Transocean Ltd (Switzerland)

Good day and welcome to the Q1 2022 TransOcean Earnings Conference Call. Today's call is being recorded. At this time, I would like to turn the conference over to Cale Dillingham. Please go ahead, sir.

Thank you, Kevin. Good morning and welcome to TransOcean's first quarter 2022 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, Chief Executive Officer, Keelan Adamson, President and Chief Operating Officer, Mark May, Executive Vice President and Chief Financial Officer, and Roddy McKenzie, Executive Vice President and Chief Commercial Officer. 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 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, 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, Cale, and welcome to our employees, customers, investors, and analysts participating in today's call. Before I get into the quarterly update, I would like to provide just a few thoughts on the current global state of affairs. During the first quarter, we observed oil prices, which regularly exceeded $100 per barrel. While the Russian invasion of Ukraine and the resulting sanctions certainly contributed to these higher prices and focused the world's attention on the importance and value of energy security, we believe that the persistent underinvestment by EMP companies to replace the reserves has resulted in diminished capacity to produce hydrocarbons globally, serving as the primary driver of sustained higher oil prices. As you know, over the past few years, some of the capital that certain E&P companies may have previously earmarked for investments in reserve replacement and production growth was instead distributed to their shareholders in the form of dividends and buybacks, as well as invested in various energy transition initiatives. All else being equal, this has left them with less capital to invest in, plan for, and develop offshore projects. While we recognize that taking steps to achieve a lower carbon future is important, we also firmly believe that a diversity of energy sources is critical to ensure adequate and reliable supply. Hydrocarbons will, without question, continue to play a central role as the energy transition proceeds. In fact, cash flow generated from the sale of oil and natural gas will play a critical role in funding energy transition technologies and initiatives by our customers. Indeed, the EIA's International Energy Outlook 2021 indicates that global energy consumption is expected to increase nearly 50% over the next 30 years. While renewable energy resources are expected to experience the most significant growth rates, albeit from a very small base, demand for both petroleum and natural gas sources will continue to increase to meet this demand. Exploration and production companies will continue to engage in the exploration and development work to meet worldwide demand and replenish diminishing reserves. With constructive commodity prices combined with now proven and consistent lower project costs than the industry experienced several years ago, the economics of offshore projects remain robustly favorable. In fact, the consensus of industry observers and experts indicate that approximately 80% of offshore projects are profitable at $60 per barrel, with numerous customers claiming that the break-even price for their respective projects is well below $40 per barrel. Now to the quarterly results. As discussed in yesterday's earnings release, for the first quarter, we reported adjusted EBITDA of $163 million on $616 million in adjusted revenue. This strong operating performance was again driven by our team of experienced professionals who delivered fleet uptime of 97.6% for the quarter. Let's now turn to the fleet and our recent fixtures. During the first quarter, we were able to secure $87.2 million in incremental backlog and return one of our recently idled rigs to work, leaving us with only two warm rigs remaining in our worldwide fleet. And as we mentioned in our press release, we just added an additional $200 million of backlog with fixtures on the Skiros and Invictus. In the Gulf of Mexico, the Deepwater Inspiration secured a one-well extension with Enven Energy at an increased day rate of $300,000 per day. The additional well keeps the rig busy into January 2023. Remaining in the Gulf of Mexico, the Deepwater Invictus secured a two-well extension with BHP at an increased day rate of $375,000 per day. The additional wells keep the rig busy through Q1 of 2023, representing eight years of continuous service for BHP. Heading south to Columbia, the Development Driller 3 returned to work, securing an 80-day contract with Petrobras at a rate of $331,000 per day. The rig had been idle since concluding its most recent contract in January. Given the lack of availability of similar assets in the region, combined with the well-deserved, favorable reputation of the rig, we are actively pursuing opportunities for additional work for her commencing later this year. In Norway, we added a three-well extension to the Transocean Spitsbergen campaign at a rate of $305,000 per day, which will keep the rig working into January 2023. The agreement also contains provisions for additional work at escalating rates through 2023. In Angola, as mentioned in our earnings release, we are pleased to announce that the Deepwater Ski Roads recently secured 540 days of additional work with a major operator at a base day rate of $310,000 with the opportunity to earn a significant performance-based bonus. The rig is now contracted into May of 2024. The award for additional work, while very much appreciated, was not totally surprising as the Deepwater Ski Roast was previously awarded Total's Rig of the Year thanks to its superior operational performance. Heading east to India, three long-term tenders were recently released. Based on our extensive experience in-country and our stellar operational performance, we believe we are in a strong position to win some of this work. As we look toward upcoming opportunities for 2022, we are encouraged by the market and industry trends that continue to take shape. Oil prices, while somewhat volatile, have remained highly supportive and are driving a steady increase in offshore activity. We continue to see a tightening of the offshore market unfolding across multiple regions, with committed drill ship utilization consistently exceeding 90%, with some industry experts suggesting utilization as high as 97%. As further evidence that the market has reached an inflection point, according to rig broker Clarkson's, For the first time in eight years, new contracts are on average being awarded at higher day rates than the contract they are replacing. Additionally, Rice Dad Energy analysts yet again increased their short-term expectation for deepwater investment, this time to 14% year-on-year, which is double Rice Dad's expectation just six months ago. As we've been predicting, the current supply shortage of active floating rigs, driven by the scrapping of rigs during the historically low demand cycle over the past eight years, has contributed to the recent increase in day rates. Since 2014, more than 150 benign environment floating rigs have been scrapped and permanently removed from the global fleet. In addition, we strongly believe that the current real supply of rigs is even more limited than headline data would suggest due to high and increasing reactivation costs combined with long lead times for equipment. Based upon several third party estimates and given slight differences in their definitions, there are between 25 and 35 benign floating rigs cold stacked globally. We estimate that the reactivation of a cold stack rig will take at least 12 months to execute, which has increased due to supply chain constraints and could drive additional cost escalation depending upon demand and availability of the required equipment. Also, it is very possible that some of these cold stack rigs don't actually have the required specifications to be marketable in the future and will never return to the market. On the topic of reactivations, I want to reiterate that Transocean will not speculatively reactivate a rig. we will only bring incremental capacity to our active fleet with a contract that generates a suitable return on investment. We remain committed to fiscal discipline, and we believe that ultimately rig utilization and day rates will continue their upward progression. Per Fernley's recent assessment of order books, there are 17 new builds currently at shipyards or recently in the hands of investors. We believe the majority of these rigs will likely each require significant additional capital expenditures, in excess of $100 million to $125 million to prepare to go to work, which is in addition to the underlying construction costs. As such, we believe, with few exceptions, the aggregate constraints of the balance sheets and liquidity of most industry participants, combined with the constraints in the global supply chain, will govern the rate of entry of both cold-stacked and new-build assets into the active fleet. Taking a closer look around the global market environment, worldwide committed drill ship utilization currently exceeds 90%. Many of these high-specification assets are concentrated in the U.S. Gulf of Mexico, where we continue to observe the most significant growth in day rates from the low $200,000 just a few years ago to well over $300,000 per day for recently announced fixtures. It is very possible that we will see awards made in the near future at day rates above $400,000 per day, which reflects the increasing titan of this already nearly sold-out market. Remaining in the Gulf of Mexico, we eagerly await the delivery of our two new-build drill ships, the Deepwater Atlas and the Deepwater Titan, which will enter the region in the coming months. As you will recall, these floaters have already secured firm contracts for drilling on behalf of Beacon Offshore Energy and Chevron, respectively. Historically, the Gulf of Mexico has served as a leading market indicator for other deepwater offshore drilling markets. As in the Gulf of Mexico, direct negotiations with customers continue to increase in multiple locations, with improving contractual terms, higher day rates, and longer durations, reflecting customers' recognition that there is a looming shortage of rigs and therefore limited time for tendering or lengthy negotiations. In Latin America, we expect strong demand growth going forward. Industry analysts expect a 50% increase in rig demand from March of 2022 through September of 2023. Given our experience, established support infrastructure, and operational track record in the region, we believe we are very well positioned to compete for these incremental 15 opportunities. Just last week, Petrobras issued new multi-year tenders for up to eight additional rigs, which could ultimately necessitate up to seven new rigs entering Brazil. In addition to the Petrobras prospects on the horizon, medium- to long-term opportunities with IOCs and other NOCs, including Equinor, Shell, Petronas, and Total Energies, are expected to commence in 2023. Current opportunities in Latin America could add more than 14 rig years that would start within the next 18 months. With no high specification idle floaters in the region, rigs from other areas will be required to meet additional demand, which should remain strong over the next several years. In West Africa, we remain very encouraged by floater demand. We see 20 opportunities with program durations of greater than one year commencing within the next 18 months. If this demand materializes as we expect, a minimum of 15 rig years could be awarded. This additional demand is driven by a return to activity in Angola and Ghana, and the recent large discoveries in Namibia There are opportunities for MPD drill ships in Asia, but there are no available MPD units in the region. We are also seeing increasing demand for Australia, which is most likely to occur in 2023. However, similar to what we are seeing in Asia, there is likely to be a rig shortage in Australia at that time. Transitioning to the harsh environment market, broader expectations are for a stronger Norwegian market beginning the 2023 drilling season. A record level of sanctioning is anticipated by year-end as operators move projects forward to utilize expiring tax incentives. Norway may be challenged in 2022 and into the summer of 2023 due to program delays based on a shortage of critical subsea equipment. We do, however, anticipate a stronger market by mid-2023 and a sold-out market in Norway in 2024. Our customers may also need to contend with additional tightening in the market as evidenced by a recent 500-day tender in the region starting in late 2023. Total Norwegian active utilization currently stands at 82%, with 14 assets working and an active supply of only 17 rigs. This market could further tighten if rigs leave Norway for the UK and or Canada, which is a very real possibility now that the Bay to Nord project in Canada has received environmental approvals offshore in Newfoundland. And in the UK, there's a lack of warm assets. Given the prohibitive cost of reactivating a cold stack rig, we could find ourselves in an environment in which hot rigs from Norway are moved to the UK to perform some of the work anticipated over the next year, further tightening the Norwegian market. This would obviously bode well for us, as Transocean remains one of the two main providers of sixth-generation semi-submersibles in the North Sea. Additionally, as a result of the recent announcement made by the UK government regarding energy security policy to support European energy requirements, we now expect an increase in demand for rigs. We are actively responding to a number of new tenders that have emerged during the past couple of months and are encouraged by the new licensing round for North Sea oil and gas projects in the fall of 2022. In summary, our outlook is increasingly more positive than at the end of the fourth quarter, reinforced by recent fixture trends, customer conversations, industry analyst reports, and market projections for commodity supply demand balances. The evidence is clear that the market has further tightened since our last earnings call, and the day rates contemplated in contracts continue to increase. As a reminder, in the context of a steadily rising market, we will continue to manage our portfolio of rigs to obtain the best combination of rate and term. TransOcean currently has significant growth opportunities, represented by our 12th, 6th, and 7th Gen stacked or idle rigs. We will evaluate these opportunities on a case-by-case basis, ensuring that the financial return results in value creation for all shareholders. As you know, Transocean owns and operates the industry's most technically capable fleet of floating rigs, and we are always implementing innovative technology to continuously improve the safety, operating efficiency, and value of our assets around the world. The robotic riser system was installed on its first rig in cooperation with our customer in the U.S. Gulf of Mexico and just completed a first pull from 9,500 feet. The robotic riser system automates all activities around the rotary table during riser operations, which improves personnel safety by eliminating the need for work in the red zone area, while simultaneously improving consistency and increasing efficiency of operations. We will deploy a second system to another rig this month in the U.S. Gulf of Mexico. The enhanced kick detection system, developed with enhanced drilling, was deployed early in the first quarter and has delivered improved well efficiency and operations integrity benefits for our customer through monitoring fluid volumes to help detect flow anomalies. Our KBOS shearing technology provides unrivaled shearing capability that will result in a safer well construction process. In the U.S. Gulf of Mexico, following a just over 120-day deployment, we successfully tested our KBOS technology shearing a landing string-grade drill pipe in milliseconds to demonstrate the benefits of such a system in emergency conditions. Needless to say, we are very pleased with the performance of these new technologies and look forward to continuing the deployment across selected rigs across our global fleet. In conclusion, our industry-leading backlog provides us with the visibility to future cash flows that enables us to continue positioning Transocean for what we anticipate will be a sustained industry recovery. I'll now turn the call over to Mark.