Transocean Ltd (Switzerland)

Good day and welcome to the Q2 2021 TransOcean Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Lex May, Manager of Investor Relations. Please go ahead.

Thank you, Madison. Good morning and welcome to TransOcean's second quarter 2021 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, Keelan Adamson, Executive Vice President and Chief Operations 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 our forward-looking statements and for more information regarding certain 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 with our team. 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 reported in yesterday's earnings release, for the second quarter, Transocean delivered adjusted EBITDA of $255 million on $713 million in adjusted revenue, resulting in an adjusted EBITDA margin of over 36%. We continued to operate at a high level during the second quarter, as evidenced by our company best revenue efficiency of 98%. In fact, even compared to a very strong first quarter, we still reduced our sequential downtime by over 14%. This reflects the steps we've taken to continuously improve our reliability through our disciplined operational procedures, the extensive collaboration we engage in with our various equipment providers for the maintenance of our assets, and the broader use of our proprietary smart equipment analytic system, which enables us to identify anomalies, tailor our actions, and ultimately improve our reliability. As such, I would like to extend a sincere thank you to the entire Transocean team for the devotion that you demonstrate each and every day to deliver best-in-class service to our customers. You have shown tremendous strength and resilience throughout this pandemic, and I would like to acknowledge the personal sacrifices that you continue to make each and every day to keep our rigs operating safely, reliably, and efficiently to support our customers. Now taking a look at our fleet. Starting in the Gulf of Mexico, I'm extremely pleased to announce that the Deepwater Conqueror, one of our most capable rigs, was awarded a new contract that will commence in direct continuation of our current campaign. And as compelling evidence of improving market conditions, this most recent fixture includes one well priced at $335,000 a day, plus two one well options. This is yet another leading edge fixture in the Gulf of Mexico and our third fixture above $300,000 per day this quarter, which is an important milestone in the offshore recovery and the type of rates that will help us to generate sufficient cash flow to continue delivering the balance sheet. Continuing with this momentum, Deepwater Asgard was just awarded a 90-day contract with a major operator in the Gulf of Mexico. This contract is expected to begin in the first quarter of 2022 and carries a day rate of $255,000 per day, plus an additional $40,000 per day for MPD, bringing the total day rate to $295,000 per day. These awards and day rates support our view that our customers recognize the value and increasing scarcity of readily available high-specification alternative water assets. Staying in the Gulf, the Discover Inspiration has commenced her reactivation from warm stack status for her Nine Well P&A campaign that is set to commence in September. Moving down to Trinidad, the DD3 finished a very successful campaign for Shell, which included banner safety performance with no lost time incidents. We are confident that she will continue to operate at a high level with BHP on her current assignment, which began in June. And as we look forward, we are encouraged to be bidding her into multiple opportunities around the world when she becomes available after her work in Trinidad concludes. Continuing our journey further south to Brazil, I'm pleased to report that Petrobras 10,000 was awarded a two-year contract extension by Petrobras in direct continuation of her current contract. This award adds over $241 million in backlog and boasts an average day rate of $330,000 per day, excluding royalties. This contract reinforces our belief that our customers recognize the shortage of readily available, high-specification, not to mention well-run, ultra-deepwater assets. Jumping over to Norway, we were recently notified by our customer, Molnorga, that following disappointing results of the reserves found after drilling the first wells in the campaign, they will not be continuing their drilling program. As such, in accordance with agreed terms, the customer ended the Trans-Ocean Barrens contract earlier than we anticipated. While the decision by MolNorga was disappointing, just prior to the notification, we received a new 200-day contract award from Shell for work in Norway at a day rate of $302,000 per day plus bonus. The contract is set to commence in February and adds over $60 million in backlog, once again demonstrating the confidence that our customers have in both the bearance and the service that we deliver in this challenging operating environment. Staying in Norway, during the quarter the Transocean Norga successfully completed her maiden contract with Equinor. and importantly, was awarded a new four-well contract with ConocoPhillips. The contract is expected to start in March of 2022 and add $56 million in backlog with the potential for an additional five one-well options. And wrapping up in Norway, the Transocean Spitsbergen had two one-well options exercised by Equinor at a day rate of $290,000 per day and is now expected to remain on contract through September of 2022. This state-of-the-art rig has developed a strong operational reputation and continues to draw customer interest from both NOCs and independents. Again, we remain encouraged by the Norwegian market's resilience and the outlook. The steady flow of projects continues to build as the favorable well economics encourage more investment on the Norwegian continental shelf, which bodes well for our large, established, and respected fleet of high-specification harsh environment assets. Turning now to West Africa, as we noted on last quarter's call, the Deepwater Ski Roast was awarded Total's Rig of the Year thanks to its superior operational performance. As additional confirmation that our performance is a key differentiator, Total exercised its one-year option on the rig, adding more than $72 million in backlog. As I will discuss in a moment, activity in this perennially difficult market finally appears to be improving. And finally, looking at the Asia Pacific region, the Deepwater Nautilus had a one well option exercise by POSCO, which will keep the rig active through November. Additionally, the Nautilus was also awarded a new contract by Mubadala Petroleum that is expected to start in the first quarter of 2022. Rounding out the new contracts in our fleet, the KG2 was awarded a one well contract in Brunei with Shell, which is expected to start in December. These data points firmly corroborate our belief that we are in the beginning of an upcycle in the offshore drilling industry. As the world continues to rebound from the global pandemic, the need for hydrocarbons is increasing, which in turn dictates that more exploration and production is needed. Looking forward, we are encouraged by the relative stability in oil prices. They've remained well above $60 per barrel since early February and more recently above $70 per barrel. And as a result of the recent production agreement between OPEC and its allies, we expect this new pricing floor to be highly constructive and attractive for future investment from our customers. As the COVID-19 vaccines are distributed around the world, we expect that global demand for hydrocarbons will continue to recover. However, we are pragmatic. The timing of the global recovery may be a bit more fluid given the COVID variants that are circulating. Yet, we've already witnessed as COVID cases diminish, economic activity returns, and so does the need for hydrocarbons. Most importantly, we believe our customers also share our view. Their confidence in improving oil market fundamentals has resulted in accelerated planning for new or previously sidelined projects. many of which are expected to commence later this year or early next year. Taking a closer look around the global market, starting in the U.S. Gulf of Mexico, we continue to see an extremely tight market with only one available asset as we enter 2022, and the very real possibility that this market could be entirely sold out of active and marketable rigs by year end. Several of our recent fixtures for our seventh gen assets are now near or above $300,000 a day, reflecting the improving market and the obvious scarcity of active high specification assets. We expect this trend to continue through 2022 with relatively few assets available in the region. It's worth noting that we are not only responding to more tenders, we are also engaging in far more direct negotiations, particularly with customers operating in the Gulf of Mexico. In fact, our direct negotiation volume has more than doubled since this time last year, and there are other indications that there will be more projects moving forward. With an urgency not seen in quite some time, independents and IOCs are both requesting information on available assets in this region. As we predicted previously, operators are now increasingly entertaining paid mobilizations and reimbursement of project-specific rig upgrades. This is an important signpost that indicates improving market conditions and key aspects of an upcycle. The increased level of activity we are seeing in the US Gulf of Mexico is a direct result of higher and more stable oil prices, coupled with the reduction in offshore project costs that have been driven down over the past several years, as well as the added pressure that our customers are now facing to generate production with the lowest carbon intensity. To that point, one IOC recently stated their deepwater Gulf of Mexico production had the lowest carbon intensity production among its entire global portfolio. And to corroborate this increasingly pervasive theme, a third party recently published an article indicating that a barrel of oil in the U.S. Gulf of Mexico offered the lowest carbon intensity behind only Norway and United Arab Emirates. We firmly believe lower carbon barrels will drive our customers' future investment decisions and feel validated that our strategy to specialize in the highest specification, most efficient assets, focused primarily in Norway and the United States, was and continues to be the most advantageous. Remaining in the U.S. Gulf of Mexico, we eagerly await the deliveries of our new-build drill ships, the Deepwater Atlas and the Deepwater Titan, on order from CEMCOR Marines' Jurong Shipyard, which are expected to commence their maiden projects with Beacon Offshore Energy and Chevron, respectively. During the quarter, we reached an agreement with the shipyard to defer delivery of these assets, as well as the associated shipyard payments. We now expect the Atlas to be delivered in December of this year and the Titan to be delivered in May of next year. Importantly, as part of the arrangement, we have deferred over $450 million in near-term capex. While on the topic of new builds, Beacon has extended the FID deadline for its Shenandoah project to August 17th. Based on our almost daily discussions, we believe Beacon is fully committed to the project and is conducting its final procedures in advance of its FID. However, in the unlikely event a decision is made to not pursue the project, you should know that we have a very favorable arrangement in place with the shipyard to further delay the associated payments for the Atlas. Now turning to Brazil, we see over 18 rig years of work to be awarded for drilling starting in 2022. With almost all of those expected awards coming from Petrobras, we believe we are well positioned to capitalize on this incremental work. We've established a strong relationship with Petrobras, as evidenced by our three drill ships currently all on long-term contracts. And it should be noted that all three of our rigs rank very highly in Petrobras' Sondopolis performance rankings for offshore contractors. Based on Petrobras' tendering activity and the incremental demand forecasted from the IOCs, we expect the rig count in Brazil to rise steadily over the next couple of years. We are also 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 not seen in several years. Jumping over to Norway, we are excited about the opportunities unfolding as a result of the government's enactment of favorable tax incentives for oil and gas projects sanctioned by December 2022. We anticipate this market will continue to remain in balance as more projects are brought forward to capitalize on the favorable investment incentives. With much of the Norwegian fleet already contracted, white space for 2022 and beyond is now beginning to be filled, voting well for continued high utilization and strong day rates. As you would expect, we are engaged in conversations for extending or finding new opportunities for the extremely well-respected Cat D rigs, which we acquired in the Sangha offshore transaction. Looking now at the UK, we are witnessing an uptick in market opportunities and are actively responding to a number of new tenders that have emerged over the past couple of months. Current opportunities could add more than six rig years of work that would start within the next 12 months. And due to the lack of warm assets in this market, available assets could command increasingly stronger day rates. If this happens, given the prohibitive cost of reactivating a cold stack rig, we could find ourselves in an environment in which hot rigs from Norway, perhaps even the Cat D's, are being attracted to this market to perform some of the work anticipated over the next year. Turning now to West Africa, despite the ever-present challenges, our customers are becoming more willing to consider programs in this region. In fact, we're seeing multiple opportunities emerge for both short- and long-term work. Additionally, we are eagerly awaiting both Total's and Exxon's development awards for multi-year programs in Angola, which would add a minimum of three and a half rig years of work beginning in 2022. We believe we are well placed to capitalize on one or more of these opportunities, either through direct awards or the removal of lower price supply in the region. In the Asia Pacific region, which includes Australia, we see several short and medium term opportunities starting in the second half of the year and carrying over into next. Needless to say, we are encouraged by the continued volume of opportunities this region has generated. In summary, we are growing increasingly optimistic about the tightening markets we are seeing around the world and take comfort in our approximately $7.3 billion backlog. In fact, we've recently seen floating regularization for the Golden Triangle exceed the 80% mark, something we haven't seen since 2015. This has historically been a key inflection point for material improvements in day rate and contract term. Supported by the ongoing conversations with our customers, we believe we are at the beginning of a sustainable recovery for offshore drilling. Assuming oil prices remain constructive, we believe we will witness a robust offshore market recovery in 2022 and beyond. As many of you know, due to many factors, such as the speculative building or reactivating of assets, undisciplined contract bidding, not to mention a global pandemic, most of our competitors failed and as a result entered into financial restructuring. Now that most of our competitors have emerged from restructuring, we believe that the new owners understand and appreciate the value of disciplined bidding, the value of industry consolidation, and the value of retiring older and less capable assets. Before I go on, I feel obligated to say that Transocean is one of the few international offshore drilling companies that has protected the interests of its equity holders. And for that, we are very proud. We continue to lead the industry in sustainable, disciplined bidding practices, industry consolidation, and rig retirements. This approach has helped us navigate the worst downturn this industry has ever seen, and we are relieved and excited about the upcycle. As we think about the recovery, not only will industry consolidation and asset retirements play a role, but rig reactivations will also materially influence the market dynamic. Based on Transocean's fleet of cold-stacked assets, we estimate that the total cash cost of reactivating a cold-stacked asset starts at $60 million and could go upwards of $100 million depending on contract and location-specific items. TransOcean maintains that it will not speculatively reactivate a rig and will only do so with a contract that generates a suitable return on investment. This discipline will help us to ensure rig utilization and day rates maintain their upward progression. Having said that, we recognize that undisciplined speculative reactivations by our peers could slow that momentum we are experiencing. Still, while some of our peers have emerged from restructuring with relatively clean balance sheets and a much lower interest burden, we do not believe that they have sufficient liquidity or visibility to future liquidity, given their limited backlogs, to reactivate more than a couple of assets without more lucrative contracts. As such, we feel confident that transition will soon be rewarded with higher day rates and longer-term contracts, which will ultimately enable us to delever and increase value to our shareholders. In conclusion, transition remains uniquely and exceptionally well-positioned for the offshore market recovery. We have spent the last several years positioning ourselves as the industry leader by establishing the offshore drilling industry's largest and most profitable backlog, providing us with visibility to future cash flows that enable us to continue to invest in our people and our assets. We have assembled the industry's largest and most technically capable fleet of floating rigs, and our cold stacked assets provide us the capability to capitalize on the offshore market recovery as assets prepare for reactivation. In fact, using Transocean's proprietary rig ranking database, all of our cold-stacked ultra-deepwater assets are ranked within the top 100 of benign environment floaters, positioning us well above our peers and making our available assets some of the most sought-after rigs in the market. We are encouraged by both market data points and that we are best positioned to capitalize on the market recovery. As we prepare for that recovery, we will continue to execute our strategic priorities to further enhance our position as the industry leader and deliver value to our shareholders. Thank you, Mark.