Transocean Ltd (Switzerland)

Good day and welcome to the Q4 2020 Transocean Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Lexington May, Manager of Investor Relations. Please go ahead, sir.

Thank you, Sierra. Good morning and welcome to Transocean's fourth 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 McKenzie, 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 will 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 for the better part of the past year, we continue to work following appropriate protocols to do our part to prevent the spread of COVID-19. And as many of you know, in Texas, we've been battling record low temperatures power and water outages, and are also experiencing intermittent connectivity and communications challenges. Therefore, please forgive us for any deterioration of the call's audio quality today. As reported in yesterday's earnings release, for the fourth quarter, Transocean delivered adjusted EBITDA of $210 million on $747 million in adjusted revenue. Importantly, this strong operating performance, which was driven by our experienced, committed, and unbelievably resilient teams, enabled us to generate $279 million in operating cash flow. Despite a number of challenges that we faced during the past year, including a global pandemic that presented new and unparalleled logistical and physical hurdles, we continued to deliver best-in-class, safe, reliable, and efficient operations for our customers. In fact, we delivered the best overall operational performance for any single year in the history of Transocean. In 2020, we delivered a total recordable incident rate of 0.24, the second lowest in the history of our company. Even more remarkably, we achieved this with no lost time incidents. We also delivered over 97% uptime across our global fleet, which marked a new best for Transocean. Importantly, we delivered this result with a fleet of floaters that are focused exclusively on ultra deep water and harsh environment operations, which present the most challenging operational conditions. Additionally, due to market conditions, our active fleet has decreased. Therefore, this makes each unplanned event even more significant to our business. So needless to say, our operations team delivered a great 2020. And for that, I would like to extend my deepest gratitude to our entire team at Transocean for the personal sacrifices made each and every day to deliver best-in-class service to our customers. Despite the COVID-19-related challenges we continue to face, the strength that our team continues to demonstrate throughout this pandemic is truly inspiring. In addition to the great effort delivered by our operations teams, I'd like to take a moment to recognize our shore base support teams as well. Our HR and travel teams have moved heaven and earth to ensure that we have the right people on the right rig at the right time. Our supply chain teams overcame numerous obstacles to deliver equipment, parts, and services to properly maintain and operate our assets. Our finance and legal teams continue to demonstrate their creativity, skill, and efficiency as they identified and seized opportunities to extend our liquidity runway and reduce our material exposures. Our IT teams continue to ensure that we remain connected and efficient in a remote working environment. And while the opportunities were scarce for much of 2020, our marketing team continued to work with our customers to create mutually beneficial solutions. And speaking of those solutions, I'm proud of the fact that we continue to align our interests with those of our customers by linking compensation from our customers to our operational performance, a practice that many of our competitors have rejected, but a practice that has resulted in an enhancement to our revenues. We believe the combination of our highly efficient performance and our ability to overcome challenges such as COVID-19 helps drive the efficient conversion of our approximately $7.8 billion backlog into revenue and ultimately into cash. So once again, well done to the entire team and thank you for all that you continue to do for Transocean. Now turning to the fleet, starting in Norway where we recently repositioned the Transocean Barons, we are pleased to report she has already secured a contract with MOL Norga. The campaign is set to kick off in the second quarter and is slated to run through the end of the year. This fixture is a direct result of the outstanding reputation that Transocean and the Barents have in Norway, and further highlights the attractive market conditions resulting from the Norwegian government's favorable change in tax law to help spur investment in offshore exploration and production. Also in Norway, the Transocean Norge has just recently secured an additional extension with Equinor that will keep her busy until the summer. We are actively bidding her into several projects that would commence after the completion of her current campaign. This state-of-the-art rig has continued to garner customer interest and proven she can deliver. As such, her future remains very bright. In the UK, Crysor extended the contract for the Paul B. Lloyd Jr., which will now continue working through the third quarter. Moving over to the Gulf of Mexico, I'm pleased to announce Shell recently named the Deepwater Colossa its Floating Rig of the Year for its outstanding performance in the Gulf of Mexico. This is a testament to our operational excellence and best-in-class customer service. Staying in the Gulf of Mexico, I'm happy to announce that just last week, BHP has exercised one of its options on the Deepwater Invictus at an increased day rate of $215,000 per day. The rig is expected to continue working through the summer. And finally, in the Gulf of Mexico, the Asgard recently completed a successful campaign for Beacon Offshore in January. The rig is now warm-stacked, but as you well know, the Asgard is one of the most technically advanced and most well-respected assets in the U.S. Gulf of Mexico. As such, we're actively bidding her into multiple opportunities. Continuing our look around the fleet, now focusing in Trinidad, I'm pleased to report that the DD3 received a one-well extension from Shell and signed a new contract with BHP in Trinidad. These fixtures both carry attractive day rates ranging from $220,000 a day to $250,000 a day. The work will keep her busy through August with an option that could further extend her activities into the fall. In Brazil, during the fourth quarter, we announced that Petrobras exercised the 680-day option for the Deepwater Corcovado and the 815-day option for the Deepwater Mykonos. These extensions will keep these rigs working in Brazil through the summer of 2023 and added a total of nearly $300 million to our industry-leading backlog. Moving to West Africa, I'm pleased to report that Total has named the Deepwater Skyrose as its rig of the year, due in large part to its superior performance and zero lost time record. Shifting over to India, I'm pleased to report that Reliance exercised its seven-well option on the KG-1. This will keep her busy into the fourth quarter of 2022 and added more than $85 million in backlog. In the Asia-Pacific region, the KG-2 recently commenced her contract with Woodside in Myanmar. Despite recent events in the area, the rig has continued to operate with the crew safely on board. Rest assured, we will continue to closely monitor the developments there with our crew safety as our number one priority. Also during the quarter, the Deepwater Nautilus was under contract with our customer Petronas in Malaysia for a term that was expected to expire at the end of February. The customer attempted to terminate the remaining term early in November 2020. We strongly believe that this attempted early termination is invalid and we are urgently pursuing all applicable remedies. Furthermore, I'm pleased to announce that just yesterday we signed a new fixture for the Nautilus with POSCO. The rig will begin working at the end of March and continue into the summer. In addition to keeping our active fleet working, we remain diligent and continue to assess each asset's long-term marketability. And as we have demonstrated repeatedly since early 2014, once we determine that a rig has limited profitable opportunities, we quickly remove her from our active fleet. Consistent with past practice and our discipline philosophy on retirement of less competitive units, we decided to responsibly recycle the Leif Erikson after completion of her successful campaign with ConocoPhillips in Norway. As we look toward upcoming opportunities, we're encouraged by the stability and steady improvement of oil prices since we last spoke. Today, Brent is trading above $60 per barrel as a result of OPEC's production cuts, disciplined spending from U.S. shale producers, and demand slowly recovering as the COVID-19 vaccine is distributed around the world. Our customers are reacting to this upwardly biased stability and have started planning for new or previously delayed projects to commence later this year and going into next, in line with the timing of the expected global economic recovery. Taking a closer look around the globe, starting in the US Gulf of Mexico, activity is expected to increase with several projects starting in the second half of 2021 and early 2022. With contract awards expected in the coming weeks and months. And given their technical specifications and stellar reputations, We believe both the Asgard and Inspiration are well-placed to capitalize on these opportunities. In Brazil, Petrobras continues to make awards, adding long-term fixtures for the Trace Marinas project and recently launching several additional multi-year tenders that should book many, if not all, of the available rigs in Brazil. We expect the rig count in Brazil to sustain and steadily rise over the next couple of years based on Petrobras' tender count matching pace with rigs coming off contract, coupled with demand from the IOCs incrementally adding to the pack. Encouraged by the signs we are seeing, we are optimistic that a handful of successful exploration wells in the pre-salt fields by the IOCs will signal a welcome return of activity in Brazil to levels that we haven't seen over the past few years. In 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 during 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. As I previously mentioned, we've already started to see this come to fruition with the contracting of the transition bearance. Looking now at the UK, we've witnessed a slight resurgence following what appeared to be a dearth of prospects, and we are now encouraged by new tendering activity that has emerged, including the first multi-year tender we've seen since 2018. The lack of warm rigs available in the UK could actually see a pool of hot rigs from Norway to perform some of the work anticipated over the next year. In Africa, excluding Total's multi-year tender for Mozambique, which could be awarded in the coming months, we see several medium- and long-term programs that could be awarded for Angola, including Exxon's 17-well tender and Total's multi-year tender. In the Asia Pacific region, including Australia, we see several short- and medium-term opportunities starting in the second half of this year. As you may know, this region has generated continued activity through these difficult times, and the volume of opportunities is nearing pre-COVID-19 levels. In summary, we recognize the challenges brought on from a global pandemic and that our expectations for a sustained recovery and offshore drilling will likely not materialize before mid 2021. We do expect the global floater count to continue to decline before stabilizing in the second half of the year. However, we are very encouraged by the improving macro environment and conversations with our customers for many opportunities emerging in the back half of 2021 and 2022. Following the initial disruptions caused by COVID-19, we have seized the opportunity to innovate, adapt, and deliver meaningful change across our organization. I believe that this is the direct result of our collective efforts each and every day to continuously improve Transocean, including through our investments in high specification assets, the development and deployment of innovative technologies, and our investment in the continued development and training of our valued team members. As evidence of our dedication to innovation, we recently announced the successful deployment of our patented HaloGuard technology on the Deepwater Conqueror in the Gulf of Mexico. HaloGuard works through a combination of locating device technologies worn by personnel on the drill floor and a machine vision system using leading edge techniques in machine learning and perception. As a crew member moves around the drill floor, the technology is able to not only locate, track, and alert the individual to equipment moving in his or her area, but also has the ability to halt moving equipment. further enhancing the safety of our crew members and overall operations. The ability for drilling equipment to identify and respond without human prompting is something we haven't seen before. We are pleased to provide our crews with additional tools and resources to complement our industry-leading training and safety programs. This technology adds an additional layer of protection for our crews, and we believe other industry participants and potentially other industries will also want to consider incorporating this technology into their operations going forward. We are currently planning to install this technology on six additional floaters this year. I'd now like to take a moment to discuss the state of offshore drilling. The majority of our peers have either formally started the restructuring process or have recently emerged. Transocean is in a very different and advantageous position relative to our competitors. Given our liquidity position and industry-leading backlog, we are not facing a restructuring decision. But candidly, we're pleased to see our competitors embracing the decision to restructure, as we anticipate that post-restructuring, we will experience a wave of fleet rationalization and industry consolidation, as the new owners of these restructured companies move quickly to reduce cash costs, including costs associated with stacking and ultimately reactivating less capable assets, as well as the costs associated with maintaining multiple management teams. This will undoubtedly make it easier for our peers to rationalize their fleets and reduce the marketable supply of rigs. And as consolidation unfolds, we believe that we will witness a more sustainable approach to contracting to benefit new and existing shareholders. When looking at the demand side of the equation, we see activity starting to pick up in the latter part of the year and heading into next. As the COVID-19 vaccines continue to be distributed and the global economy begins to recover from the pandemic, we believe demand for hydrocarbons will increase. This is setting up a potentially robust recovery for offshore drilling. with increasing demand and a dwindling and consolidating supply of assets converging at precisely the same time. If the market plays out the way we currently think it will, day rates could meaningfully increase as we move into 2022 and beyond. Our fleet of high specification floaters is exceptionally well positioned to capitalize on the recovery, ultimately providing us with opportunities to generate sufficient cash flow and meaningfully deliver the balance sheet when opportunities arise. While we are increasingly encouraged by the market dynamics and take comfort in our approximately $7.8 billion backlog, we fully recognize that we have experienced a few major market-related head fakes over the past six years. As such, we remain very pragmatic and prudent in our operational and financial planning, recognizing the challenges to the industry and specifically those that Transocean will continue to face in the near term. Now I'd like to address some of the potential concerns regarding drilling activity in the U.S. Gulf of Mexico. As the leading deep water drilling contractor in this region, we are paying close attention to any regulatory or legislative changes that could adversely impact the offshore drilling industry. I can report that our current drilling activity has not been impacted by the recent executive orders. We understand the Biden administration is taking time to review the current policies and regulations around permitting and leasing for federal lands and waters. We believe this is an effort by the Biden administration to impose more stringent regulatory requirements around hydrocarbon exploration and production on federal property as part of the administration's desire to reduce carbon emissions to fight climate change. However, we believe these actions may have two significant implications on the long-term macroenvironment. The first being that more stringent regulations will be placed on our customers that could ultimately cap U.S. production growth. The second is that it will lead to our customers looking elsewhere to explore and produce hydrocarbons, including the vast and prolific offshore basins around the world, such as Brazil, the North Sea, and West Africa, among other areas. It should be noted that one barrel of oil produced from the deep water Gulf of Mexico has the lowest carbon intensity of all oil produced in the United States. We believe oil production in the Gulf of Mexico is an important part of the United States economy, as approximately 10% of the total U.S. oil production comes from the Gulf of Mexico, and of that, 90% comes from deep water. As such, we believe that we will continue to need oil from the Gulf of Mexico to help fulfill the world's energy needs. It's important to note that while we have heard from certain operators in the U.S. Gulf of Mexico who have received new permits for certain types of drilling activities following the initial announcements from the Biden administration, it is still too early to assess the full impact to Transocean regarding the actions that have been announced thus far, but we will continue to be proactive in our approach to protecting our company and our shareholders. In conclusion, Transocean has strategically assembled the most competitive floating fleet in the industry with the industry's most experienced crews and shore-based support team. We maintain the largest contracted fleet with the strongest 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 overcome challenges and benefit from the eventual market recovery. We think that we should observe more compelling evidence supporting a full-scale recovery in the deepwater market later this year. Indeed, as oil prices have stabilized, 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 position ourselves as the clear leader in harsh environment and ultra-deepwater drilling, and we'll 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 the current economic cycle.