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.