before, those that are using us just now are extremely pleased. So again hats off to the ops team they've done a fantastic job and then of course with our long-term customers we're executing extremely well as can be seen in the you know the revenue efficiency numbers but not only that the way that the the teams have dealt with COVID you know almost uninterrupted operations I mean only a few instances where rigs went on standby for short periods of time and many more. Thank you. We know that you guys are a bit more expensive. You perhaps deserve that premium. They're always cautioning us not to be too expensive, but we're proud to say that we're able to get a premium. But I think we deliver tremendous value for that premium, and actually I wouldn't describe it as a premium. I would describe it as a saving for the operators.

Okay, great. Thanks, Roddy. And then just kind of for Jeremy or Mark, a little bit bigger picture question, more around capital allocation. as we look across the capital structure and obviously there's bonds in the back end that are trading at huge discounts but there's also some in the near term that are trading at discounts and cash is key but is there any arbitrage opportunity as you kind of look at your equity versus your debt where you could kind of take advantage to We've kind of pushed, you know, solidified Transocean liquidity position, balance sheet position, you know, a little bit more. It looks like there should be.

I'll defer to Mark on that one.

Yeah, Greg, as you know, we've been very proactive over the last several years in managing our balance sheet. We've raised over $3.5 billion. We've refinanced over $2 billion of debt. We've done tenders on a regular basis. We've done open market repurchases virtually every quarter. So we look at every opportunity to link to our runway, to look at our near-term maturities, make sure we've got liquidity available to address that. And nothing's going to change now. We're going to continue to do that. And you're right, our bonds are trading at deep discounts, but our equity is trading at a very low price as well. So it's very difficult to go out there and say we want to issue several hundred million dollars of equity to buy in debt when both sides of the equation are deeply discounted at the moment. But that being said, we will continue to look at interesting ways in which we can extend the runway and keep the company operating at a very high level of excellence.

Okay. Hey guys, thank you very much. Have a great day.

Thank you. Our next question comes from Mike Sabella with the Bank of America.

Hey, good morning, everyone. Morning. I was just kind of thinking maybe we could we could talk for a little bit more about about the upgrade the Atlas and just kind of walking us through that decision. So, you know, really kind of maybe what are the options for you or, you know, kind of really any of your peers to upgrade kind of an existing rig instead of taking a new build? And then maybe kind of what, you know, on the flip side, what you could have reasonably expected from the shipyard, you know, if you had decided to just delay or, you know, cancel delivery of that rig?

So, let me start. I'll start with the last piece first. There really was no opportunity to cancel the rig. Contractually, we were committed. And so, you know, we've obviously thought about every possibility over the course of the last five years during this downturn and recognizing that this was a significant capex for us here as we roll into 2021. So that was kind of off the table for us. So with respect to the upgrade itself, You know, there's more than just buying the 20K pressure control equipment to upgrade one of these assets to be able to drill and complete effectively in the Gulf of Mexico. The higher hook load, which we mentioned on the call and we mentioned several times before, is of paramount importance. The larger deck that both of these rigs, the Titan and the Atlas, have are ideal for large completion work. There's several other features, attributes that have been added to these rigs to make them really optimal for these 20K projects in the lower tertiary. So are there other assets that are out there for us or our competitors that could be upgraded? Yes, but significant cash. Bringing one of these assets into a shipyard, upgrading the hook load capacity, upgrading the mud system, acquiring the 20K pressure control equipment and associated plumbing and everything else that goes with it. So it's really, as we look at our competitive landscape, there's not really a viable option out there because everybody is so desperate right now with respect to their cash positions. So we feel like we're in a very unique situation having the only two 20K capable assets in the industry. We feel good about it. We're excited to have the drilling contract, although conditional, with Beacon and their partners. And we see other opportunities. We've been in active conversations with other customers about follow-on work after the Shenandoah project. Still a few things left to be done, but excited about the opportunity.

Mike, this is Mark. As Jeremy indicated, all the other upgrades have to occur to the rig. We took this decision 12 to 18 months ago to go ahead and prepare the rig for a 20,000 PSI BOP. So those costs have all been included in the numbers I mentioned earlier. You know, Ian asked the question earlier, does it include everything? except for some well-controlled equipment. And the reason I'm not specific on that is because the contract that we've signed is conditional and it has some items that need to be agreed upon, including some of the well-controlled equipment. So once we get a better handle as to what that is, we'll be able to give you a better estimate as to what that costs. But the vast majority of the other costs associated with this, in fact all of it, is included in the $1.4 billion.

That's great, guys. That was very helpful. And then just a follow-up. So we recently saw a contract disclosed by a peer in the Gulf of Mexico on a 450 days at $180,000 per day going out to 2022. I was wondering, you know, just as we all try to figure out, you know, what the day rate curve looks like, you know, assuming you all were a part of the bidding process on that rig, Was it really kind of the front end that you didn't like the rate or the back end as well? And then just kind of what does that indicate for where you guys think rates could go out into 2022?

We've been very vocal, especially over the last couple of quarters, with respect to the fact that we need to enter into contracts that generate positive cash flow from operations. and that means not only covering our rig-specific costs, but covering our corporate overhead. We have to generate cash, as do all of our competitors, and so that's how we are approaching our response to tenders.

And Roddy, I don't know if you've got... Go ahead. Yeah, sure, I'd also add, you know, you asked about the front end and the back end. The truth of the matter is, on that one, there's a fairly significant period to elapse before that campaign starts. So, you know, in our view, you know, Thank you very much for joining us. Thank you. Our next question comes from Kurt Halyard with RBC.

Hey, good morning.

Hey, just initial follow up here for for Mark, you know, when you provided the liquidity, you know, guidance out going forward, that 1.2 to $1.4 billion range, I was just curious as to whether or not that you anticipate having to tap into revolver to maintain that liquidity level.

Kurt, our revolver is $1.3 billion, so it's right in the middle of the range. So if we hit the middle of the range, the answer is no, but there's a potential that we dip into it by as much as $100 million.

Okay, that's fair enough. I appreciate that. And then just follow up on the cash flow dynamic here. You kind of provided your CapEx numbers for the back half of the year, and you indicated you'd be positive from cash from operations. Given the We will be close, Kirk. We do have $170 million in capex for the second half of the year. It should be close. Okay.

And then just one follow-up for Jeremy. You guys talked about the difficult decision to have to

You know, reduce cost and reduce some personnel. Kind of on a broader dynamic around cost reductions, given the dynamics that have occurred over the course of the year, has there been any opportunity potentially to reduce, number one, your daily rig operating costs? And secondly, have you been able to negotiate better terms with vendors Robert Thaddeus Vayda, Jeremy Thigpen

We certainly work with customers to optimize the crews that we have on each of our assets. and we've done that on several assets where we've been able to pretty substantially reduce crew size without negatively impacting performance. In fact, we've seen safety performance and reliability improve in most of those cases and so constantly looking for opportunities. With respect to our supplier base, our supply partners, we've entered into, and this is probably two years plus now, Thank you for joining us today. Those are long-term relationships, long-term contracts where we negotiated fairly significant discounts a couple of years ago. Obviously, we continue to go back to our vendors for support given these challenging times, but I think the incremental savings are going to be pretty de minimis, not overly material.

Great. Thanks for that.

Thank you. Our final question will come from Sean Mecham with JP Morgan.

Thanks. Hey, good morning.

Good morning.

Maybe just to follow on the Atlas discussion and the Beacon contract, the numbers look pretty good, but it seems like there's pretty limited visibility on follow-on opportunities. North Platte seems like the other big piece of the puzzle. It's unclear maybe the likelihood or timing of that one. Are we missing some others out there from a 20K perspective? And just how do you think about follow-on opportunities as you try to secure cash payback on that rig? Thank you for joining us today.

and everyone from Chevron and Beacon or the Shenandoah Group. On top of that, there's Total. There's also more requirements for some of the bigger guys as well. Even Chevron Shell, these folks are all talking about the possibility of incremental demand in that area. Now, of course, right at this minute, in the midst of COVID, there's some uncertainty about timing of those kind of things. But needless to say, there are additional opportunities. And, you know, without going into the details of the beacon arrangement, we've put that in such a way that allows us to move forward with minimal risk to not recovering the investment that we'll make in the well control and many more. So certainly there's plenty of fields that require this equipment in the Gulf of Mexico. And we think three to four years is plenty of time for the efficiencies of deep water to come through. We're already seeing how well we're performing versus shale and other places. But as time moves on and we continue this fantastic drive on efficiency, I think there's lots of opportunities there for it We kind of feel that we should be able to take advantage of that first mover position.

Got it. Thanks Rod. I think you framed that really well. So then Jeremy, you know, you certainly have an advantage in bidding right now as your peers restructure. But unfortunately, there's quite a limited opportunity to practice that advantage given the lack of tenders. So, you know, the goal since the early days of the last downturn was for you to be the last man standing. Seven years post-peak, you're about there. and you made all the right moves in the interim to position yourself there. So, you know, you called it right. But even with restructuring, there's a huge capital hole in the sector. So just does your view on being the last man standing change? Is there a shift in strategy on capital structure if deep water activity stays pretty anemic for the next 12 to 18 months?

No, it doesn't. It doesn't change. I think, I mean, ultimately, as you well know, we're going to need some help from the market at some point in time. But we, you know, We maintain a five-year forecast and continue to look at our liquidity position under various different scenarios in terms of utilization and day rate and feel comfortable with our near to mid-term. Obviously, if we get three years out plus and the market hasn't started to recover and day rates haven't started to recover where we can generate some significant cash flow from operations, then obviously we're going to be like everybody else that's going through the process right now. We are the last man standing. We have done, I think, made all the right moves both from a fleet operations and balance sheet perspective and will continue to pull every lever we can to extend that liquidity runway and keep moving on.

Yeah, fair enough. Thanks for the thoughts, Jeremy. I appreciate it.

Thank you. I'd like to turn it back to Mr. Brad Alexander for closing comments.

Thank you, David, and thank you to all participants on today's call. If you have further questions, please feel free to contact me. We look forward to talking with you again when we report our third quarter 2020 results. Have a good day.