Transocean Ltd (Switzerland)

Ladies and gentlemen, good day and welcome to the third 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. Lexington Mayne, Manager of Investor Relations. Please go ahead, sir.

Thank you, David. Good morning and welcome to Transocean's third quarter 2020 earnings conference call. A 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, Innovation, and Industry Relations. During the course of this call, Transocean 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 on this call, please limit yourself to one initial question and one follow-up. Thank you very much. I'll now turn the call over to Jeremy.

Thank you, Lex, and welcome to our employees, customers, investors, and analysts participating in today's call. As we have since March, we continue to work remotely to do our part to prevent the spread of COVID-19. Therefore, please forgive any challenges associated with maintaining audio quality during this call. As reported in yesterday's earnings release, for the third quarter, Transocean delivered adjusted EBITDA margin of almost 41%, with $338 million in adjusted EBITDA on $830 million in adjusted revenue. Importantly, this strong operating performance, which was driven by our experienced and committed teams, enabled us to generate $81 million in operating cash flow. Despite a number of challenges, including a global pandemic and an extremely active storm season in the Gulf of Mexico, we continue to deliver safe, reliable, and efficient operations for our customers around the world. During the third quarter, we had 26 active rigs across 10 countries. To put just some of our pandemic-related challenges in perspective, I will share with you that before a crew change, 14 of our rigs require crew members to enter a secured quarantine period, ranging from 5 to 14 days, depending on customer protocols and country regulations. And they must also have a negative COVID-19 test before joining the rig. In addition to the delays associated with quarantines and testing, to reduce overall exposure, we have asked more than 2,500 of our crew members to serve extended pitches, meaning even more time away from home, family, and friends. In addition to the quarantine periods and extended hitches, while onboard our rigs, our crews are subjected to daily temperature checks and are required to wear face coverings and practice certain social distancing protocols when possible. Needless to say, these are suboptimal operating conditions, yet our crews persevere with absolute resolve. Their sacrifice and dedication to our company is truly inspiring. And it's not just our crew members demonstrating their commitment to Transocean success. Our excellent customer service could not be delivered without the contribution of the entire organization, including our shore-based staff. The logistics involved in planning, coordinating, testing, and executing the movement of thousands of personnel, spare parts, and pieces of equipment during a global lockdown is nothing short of extraordinary. COVID-19 has forced our organization to adapt. Our offices around the world largely remain closed, and our employees continue to work remotely to help mitigate the spread of the virus. Virtual meetings and remotely provided expert technical rig support are the new normal. And as a testament to the strength and resilience of our entire organization, we have continued to deliver the same high level of performance as we did before COVID-19. For all of this, I extend my deepest gratitude to all of the men and women of Transocean for the personal sacrifices they make each and every day to keep our rigs operating safely, reliably, and efficiently to support our customers. We face tremendous challenges as a result of COVID-19. However, the strength and resilience our team has demonstrated throughout this pandemic is truly remarkable. We will continue to take every necessary precaution to keep our crews and our shore-based personnel safe and healthy for as long as necessary while we deliver best-in-class operating performance to our customers. Now, looking more closely at our third quarter performance, as a whole, our fleet continues to meet and often exceed expectations. I am extremely proud of our crews for the $10 million in performance bonuses achieved during the third quarter as a result of exceeding our customers' drilling schedules. This is a direct result of our collective efforts each day to continuously improve Transocean, including through our investments in high specification assets, the development and deployment of innovative technologies, and our industry-leading training programs. In addition, we have aligned interest with our customers by linking compensation and performance. A practice that many of our competitors have eschewed, resulting in an enhancement to our revenues. Obviously, this high level of performance helps in the efficient conversion of our $8 billion backlog into revenue, and ultimately into cash. Now turning to the fleet, starting in Canada, the Transocean Barons recently completed a successful campaign with Equinor. Since future prospects in Canada are somewhat bleak, and demand in Norway continues to be robust, we have already begun the process to prepare her for mobilization to Norway. In Trinidad, the DD-3 completed her first full quarter of operations with Shell and continues on her one-year contract until mid-2021. We believe the DD-3 is well-placed, and we are encouraged about potential follow-on opportunities in the area. In the UK, Crysor kicked off its 10-month campaign with the Paul B. Lloyd Jr. As you may recall, the work was originally slated for the 712, but was transferred to the Paul B. Lloyd, allowing us to further rationalize our fleet. Last quarter, we reported the anticipated early termination of the Deepwater India's work in Egypt. However, upon review of the successful drilling program, coupled with the improvement of oil prices, Bareilles reversed course and fulfilled the full program without early termination. This kept the India drilling into July. Unfortunately, with no near-term prospects on the horizon, we moved quickly to Cold Stacker in Greece. Moving to offshore India, I'm pleased to report Reliance exercised its 180-day option on the KG-1. This will keep her busy through the second quarter of 2021. Moving to Asia Pacific, the DD1 recently completed her successful campaign in Australia with Chevron. As we currently do not see any near-term opportunities for her, we have decided to cold stack her. And finally, the KG2 just this week commenced her contract with Woodside in Myanmar and is currently on standby at a reduced day rate. We believe that Woodside will commence mobilization in January, at which point we will be on full operating day rate of $250,000 per day. In addition to keeping our active fleet working, we remain diligent in assessing our fleet for ongoing marketability. And as we have demonstrated since the start of the downturn in 2014, once we determine that a rig has few profitable opportunities, we quickly remove her from our active fleet. Consistent with past practice and our disciplined philosophy on retirements of less competitive units, upon the completion of her recent drilling campaign, we decided to recycle the Transocean Arctic. Looking now at upcoming market opportunities, the contracting environment has materially improved from when we last spoke three months ago, when there was minimal customer interest. As a reminder, when we entered 2020, we were starting to see tangible signs of the recovery unfolding. Our high specification harsh environment assets were fully utilized, day rates exceeded $300,000, and visibility to future work was very encouraging and improving. And in the ultra-deepwater markets, utilization was also starting to trend higher. Indeed, at the end of 2019 and early 2020, we were awarded several Ultra Deep Water fixtures with day rates around $250,000 a day, which represented a 100% increase from fixtures signed earlier in 2019. In light of these data points, we were increasingly optimistic that the protracted market recovery was picking up sustainable momentum. Unfortunately, the world was hit with COVID-19, reducing demand for energy. This, when coupled with a temporary increase in supply that was spurred by production disputes among major producers, drove oil prices to historic lows, stalling the momentum that we were experiencing through early 2020. Understandably, this caused many of our customers to pause and reassess how and when to utilize their respective portfolios, and ultimately led to them delaying many of the projects that we expected to be sanctioned in the latter half of this year and the first half of 2021. While the delay in awards has certainly been disheartening, we're encouraged by the fact that most of these previously anticipated projects have not been canceled. Instead, they've been deferred by approximately 12 months. In fact, our bidding activity level this quarter has doubled from the low point in the second quarter and has returned to pre-COVID levels. During the third quarter, we participated in 18 bids, which is the same amount we participated in during the fourth quarter of 2019, just before COVID hit. Taking a closer look around the globe and starting in the U.S. Gulf of Mexico, while the near term is a bit challenging, a handful of projects with start dates in the second half of 2021 are beginning to emerge among independents, IOCs, and NOCs. In Brazil, Petrobras recently awarded long-term fixtures for the TraceMarinas project in the pre-salt, and we expect to see several more Petrobras awards in the near future. Furthermore, Equinor has recently retendered its four-year program in the bacalao field and we remain encouraged by the improving activity in Brazil. Moving over to Norway, we are excited about the opportunities unfolding as a result of the Norwegian government's recent enactment of favorable tax incentives for oil and gas projects sanctioned over the next two years. We anticipate this market will continue to tighten as more projects are brought forward to capitalize on the favorable investment incentives. In fact, we've identified two dozen projects that could be given the green light as a result of the tax change If all of these projects move forward, we believe that the market for high specification assets could be sold out as we exit 2021 and enter 2022. And with the most recent fixtures for such assets around the $300,000 per day mark plus performance bonus incentives, we are optimistic about the future prospects of our industry-leading fleet in Norway, which once again will soon include the transition barons. In Africa, excluding Total's multi-year tender for Mozambique, we could be Thank you for joining us today. In summary, while we are certainly disappointed that the Ultra Deepwater recovery continues to be delayed, we are encouraged by the emergence of multiple opportunities for work in 2021 and beyond. While we take some comfort in our approximately $8 billion backlog, we remain very pragmatic, recognizing the challenges to the industry and, specifically, those that Transocean will continue to face in the near term. As such, we will continue to take the necessary actions to preserve and enhance liquidity, including, but not limited to, Delivering flawless operations that enable us to convert as much of our backlog into revenue as possible, further improving our cost structure to fit the evolving active fleet, quickly cold stacking or scrapping non-working idle assets, and executing timely and opportunistic financing transactions. In this regard, as you likely know, the third quarter was very active from a capital markets perspective. During the period, we undertook a series of actions to reduce our debt, and more importantly, did so while also improving our liquidity forecast. As a result, during the quarter, we successfully reduced our debt by almost $1 billion, reducing our interest expense and extending our liquidity runway as we continue to navigate through this economic cycle. And as we have demonstrated over the last several years, we're not done. Our finance and legal teams have proven time and again that we can successfully execute fiscally responsible transactions and favorably resolve disputes as they arise. We will continue to be proactive in managing our balance sheet in a way that enables us to continue to invest in our people, our assets, and the development of new and differentiating technologies. I would now like to provide a few comments regarding the state of the offshore drilling sector from our perspective. The majority of our peers have either formally started the restructuring process or taken steps that indicate that they are likely to do so in the near future. Given our large backlog, strong operating performance, and liquidity-enhancing balance sheet transactions, TransOcean is in a very different and advantageous position relative to our competitors, as we are not currently facing a restructuring decision, nor are we experiencing the difficult and sometimes demoralizing and crippling distractions associated with such a process. Instead, we believe we have the liquidity to continue to prudently invest in our business, and importantly, we are able to maintain a singular focus on delivering best-in-class operations to our customers. As our competitors emerge from restructuring, it is possible that we may see some consolidation. which we believe is a natural and inevitable result based upon industry economics. Furthermore, marketable supply of rigs is likely to fall at a pace that we expect will eventually meet with the contracted rig count, which we are already starting to see. Therefore, when oil prices stabilize at more favorable levels, 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 rigs. TransOcean will continue to take the necessary actions to ensure that we maintain the most competitive fleet in the industry and remain disciplined in our approach to contracting that fleet. In conclusion, TransOcean has strategically assembled the largest and most competitive floating fleet in the industry with the industry's most experienced crews and shore-based support teams. We maintain the largest contracted fleet with the strongest and most lucrative backlog providing us with the visibility to future cash flows 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. We've accepted that a full-scale recovery in the deepwater offshore market will not likely begin before the middle of 2021. However, as the market has begun to stabilize, it gives us confidence that our customers will be ready to increase their offshore activity in the years to come. In the interim, we are committed to our customers and to the preservation and generation of cash flows. We are proud to have positioned ourselves as the clear leader in harsh environment and ultra-deep water drilling and will continue to strategically refine our fleet to further enhance that position. As such, we expect that our marketed fleet will remain the industry's most utilized as we successfully navigate this current economic cycle. With that, I'll turn it over to Mark.