Transocean Ltd (Switzerland)

Good day, everyone, and welcome to today's Q3 2022 Transocean Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question-and-answer session. You may register to ask a question at any time by pressing the star and 1 on your touchtone phone. You may withdraw yourself from the queue by any time by pressing star and 2. Please note this call may be recorded. I'll be standing by if you should need any assistance. It is now my pleasure to turn the conference over to Allison Johnson, Investor Relations.

Thank you, Shannon. Good morning, and welcome to Transocean's third 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, Huynh 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, Allison, and welcome to our employees, customers, investors, and analysts participating on today's call. As reported in yesterday's earnings release, for the third quarter, Transocean delivered adjusted EBITDA of $268 million on $730 million in adjusted revenue, resulting in an adjusted EBITDA margin of approximately 37%. Our overall performance was supported by strong bonus revenue and the transition to higher day rates on several of our rigs. As usual, this was truly a team effort. As such, I would like to extend a sincere thank you to the entire Transocean team for their commitment every day that deliver best-in-class service to our customers and the best possible results for our shareholders. On our second quarter earnings call, I addressed the ongoing energy security concerns that have become an area of international focus following the Russia-Ukraine conflict. Access to affordable, reliable energy sources is essential to global economic prosperity. The sabotage of the Nord Stream pipeline carrying gas from Russia to Europe further underscores the importance of a reliable and diverse energy supply chain. A vicious cycle of poor shareholder returns and the downturn and aggressive ESG investment mandates led to chronic underinvestment and reserve replacement, which ultimately affects production. Consequently, we are facing a risk of sustained oil and gas shortages globally. Separately this year, soaring inflation and rising interest rates have, for the first time in almost eight years, shifted investor sentiment toward energy stocks, oil and gas in particular. This shift, coupled with the recent effects of systemic underinvestment in energy, have further exposed the impracticality of a swift global transition from fossil fuels. In the mid to long term, demand for all sources of energy will continue to grow, and it's imperative that new sources of supply are discovered and developed to meet this demand. And while hydrocarbons will undoubtedly over time lose market share to renewables in the overall energy mix, most believe that volumetric demand for oil and gas will continue to increase. In fact, RISDAD Energy recently estimated that 63 million barrels per day of new supply are needed to avoid a shortfall in 2030. This cannot be accomplished without significant investment in additional exploration and development, including in the offshore basins requiring our assets and expertise. Accordingly, we as the market leader in offshore drilling have a necessary and important role to play in the ongoing energy expansion for the foreseeable future. Let's now turn to the fleet. As reflected by the new fixtures in our October 13 fleet status report, we observed heightened demand for our services again in the third quarter. I'm pleased to share that we added an incremental $1.6 billion in backlog since the release of our July fleet status report, bringing our total backlog to $7.3 billion. Importantly, these fixtures come from five separate regions, confirming that the recovery of the offshore drilling market is indeed global. And as I will discuss in more detail in a few minutes, we continue to see a steadily increasing number of tenders in addition to numerous direct negotiations with our customers. I now provide a summary of our recent fixtures. First, I'd like to briefly recap two awards discussed on our second quarter earnings call as these two important contracts are now reflected in our backlog numbers. In the Gulf of Mexico, we signed a contract with a major operator for two years on the Deepwater Conqueror in direct continuation of the current program at a very favorable rate of $440,000 per day, with up to an additional $39,000 per day for managed pressure drilling, integrated services, and our technology products. The contract represents approximately $320 million in firm backlog and takes the rig off the market through Q1 2025. Also discussed in our previous call, in Brazil, the Petrobras 10,000 received a nearly six-year contract starting at $399,000 per day, and escalating annually to $462,000 per day. As a reminder, the rate does not include an additional fee for the customer's anticipated use of our patented dual activity technology, which remains valid through May of 2025. The contract will commence directly following the end of the current term in October 2023 and adds an estimated $915 million to our backlog. Now to the remainder of our recent fixtures. In the Gulf of Mexico, Murphy Oil awarded the Deepwater Asgard a one-well contract plus a one-well option at a rate of $395,000 per day, anticipated to commence in the fourth quarter. I'm pleased to say that the option has since been struck and closes the small gap before the rig moves to its next program, a one-year contract with an independent operator at a rate of $440,000 per day. With the addition of these two contracts, the rig is now busy through January 2024. In Suriname, the Development Driller 3 received a one-well contract with Total Energies at a rate of $345,000 per day, excluding additional services. The firm contract, which is expected to commence in Q1 2023, also includes two one-well options at $360,000 per day and $370,000 per day, respectively. In Norway, our joint venture, Harsh Environment Semi, the Transocean Norge, was awarded a 17-well contract with Wintershaw DEA and OMV, at day rates escalating from $350,000 per day to $430,000 per day, resulting in an initial $73 million contribution to our backlog. But assuming that the components of the program receive final investment and government PDO approvals, which we expect, the backlog potential is $437 million based upon an average market leading regional day rate for the full term of $408,000 per day. Also in Norway, Equinor exercised a one-well option on the Spitsbergen at a rate of $316,000 per day. The option extends the current firm term through September 2023, bridging the gap between the end of the current contract and the commencement of the RIG's follow-on contract, also with Equinor. In the UK, Harbor Energy exercised a one-well option on the Paul B. Lloyd Jr. at a rate of $175,000 per day, extending the contract through September of 2023. If all options are exercised, the Paul B. Lloyd will be contracted through June of 2024. In India, Reliance Industries exercised a one-well option on the KG-1 at $330,000 per day. The rig will move to perform this work and then return to complete the current campaign. With the addition of this well, the rig is now contracted through October 2023. Looking forward, we expect the global recovery for the offshore drilling market to continue on a pace consistent with the past several quarters. The offshore CAPEX budgets of the majors have increased for the second consecutive year, and we're seeing this reflected in tender and contracting activity. Importantly, these budgets are increasingly directed to offshore deepwater. Year-to-date, the majors have contracted nearly 31 rig years on deepwater drill ships, when compared to 20.5 rig years for jackups. Drill ship day rates have continued their upward trajectory and moved comfortably above the $400,000 per day mark. As an example, in just 10 months, the Deepwater Conqueror saw rates increase $105,000 per day, excluding integrated services like MPD. And if we look at the third quarter of 2020, the average drill ship fixture was $184,000 per day. Last quarter, the average was $393,000 per day, an increase of 113%. Taking a closer look at the global market environment, Active utilization in the Gulf of Mexico is expected to remain effectively 100% as we estimate eight programs to be awarded with commitments in the next 18 months. As a direct result of this limited active supply, we continue to see our customers favor direct negotiations with an increasing propensity toward multi-year programs. Also, I'm pleased to share that last week, the Deepwater Atlas commenced its inaugural campaign with Beacon Offshore Energy. Needless to say, we are extremely excited to kick off this development with one of our two new eighth-generation drill ships. The Atlas will perform the drilling campaign with Beacon for the first 255 days of its contract before the installation of its 20,000 PSI BOP stack. The Atlas will then return to operations with Beacon for another 275 days as the industry's first, or perhaps second, closely following our deepwater titan, 20,000 PSI floating rig. Next, contracting activity in Latin and South America remains strong with a number of open tenders. In Brazil, Petrobras alone could contract an additional 12 rigs to long-term work. several of which would likely come from outside the country. The much anticipated results of the Petrobras pool tender have been announced, and we are pleased to confirm that the Deepwater Corcovado and Deepwater Orion are among the seven rigs that Petrobras selected for this work, at day rates of $399,000 per day and $416,000 per day, respectively. The period for public comment has passed, and we anticipate contracts will be signed in the coming weeks, at which time we estimate we will add approximately $1 billion to our backlog. Additionally, Petrobras' BMS 11 prospect is expected to be awarded by the end of the year, with the award for the Buzios field development anticipated in the first quarter. These two multi-year tenders could put an additional five rigs to work, further limiting the pool of available rigs and tightening the global market, as we expect most, if not all, of the rigs necessary to deliver these projects will be mobilized from outside the region. In addition to Petrobras' requirements, Shell, Equinor, and Total Energies will be tendering for their respective programs in Brazil. each requiring a minimum of one year, with anticipated commencements in the 2024-2025 timeframe. In India, we anticipate in the next few months, ONGC will re-tender for previously tendered work that was not awarded. The new tender is expected to be for two rigs, each with 21 months of firm term, with commencement scheduled for mid-2023. With extremely limited local supply, we expect strong day rates to be announced when contracts are ultimately awarded. Moving to the harsh environment market, in the third quarter, 3,924 days were contracted in the North Sea market, including Norway and the UK. It's the highest incremental days added since the third quarter of 2012. Of the contracted days, 72% were in Norway, where we are beginning to see the supply of rigs decline, as demand from outside Norway could pull up to four rigs out of the North Sea market in 2023. This is a result of the opening of new harsh environment regions, including the South Atlantic and the Bass Strait south of Australia. In the UK, policies to improve energy reliability and security are expected to drive incremental investment in the sector, including offshore oil and gas. The active market is nearly sold out for 2023, and we are seeing longer-term opportunities that have not been typical in the UK in recent years, including programs longer than one year in duration for Ithaca, Equinor, and Inquest. In the near term, it's likely shorter-duration opportunities will require rigs to come from outside the country, applying even more strain on the rig availability in Norway. On that topic, earlier this week, we signed a conditional letter of award, or CLOA, for the bearants for work in the UK, commencing in the first quarter of next year. Final signature is expected by the end of the month, and the CLOA provides for cancellation fees in the event of termination. With the recent multi-year awards for our transition NORGA and several of our competitors' rigs in Norway, we expect the number of available high-spec rigs in-country to diminish very quickly. Based on our internal analysis, we expect the Barron's to be one of several rigs that will leave Norway in the next few months for work elsewhere, removing the highest specification available assets remaining from the Norwegian market. Presently, there are 24 Norwegian AOC-compliant semis and just 18 of those in-country. Current demand supports around 15 floaters and is expected to increase as projects sanctioned under the tax incentives come online. Consequently, we anticipate the Norwegian market will not have enough rigs to fulfill customer requirements by 2024. In Australia, there are two programs with durations greater than one year expected to commence in the next 18 months. We believe this requires up to two incremental rigs. One opportunity is in the Bass Strait in southern Australia, and due to extreme marine conditions, requires a harsh environment semi. Separately, Woodside is tendering for a DP more rig for its program. As we prepare our assets for the future, we continue to invest in technologies that add value for Transocean and our customers. Last quarter, we installed the first crane anti-sway rotator in our fleet onto the Deepwater Colossa. This technology further reduces the exposure of our personnel to hazards associated with lifting and moving equipment and frees them up to complete other activities. We look forward to fully utilizing the tool in operations and installing units onto other assets across our fleet. We've also agreed with one of our customers to deploy the second kinetic blowout stopper in our fleet and anticipate it being operational in the first quarter of 2023. As a reminder, KBOS is a pyromechanical device that is designed to shear and seal any object in the wellbore in milliseconds. Importantly, this technology significantly reduces the risk of non-shearables across the BOP. As an update to our emission reduction initiatives, we've now adopted and implemented a fuel additive on four of our rigs, with agreements for implementation on four additional rigs. When these installations are complete, we will be utilizing the additive on over 40% of our contracted fleets. The additive optimizes fuel consumption, thereby lowering our emissions and reducing our costs. Field tests utilizing the additive suggest fuel consumption can be reduced by up to 6% depending upon engine loads. At this time, we're tracking operational statistics to better analyze real-world reductions in savings. In summary, the demand for our assets and services remain strong, and accordingly, our outlook for our high-specification floating fleet is the most optimistic it has been in recent years. Increased cash flows from higher dairy contracts will enable us to continue to address our balance sheet, As we transition our focus from extending our liquidity runway to actually deleveraging and positioning the company for the future. As the supply of high specification floaters remains extremely limited, we anticipate there will be more opportunities to begin reactivating our cold stack fleet. As always, we will continue to prudently examine all opportunities to place our cold stack rigs back into the market and thoroughly assess each potential reactivation on a case-by-case basis to ensure that each creates value for the company and our shareholders. Finally, we echo the sentiment heard across broader oilfield services and reaffirm our view that we have definitely entered a multi-year upcycle. As always, we will continue to focus on delivering the safe, reliable, and efficient operations upon which we have built our reputation as the leading provider of high-specification, ultra-deepwater, and harsh environment drilling services. I now turn the call over to Mark.