Transocean Ltd (Switzerland)

Good morning and welcome to Transocean's second quarter 2023 earnings conference call. A copy of our press release covering financial results resulting 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, 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 will 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 you saw in our latest police stats report, over the past several months, we added $1.2 billion of backlog for a total backlog of $9.2 billion as of July 19th. This is the fifth consecutive quarter during which we've added more backlog than we've consumed, resulting in an increase in backlog of approximately $3 billion from April 2022. Importantly, our Ultra Deepwater fleet average day rate increased significantly over the same time period. Per our fleet status reports, in the second quarter of 2023, our average day rate was approximately $363,000 per day versus $312,000 per day in the second quarter of 2022. And based on existing backlog, by the second quarter of 2024, we expect it to approximate $433,000 per day. Needless to say, it's been an exciting start to the year. Not only have we increased average day rates for our ultra deep water fleet, we've also experienced a rapid tightening of the high specification harsh environment semi-submersible market. As recently confirmed by Westwood Global Energy Group, this asset class is now effectively sold out with committed utilization at 100% for the first time since 2014. We first highlighted the emergence of new harsh environment regions on our third quarter 2022 earnings call. At that time, we predicted that the exodus of high specification semi-submersibles from Norway would leave the Norwegian market undersupplied in 2024. Even so, we underestimated the speed and magnitude of this migration. Since then, three of our rigs, the Transocean Barents, the Transocean Equinox, and the Transocean Endurance, have moved or are preparing to move to new markets, including Australia and Lebanon. And we see more movement on the horizon as opportunities for these assets continue to develop, deepening our conviction that this market will remain tight for the foreseeable future. Compounding these supply constraints, expected demand for the Norwegian market may be nearly 20 rigs by 2025. If this work materializes, Norway will be significantly short of supply, as only 12 high-specification harsh environment semisubmersibles are anticipated to remain in country through this period. As a natural consequence, day rates for harsh environment semisubmersibles have meaningfully increased since the beginning of the year and are now rapidly approaching $500,000 per day for firm work, with certain priced options already above this threshold. With that context, I'll now transition to our recent fixtures, many of which contributed to this rapid improvement in the harsh environment market. As discussed on our first quarter call, the transition bearance was awarded a one-well contract with Total Energies in Lebanon at a rate of $365,000 per day. The customer subsequently exercised the first option well for work in the East Mediterranean Sea at a rate of $370,000 per day, extending the firm duration to an estimated 167 days. There are two additional options remaining at rates between $350,000 per day and $390,000 per day, depending upon the location in which the work takes place. In Australia, the Transocean Equinox was awarded a five-well contract by a major operator at a rate of $455,000 per day, excluding mobilization and demobilization. The contract is expected to start in the first quarter of 2024 and provides for one option well at the end of the firm term. The Equinox was also awarded a 16-well contract in Australia at a rate of $485,000 per day, excluding mobilization and demobilization, which is expected to commence in direct continuation of the RIG's initial contract in Australia. The new contract provides for 21 one-well options at rates between $485,000 per day and $540,000 per day. If all options are exercised, the RIG may remain in Australia into 2028. As a reminder, the Equinox is the second of our Cat D semi-submersibles that will begin operating in Australia in the first quarter of 2024. As we announced in late March, the Transocean Endurance will start in January at a rate of $380,000 per day. I'd like to pause and take this opportunity to highlight that in just three months, Transocean was able to increase rates for harsh environment semi-submersibles in Australia by over $100,000 per day, along with a material increase in duration. In Norway, Wintershaw DEA exercised a one-well option on the Transocean Norga at a rate of $365,000 per day and three one-well options at a rate of $420,000 per day. This work eliminates the majority of previously anticipated idle time during the contract period. And as we indicated in our fleet status report, the customer has agreed to pay a reduced day rate for any remaining idle time on the rig. Also in Norway, six one-well options were exercised on the Transocean and Courage at a rate of $464,000 per day. The added duration extends the firm term an additional 370 days to February 2026. As for our Ultra Deepwater rigs, following the release of our latest fleet status report, an operator in the U.S. Gulf of Mexico awarded the Deepwater Invictus an estimated 20-day P&A well at a rate of $440,000 per day. The well will commence in direct continuation of the rig's current program. Finally, in the Mexican Gulf of Mexico, an independent operator awarded a 1,080-day contract for one of three of our high-specification seventh-generation ultra-deepwater drill ships at a rate of $480,000 per day. We will select the rig from among the Deepwater Invictus, Deepwater Thalassa, and Deepwater Proteus. The contract, which does not include any additional services, is expected to commence between the fourth quarter of 2025 and the second quarter of 2026 and provides us with considerable flexibility to optimize our asset portfolio as we maintain the ability to designate the RIG up to one year prior to the commencement window. Additionally, the contract includes a semiannual cost adjustment mechanism that provides margin protection from cost inflation. This picture also highlights a trend we observed in our discussions over the past several months. More customers expressing strong interest in securing rigs for longer-term projects starting further in the future. This interest is now progressing into action as multiple operators intend to commit to multi-year projects starting, as illustrated by our recent award in Mexico, as late as 2026. We believe this signals our customers' recognition of the scarcity of capable high-specification assets and clearly demonstrates their strength and commitment to offshore projects. further validating that we are in an upcycle that would be of significant longevity. Contract durations are lengthening materially. In fact, year-to-date 2023, the average contract length of a drill ship awards has increased to 495 days versus 310 days in 2022, representing a year-over-year increase of nearly 60%. Additionally, the average duration of semi-submersible fixtures increased approximately 18% over the same time period, and nearly 150% from 2020. Nearly 15,000 drill ship days have been awarded in 2023 to date, a 134% increase when compared to the same period in 2022. Similarly, nearly 8,500 harsh environment semi-submersible days have been awarded this year, a 72% increase when compared to the same period last year. Globally, we see approximately 81 rig years of work to be awarded across 80 floater programs suggesting an average duration per program of approximately one year. This is up from just between seven and eight months, just 18 months ago. Of note, more than a quarter of these programs are designated for exploration and appraisal wells. Although our contracting strategy may necessitate short periods of inactivity on key rigs as we maximize our long-term EBITDA and margins, we expect the rig market will remain tight, particularly for the highest specification ultra-deepwater drill ships and harsh environment semi-submersibles. According to Wood Mackenzie analysis, and as recently echoed by Schlumberger, approximately 85% of the nearly $500 billion of investment in oil and gas between 2022 and 2025 generate favorable returns at oil prices below $50 per barrel. Of this, approximately $200 billion is expected to be invested in deepwater projects. As you well know, commodity prices have remained comfortably above the $50 per barrel level for more than two years. and remained stable in the mid $70 to mid $80 per barrel range. As the majority of offshore break-evens are significantly below this threshold, and many are below $50 per barrel, we expect our customers' programs to receive approvals to move ahead. As further evidence of market strength, a number of operators are evaluating and increasingly pursuing long-term rig contracts that are not yet tied to specific projects or may not yet have the approval of all project partners. We have not seen this type of market behavior in some time, and it is perhaps one of the more exciting and encouraging market developments to date. Since we've already discussed the various harsh environment markets, let's take a closer look at each ultra-deepwater region. In the U.S. Gulf of Mexico, direct negotiations continue to be the preferred contracting strategy for our customers. Many of the conversations we are having involve multi-year opportunities, in some cases up to five years. These include programs and fields that require 20,000 PSI completions, a capability that only the Deepwater Titan and Deepwater Atlas currently possess. With the Titan contracted through the first quarter of 2028, the Atlas will be the only rig available with this capability following the completion of its current contract in August 2024. In Brazil, the Petrobras pulled two tenders in its final stages, with Petrobras recently announcing the winning bids, including the Deepwater Aquila. We expect the full award to be finalized by the end of August. Additionally, the much anticipated Petrobras Buzios tender is well underway. The two tenders combined could absorb up to seven rigs in the next 15 months. three of which we believe would need to come from outside the region. The momentum in the region is expected to continue as just last week Petrobras issued another tender for up to three rigs with the commencement of mid 2025. Additionally, Equinor has issued a request for information for its BMC 33 block offshore Brazil for approximately two years, starting in the second or third quarter of 2026. In West Africa and the Mediterranean Sea, there are numerous multi-year opportunities expected to commence within the next 18 months. Several operators seek rigs for projects that could be greater than five years in duration. We also see multi-year opportunities spread across the region, including Shell Nigeria, Azul Energy's two-year tender in Angola, and OMB's tender in the Romanian Black Sea. And finally, in India, ONGC's tender is nearing completion, and we believe an award for one rig for up to 21 months is imminent. We also expect to see demand for one or two additional rigs in the next 12 months. Taking a closer look at our fleet. During the second quarter, the Deepwater Titan started its first contract with Chevron on the anchor project in the U.S. Gulf of Mexico. And just last week, the Titan's 20K BOP was deployed using the third installed robotic riser system in our fleet, which further improves operational efficiency and crew safety through automation. The Titan joins its sister ship, the Deepwater Atlas, as one of only two eighth generation ultra deepwater drill ships in the global fleet. The rig's 3.4 million pound hoisting systems are capable of running heavier casing strength than any other floating drilling rigs. This can shorten well time as well as potentially preserve a larger borehole for our customers' follow on production activities. The rig's 20,000 PSI well control equipment enables completion of higher pressure reservoirs, thereby unlocking projects that were previously inaccessible. The increased hook load and higher pressure equipment provide important advantages for both drilling and completions and make the rigs highly desirable for both activities. Also during the quarter, we committed to the sale of two harsh environment floaters, the Paul B. Lloyd Jr. and the TransOcean Leader. These lower specification assets are best suited to the UK North Sea and further demonstrate our strategy to focus on our high specification floating fleet that is in high demand in other jurisdictions. Once the sale closes, we will have a fleet of 28 ultra-deepwater floaters and eight harsh environment floaters, in addition to our non-controlling ownership interest in L'Aquila Ventures, which is currently building the deepwater Aquila. Within our portfolio, we have 10 of the 14 highest hookah drill ships in the global fleet. We also have 11 cold stack floaters, including 10 ultra-deepwater rigs and one harsh environment semi-submersibles. With our active fleet near full utilization, we are actively bidding these stacked assets into open tenders and direct negotiation opportunities. Our stacked fleet provides us with the most operational leverage of our peer group. There are just 12 cold-stacked sixth and seventh generation drill ships remaining, and eight of these are owned by Transocean. In addition to the 12 cold-stacked sixth and seventh generation drill ships, there are just four so-called stranded new build rigs remaining in the shipyards without an owner or publicly known option to purchase. We expect the cost to commission these stranded rigs into the active fleet to be between two to three times the cost of reactivating cold stacked rigs due to an initial purchase price between $200 and $300 million plus contract preparation costs as compared to a cold stack reactivation estimates of $75 to $125 million. And for those of you who may be wondering, we do not believe we will see any new builds commissioned for many years. And in the extremely unlikely event that we do, the timeline to completion would likely be between three to five years and the capital required could exceed $1 billion. In short, we believe that transition will remain the supplier of choice for incremental ultra-deepwater rig capacity, and we will continue to demonstrate extreme discipline when considering contract renewals and reactivations. As we continue to benefit from the rapidly improving offshore market, the cash flow generating ability of our fleet becomes increasingly strong. Utilizing free cash flow from operations, we intend to prioritize capital allocation during the next several years, starting, as we previously said, with a focus on deleveraging our balance sheet. This remains an imperative and will be carefully balanced and coordinated with our other priorities, including maintaining our active fleet, reactivating stacked assets to specific customer contracts, and deploying some of the new technologies that we have successfully developed and tested over the past several years, all with the ultimate goal of maximizing value for our shareholders. As we've demonstrated, we will generate that cash flow by maximizing the value of our active fleet and remaining disciplined when it comes to reactivating our stack fleet. For the past several years, we have taken the approach, quite effectively, of emphasizing day rates over utilization using several of our highest specification rigs. As an example, our recent contract for the Deepwater Invictus at a rate of $480,000 per day is $220,000 per day higher than we contracted the Invictus just two years ago, an increase that is the direct result of our contracting strategy. In some circumstances, given our strong backlog position, we were able to take the tactical decision to trade utilization in pursuit of higher day rates, which, as you know, is the essential foundation of cyclical EBITDA margin maximization. This strategy has benefited Transocean and, quite frankly, the industry overall. We will continue to evaluate opportunities on a case-by-case basis and, applying our holistic portfolio approach, use our available assets to secure the optimal combination of utilization and day rates. In summary, we are undoubtedly in what appears to be a multi-year upcycle. Our customers are both demonstrating their confidence and commitment to their projects and acknowledging the tightness of the supply for the highest specification floaters by securing rigs well in advance of their programs and locking them up for multiple years. Since Transocean owns and operates the industry's highest specification fleet of ultra deep water and harsh environment floaters and also owns the majority of the sixth and seventh generation cold stack rigs, We believe that we are best positioned to capitalize on this upcycle through increasing day rates on our active fleet and remaining disciplined with our stacked fleet. Over the past year, we have demonstrated that we can achieve both leading-edge rates and maximize term and still grow our backlog. And through the flawless execution of our operations, we will efficiently convert that industry-leading backlog to cash, which we will then use to quickly deliver the balance sheet and create sustainable value for our shareholders. And I'll turn the call over to Mark. Mark?

Thank you, Jeremy, and good day to all. During today's call, I will briefly recap our second quarter results, then provide guidance for the third quarter, and update on our expectations for the full year 2023. Lastly, I will provide an update on our liquidity forecast for the end of 2023. As reported in our press release, which includes additional detail on our results, for the second quarter of 2023, we reported net loss attributable to controlling interest of $165 million, or 22 cents per diluted share. After certain adjustments, as stated in yesterday's press release, we reported adjusted net loss of $110 million. During the quarter, we generated adjusted EBITDA of $237 million, which translated into cash flow from operations for approximately $157 million. Our free cash flow of $81 million in the second quarter reflects capital expenditures of $76 million, of which approximately $50 million was related to the recently delivered H-generation drill ships, the Deepwater Atlas and Deepwater Titan. Looking closely at our results during the second quarter, we delivered adjusted contract drilling revenues of $748 million and an average day rate of $367,000. This is above our previous guidance, mainly due to the postponement of a couple of short planned out-of-service projects into Q3, higher than expected recharge revenue, and higher revenue efficiency stemming from strong bonus conversion on several weeks. Operating and maintenance expense in the second quarter was $484 million. This is below our guidance primarily due to timing of certain maintenance activities. Turn to the cash flow and balance sheet. We entered the second quarter with total liquidity of approximately $1.6 billion, including unrestricted cash and cash equivalents of approximately $821 million. approximately $175 million of restricted cash for debt service, and $600 million for my undrawn revolving credit facility. I will now provide an update on our expectations for our third quarter and full year financial performance. As always, our guidance reflects only contract-related regulations and or upgrades. For the third quarter of 2023, we expect adjusted contract drilling revenue of approximately $720 million. based upon an average fleet-wide revenue efficiency of 96.5%. This quarter-over-quarter decrease is mainly due to the planned mobilization and contract preparation activities on the Trans-Ocean Barrens, the Trans-Ocean Endurance, Deepwater Kakowato, and Deepwater Mykonos. Also driving this decrease is the Deepwater Atlas 20K BOP swap and low utilization on the Development Driller III and Discoverer Inspiration. This is partially offset by a full quarter of activity in the Deepwater Titan and Trans-Ocean Norga, the commencement of the KG2 contract in Brazil, and higher day rates on the Cocoa Borders new contract following the out-of-service period. For full year 2023, I am reiterating prior guidance of adjusted contract drilling revenue of between $2.9 and $3 billion. We expect third quarter O&M expense to be approximately $540 million. This quarter-over-quarter increase is due to the changes in feed activity, timing of in-service projects, continuing preparation of the Deepwater Orion in advance of its contract commencement in Brazil, and the start of contract preparation activities on the transition equinox, the transition endurance for their work in Australia. Our expected full-year 2023 operating and maintenance expense is forecasted at $1.95 billion, slightly higher than our prior guidance and mainly due to certain contract preparation activities on the recently announced fixtures, including the Transocean Equinox and Transocean Barrens. We expect GA expense for the third quarter to be approximately $55 million and around $210 million for the full year. Net interest expense for the third quarter is forecast to be approximately $133 million. For the full year, we estimate net interest expense to be approximately $470 million, including capitalized interest of approximately $38 million, and excluding the fair value adjustment of the bifurcated exchange feature embedded in our exchangeable bonds issued September 2022 of $179 million from the first half of 2023. Capital expenditures for the third quarter are forecast to be approximately $75 million, including approximately $33 million related to the deported Atlas and deported Titan. Cash taxes are expected to be $6.3 million for the third quarter and $45 million for the year. Our expected liquidity in December of 2023 is projected to be between $1.2 and $1.3 billion, reflecting our revenue and cost guidance and including the $600 million capacity of our revolving credit facility and restricted cash of $220 million, which is mostly reserved for debt service. This liquidity forecast includes 2023 CapEx expectations of $270 million, which approximately $160 million is related to our recently delivered new builds, and $110 million for sustaining and contract preparation CapEx. As Jeremy mentioned in his comments, we have seen a material increase in day rates across our portfolio of assets. The weighted average of our new contract day rates announced in our July 19th status report was approximately $456,000. As existing contracts conclude and our fleet continues to move on to these and other higher day rate contracts, we will increasingly generate more operational cash flow. With the completion, delivery, and contract commencement of the Deepwater Atlas and Deepwater Titan, our capital expenditures decline materially, increasing free cash flow to address our balance sheet and assess other actions that create value for shareholders. With respect to ongoing balance sheet activities, our recent share price performance has resulted in all of our changeable bonds being deep and consistently in the money. As such, we expect that these bondholders may be inclined to convert their position to shares, and in fact, we have received numerous inquiries regarding early conversion. As a reminder, our total remaining EB debt obligation is approximately $620 million. In addition to reducing our debt through early conversion of EBs, And as we have previously indicated, we remain committed to simplifying our balance sheet and reducing cash interest costs as and when market conditions are supportive. This concludes my prepared comments. Now I'll turn the call back over to Alison.