Transocean Ltd (Switzerland)

Good day and welcome to the Q3 2021 TransOcean Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Alison Johnson, Senior Manager, Investor Relations. Please go ahead.

Thank you, Marion. Good morning and welcome to TransOcean's third 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 current expectations and certain assumptions, and therefore are subject to certain risks and uncertainties. Many factors could cause actual results to differ materially. Please refer to our SEC filings for 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, please limit yourself to one initial question and one follow-up. Thank you very much. I'll now turn the call over to Jerry.

Thank you, Allison, and welcome to our employees, customers, investors, and analysts participating in today's call. As reported in yesterday's earnings release, for the third quarter, Transocean delivered adjusted EBITDA of $245 million on $683 million in adjusted revenue, resulting in an adjusted EBITDA margin of over 36%. Additionally, our quarterly free cash flow of $104 million represents the sixth straight quarter of positive cash generation. During the quarter, we matched a company-best revenue efficiency of 98% for the second consecutive quarter, and we have maintained a revenue efficiency of 97% or higher for six sequential quarters due to our consistently safe, reliable, and efficient operations across our operating fleet. Indeed, it was a true team effort globally. supported in addition to other transition initiatives by our smart equipment analytics system, which helps us monitor critical pieces of equipment and systems to identify anomalies and signs of degradation, such that we can prevent and potentially predict unplanned failures and resulting downtime. This same system allows us to track and trend fuel burn, energy consumption, and emissions in real time, helping to optimize energy efficiency in our operations. providing us a powerful tool in delivering our 2030 goal of a 40% reduction in our greenhouse gas emission intensity versus 2019. Now turning to our fleet. Starting in the Gulf of Mexico, in August, we announced the $252 million two-phase contract we signed with Beacon Offshore Energy for the Deepwater Atlas, following the final investment decision of Beacon and the Shenandoah Working Interest Owners to sanction the previously announced project in the U.S. Gulf of Mexico. The Atlas, which is nearing completion at the Jurong Shipyard, will be one of two eighth-generation 20,000 PSI ultra-deepwater drill ships in the Transocean fleet. In addition to the 20,000 PSI well control equipment, the Atlas and the Deepwater Titan also incorporate other state-of-the-art technology and features, including a gross hoisting capacity of 3.4 million pounds, efficient completion setup with dedicated well tests in offloading areas, and a hybrid power drill floor that flattens peak loads on the engines and reduces fuel consumption. Staying in the Gulf, I'm pleased to share that Chevron has exercised the two $335,000 per day options we announced on our last earnings call for the Deepwater Conqueror, bringing the firm duration to three wells. The additional term will commence in direct continuation of the current contract, and in total the three wells contribute over $100 million of backlog. These premium rate options reinforce our belief that our customers continue to acknowledge the tightening of the market for readily available high-specification ultra-deepwater assets, as well as the recognition of Transocean's ability to consistently deliver safe, reliable, and efficient operations. Also in the Gulf, we signed a one-well extension with BHP on the deepwater Invictus. The extension is expected in direct continuation of the prior well and carries a day rate of $295,000 per day. The rig is now expected to remain on contract through June of 2022. And finally, rounding out the gulf, based upon our knowledge of the responses to several recent tenders, we expect awards to be made in the near future at day rates of approximately $300,000 per day, reflecting, as we've discussed, the increasing tightening of this market. Heading down to Trinidad, following a successful find in the Calypso appraisal well, Bongo 3, drilled by the DD3, BHP exercised the one-well option at a day rate of $220,000 per day to complete the appraisal. She is now expected to remain on contract through November. We remain encouraged about the future prospects for this ultra-deepwater semi-submersible and are actively bidding the rig for multiple opportunities in various regions across the globe following the conclusion of operations in Trinidad. Jumping over to the Asia-Pacific region, the deepwater Nautilus had a one-well option exercised by POSCO. The option will keep the rig active through December before she begins mobilization to the commencement of her next campaign in February 2022. And finally, the KG2 has begun contract preparations for her One Well campaign in Brunei with Shell. Looking forward, based upon conversations with our customers and supported by increasing utilization and day rates, we are growing increasingly confident that the recovery is now gradually accelerating for ultra-deep water and harsh environment markets. Oil prices remain highly supportive, as Brent crude has remained in the low to mid $80 per barrel range since the beginning of last month. Moving forward, we expect this trend will continue, largely as a result of significant and prolonged underinvestment in traditional sources of energy. Moreover, OPEC Plus recently announced its intent to maintain its gradual production plan, and the U.S. Department of Energy has decided to leave the Strategic Petroleum Reserve untapped. Both of these decisions support a continued supply deficit outlook heading into the end of the year and possibly beyond. At the same time, we continue to see a tightening of the offshore market unfolding across multiple regions. Marketed utilization of the global floating rig fleet is nearing 80% to 85%, which has historically been the inflection point at which material increases in day rates are triggered. Notably, active utilization in the Golden Triangle, which as you know consists of the U.S. Gulf of Mexico, South America, and Africa, currently sits in the 90% range. In a few moments, I'll provide more specifics surrounding the outlooks for each of these regions. Globally, offshore rig contract awards have been on the rise for four consecutive quarters and are beginning to exceed the level seen before the pandemic. Average tender duration increased in the third quarter, with a particular uptick in the length of option periods. This reinforces our belief that our customers see the signs of a rising market and are recognizing the importance of securing the highest specification assets for longer periods of time. Project sanctioning has also recovered to near pre-pandemic levels and is projected to reach 129 FIDs in 2022, a significant increase from 2019. Indeed, all the signs point toward a positive outlook for our sector. Taking a closer look around the global market environment, Starting in the U.S. Gulf of Mexico, we continue to see high utilization of active floaters with the current active fleet essentially at full utilization. Some of this contracted activity is shorter term, but we expect that if the trend continues, the regional fleet will be fully utilized by year-end 2022. In the near term, with the majority of active floaters booked, we have recently encountered several time-sensitive pop-up requirements for operators unable to complete their work due to a shortage of capable and available rigs. While we have yet to see a large volume of long-term requirements in the region, we firmly believe that these are on the horizon. Third-party intelligence organizations also see tightening utilization and increasing demand, with one organization recently predicting a 66% increase in demand growth by 2023. In recent months, multiple IOCs have specified the Gulf as a key region for their businesses and critical to meeting their ESG goals through lower carbon intensity metrics, and more attractive economics that help fund their ESG projects. Specifically, one IOC noted the carbon intensity in the Gulf of Mexico at approximately 7 kilograms of CO2 per barrel, as compared to a global average in the high 50s or low 60s, while another IOC indicated break-even prices for its Gulf assets to be as low as $30 per barrel. The combination of these two metrics make the Gulf of Mexico a logical choice for future investment by our customers in exploration and development. Staying in the U.S. Gulf of Mexico, we look forward to the deliveries of our two eighth-generation new-build drill ships, the Deepwater Atlas and the Deepwater Titan, both expected to commence their projects with Beacon Offshore Energy and Chevron, respectively. The outlook for these rigs and the 20K market remains very positive. In addition to the potential for follow-on work with Beacon following the initial firm term on the Atlas, The 20K landscape extends to prospective opportunities with Shell, Equinor, BP, and incremental 20K prospects with Chevron as well. We're encouraged that the commencement of the first 20K projects will serve as a catalyst to greenlight future prospects, as significant cost barriers have been eliminated with the introduction of the technology required to safely drill and complete these high-pressure wells. Looking to Brazil, we've seen 10 rig years awarded by Petrobras in 2021 for commencement in the next 18 months. and we anticipate this trend will continue. With an ambitious national goal to become the fifth largest exporter in the world, Brazil needs to double production by 2030. Accordingly, demand growth for offshore rigs is projected to remain strong. Approvals of 16 FIDs are anticipated between 2021 and 2022, and known requirements support the addition of one to two incremental rigs per year through the end of the decade. While Petrobras continues to dominate near-term commencements, Multiple IOCs also have requirements over the next several years. In fact, one IOC has an ongoing tender with an anticipated total duration nearly two years expected to commence in late 2022. We believe we are well positioned to capitalize on these opportunities given our strong, long-term presence and record of performance in the region, as evidenced by the fact that we recently advanced to the number two overall position in Petrobras' performance-based Sundopolis Rankings, a true testament to the teamwork across our three rigs operating in Brazil. Moving over to Norway, we expect a relative balance in the market through 2022. However, based on customer conversations and third-party reports, projected demand in 2023 could surge to 25 floating assets, which would outstrip the current marketable supply. As we discussed on prior calls, the favorable tax incentives passed in 2020 have helped foster an attractive environment for our customers to progress their operations and are available to projects sanctioned by December 2022. It follows that we will see an uptick in requirements during this time period. Moreover, similar to the U.S. Gulf of Mexico, Norway has also been cited by our customers as having relatively low carbon intensity reservoirs. Therefore, make it a more attractive area of investment in their respective portfolios. Recently contracted day rates continue to hover around $300,000 per day before performance bonuses and are projected to climb as we begin to approach the rebalancing of the market. As much of the Norwegian fleet is booked well into 2022, we are growing increasingly confident that projections will continue to track as expected. Nearby in the UK, the outlook remains positive, and we are actively engaged in a number of discussions for opportunities commencing in 2022, both through tenders and through direct negotiations. A dozen programs are expected to commence in the region over the next 18 months. If this happens, the available active fleet in the UK is insufficient to meet the expected demand, and it's likely the market will remain undersupplied as the cost of reactivating cold stacked rigs is still prohibitive in the current price environment. Consequently, we may see one or more rigs, potentially rigs within the Transocean fleet, depart the Norwegian continental shelf for work in the UK. In West Africa, we're seeing a number of opportunities emerge for both short and long-term work from various IOCs. Previous prohibited fiscal policy in certain African countries has improved, and there is a large push for government investment. Near the beginning of the pandemic, several locations, such as Angola, experienced significant challenges from the effects of COVID. In Q2 2020, the offshore rig count in the country went to zero, as contracts were either suspended or terminated. Looking forward to 2022, we anticipate the Angolan rig count to be north of seven rigs, while Ghana and Nigeria have similar outlooks. Ongoing tenders, including the long-term Exxon and Total Energies prospects in Angola, are set to add over four rig years of firm work commencing in 2022. More broadly, regional utilization has doubled from this time last year and is projected to increase again by year-end. Indeed, the region is expected to experience some of the highest growth globally over the next three years, and we believe we are well-placed to benefit from incremental demand given our long-standing presence in the region. In the Asia Pacific region, which includes Australia, we see numerous short- and long-term tenders for work set to commence over the next 18 months. The steady flow of opportunities in the region is encouraging, and we are actively responding to several inquiries. To summarize, we believe that the industry recovery is solidly underway. We are encouraged by the sustained improvement in the macro environment as it affects our industry, specifically offshore drilling. Our view is supported by ongoing conversations with our customers and backed by third-party market outlooks. Many of our competitors have emerged from restructuring in the past year, with another anticipated to emerge from its second filing around the end of the year. Additionally, the first major transaction between two of these parties, Noble and Pacific Drilling, closed earlier this year, driving much-needed consolidation in our space. We believe that further consolidation is required, and we also believe that these actions will assist in encouraging disciplined bidding behavior that helps drive the day rates needed to support our industry and its investors. This includes incremental retirement of cold stacked assets, contracting practices that support value creation, and financial justification to reactivate idle rigs. Recent behavior suggests the obligation to return value to shareholders is of growing importance across our peer group, and we're encouraged by the developing trend. Transocean has remained committed to all its stakeholders throughout this challenging cycle, including from a financial perspective. On numerous occasions, we have seized opportunities to reduce our debt and extend our liquidity runway. Since 2016, we have completed $9.8 billion of liability management transactions, including the repurchase of $1.7 billion of debt. We will continue to look for and take advantage of opportunistic situations to further improve our capital structure as they arise. In conclusion, Transocean has taken deliberate action throughout the downturn to position ourselves as the industry leader in offshore drilling. We have assembled the highest specification floating fleet in the industry while simultaneously preserving shareholder value. Our 27 ultra-deepwater floaters, soon to be 29, and 10 harsh environment floaters comprise the most technically capable fleet in the industry, positioning us well to capitalize as the market improves. Our industry-leading, high-quality $7.1 billion backlog provides us with visibility to future cash flows, enabling us to continue to invest in the training of our employees, the proper maintenance of our assets, and new and differentiating technologies and initiatives that will enable us to deliver even safer, more reliable, and more efficient services to our customers, while simultaneously helping us to deliver our 2030 emissions goals. Needless to say, we are very encouraged by what we are observing in the market and will continue to prioritize delivering the results required to drive value for the company and shareholders. Mark?