Transocean Ltd (Switzerland)

Good day, everyone, and welcome to today's Q3 2023 TransOcean Earnings Call. At this time, all participants are in a listen-only mode. Later, you will have an opportunity to ask questions during the question and answer session. You may register to ask a question at any time by pressing star 1 on your telephone keypad. Please note this call is being recorded. It is now my pleasure to turn today's call over to Alison Johnson, Director, Investor Relations.

Thank you, Mike. Good morning and welcome to Transocean's third quarter 2023 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 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 $162 million on $721 million of adjusted contract drilling revenues, resulting in adjusted EBITDA margin of approximately 22.5%. As released on our October 18th Fleet Status Report, we recently added $745 million in incremental backlog, giving us a total of $9.4 billion. Of note, this is the sixth sequential quarter increase in our backlog. Now to our latest fixtures. In India, the Deepwater KG-1 received a 60-day extension with its current customer reliance at a rate of $340,000 per day, as well as a 21-month contract with ONGC at a rate of $347,500 per day, excluding a mobilization fee of $5 million. The rig is now committed through the end of the year, at which time it will undergo a brief period of contract preparation before its program with ONGC commences in February 2024. As discussed on our second quarter earnings call, an operator in the U.S. Gulf of Mexico awarded the Deepwater Invictus a P&A well at a rate of $440,000 per day. The program was completed in the third quarter. Finally, in Brazil, the new-build ultra-deepwater drill ship, Deepwater Aquila, was awarded a three-year contract with Petrobras at a rate of $448,000 per day, excluding a mobilization fee of 90 times the contract day rate. The Aquila was delivered from the shipyard earlier this month and will soon receive customer-specific upgrades for its initial contract, which is expected to commence in the third quarter of 2024. The contract with Petrobras was particularly important as it facilitated the acquisition of the outstanding interest in our joint venture, L'Aquila Ventures Limited, through which we assumed full ownership of the Deepwater Aquila. Transocean now owns, and with the commencement of the Aquila's contract, will operate, eight of the 12 globally competitive 1,400 short-ton hook load dual-activity ultra-deepwater drill ships in the world. The acquisition of the Aquila is consistent with our strategy of continuously high-grading our fleet, a strategy which has proven very effective, particularly over the last 18 to 24 months, as we have secured market-leading day rates with these high-specification assets. As an example, since the fourth quarter of 2022, our ultra-deepwater fleet average day rate has increased by approximately 33%. By the third quarter of 2024, based upon current farm backlog, we expect this average rate to increase to $437,000 per day. Based upon the status of discussions with customers, we expect that the Transocean Barrens will be contracted for new work starting in mid to late 2024 until initially late 2026, and the Deepwater Ski Roads will be similarly committed until early to mid 2025. Details of these prospects will be forthcoming, assuming execution of fully binding customer commitments. Not only did we have significant backlog over the past several quarters, but we also substantially lengthened contracting term during this period. In April of 2022, 12 of our rigs were contracted for durations greater than 12 months. Six were contracted for greater than 24 months, and only five were contracted for more than 36 months. By comparison, today, 17 of our rigs are contracted for durations greater than 12 months, a 42% increase. 15 are contracted for greater than 24 months, a 150% increase. And 13 are contracted for more than 36 months, a 160% increase. Of our 2023 contracted backlog, just over 80% now consists of programs of more than one year in duration. Another clear indication that our customers believe in the longevity of this upcycle and in the capability of Transocean. The significant increase in contract commitments is reflected in the size of our industry-leading backlog. From the beginning of 2022 to the present, we have added approximately $6.8 billion in backlog. When building our backlog, maximizing EBITDA and associated margins remains our goal. And these data points clearly demonstrate the effectiveness of our longstanding asset strategy and portfolio management approach to placing our assets on contracts of appropriate and meaningful value. We take decisions that make the most economic sense in the company and our shareholders. This means that at times we may seek the highest day rate possible for a specific asset or job, a consequence of which may be that we accept short periods of idle time on individual assets. In other instances, we may determine that maintaining high utilization has the optimal long-term financial impact, meaning that we fix an asset at prevailing or otherwise acceptable market rates for a longer duration, securing high-quality backlog, meaningful EBITDA generation, and longer-term visibility to future cash flows. As reflected in their budget processes, our customers continue to be disciplined in their allocation of capital. The result of this behavior is exhibited in the lumpiness of the timing of contract awards we've observed over the last couple of years. We expect this trend to continue. Our sizable backlog and portfolio approach to fixing our assets minimizes our exposure to this natural ebb and flow of customer activity, while best ensuring we achieve the best margin possible. Notwithstanding the timing of announced contracting activity, our customers are securing rigs for longer and longer durations and for programs expected to commence well into the future. This is evidenced by the increase in average contract award lead times, which have increased significantly since 2021. Drill ship contracting lead times have increased by approximately 53% to 319 days, and semi-submersible contracting lead times have increased approximately 38% to 284 days. The number of global floater opportunities continues to expand, reflecting very strong demand and further encouraging our view of the longer-term sustainability of this cycle. Indeed, overall demand remains on the rise, with 84 rig years of activity expected to be awarded for 77 discrete programs starting in the next 18 months. Looking closer at each region, the U.S. Gulf of Mexico continues to be defined by direct negotiations with our customers, with operators engaging contractors of choice for specific opportunities. We see a steady stream of demand for short-term programs with independent operators amidst a solid market with a limited supply of high-specification ultra-deepwater assets. Notably, we are engaged in discussions for follow-on work for the Deepwater Atlas upon completion of its current contract and are already having conversations with numerous customers regarding additional 20K programs, many of which are not expected to start for up to three years, once again demonstrating our customers' belief in a prolonged upcycle. The Invictus is currently competing for multiple local campaigns, including one which we believe will require a high hook load seventh generation drill ship, the available supply of which is very limited. We are also actively marketing the inspiration in various jurisdictions around the world. As you well know, Brazil continues to be a source of strong demand, and based upon open tenders, we expect the active rig count to continue over the next 12 months from the 29 rigs operating today. Over the past year, there have been 27 awards made in Brazil, 18 for rigs already in country, and 9 that brought new rigs into country. Between the open tenders, including Blizios, Stepia, Mord, and BMC 33, there are expected to be another eight rig awards, which should require two incremental rigs from outside of Brazil. This brings the addition of non-Brazilian rigs to 11 since the upcycle began. Furthermore, it's widely expected that more tenders in 2024 will keep all of the incumbent rigs busy. and pending exploration success could demand a further call on the global market to add yet more rigs to brazil clearly brazil is set to remain a pivotal long-term consumer of ultra deep water rigs with active rig count expected to reach at least 36 in 2024 2025 just by fulfilling today's known tenders across the atlantic we see in excess of 20 opportunities scattered throughout africa and the mediterranean commencing in the next 18 months for the first time in nearly a decade nigeria following its national election is showing significant signs of revival. We expect between two and four long-term programs to be tendered over the next six months, including three from international oil companies. In Angola, Chevron, Exxon, and other large operators have a mixture of short and multi-year opportunities currently expected to commence in 2024. Additionally, Namibia may require more rigs, as Total Energies has confirmed future development, while Chevron and Shell have programs expected to be awarded in 2024. The Namibian Ministry of Mines and Energy recently confirmed that projects requiring as many as five rigs are set to commence in 2024. And finally, in Mozambique, we expect tenders for both TotalEnergies and ENI in the coming months. In Australia, regulatory requirements continue to drive demand for plug and abandonment work. Additionally, several operators have indicated interest in securing rigs for additional multi-year programs. At this point, we anticipate formal tenders will be released in 2024 and expect our two rigs currently active in the region to be competitive for these tenders following their existing programs. As such, we expect both the Transocean Endurance and Transocean Equinox to remain in-country for the foreseeable future. There have also been promising developments elsewhere in the Eastern Hemisphere. We anticipate that ENI will soon require a rig for follow-on development for its recent discovery in the Kutai Basin in Indonesia. also has an open tenor for approximately 18 months of work in multiple countries in the region. And in Malaysia, we expect PTT-EP and Petronas will come to market in the near future for an ultra deepwater drill ship with a commencement in 2024. Finally, we expect the high specification harsh environment market to remain tight, as active supply in Norway is now fully utilized, in large part due to the departure of numerous rigs to other markets. As witnessed recently in a couple of public announcements, many incremental programs will require operators in Norway to mobilize rigs from other regions. And since many, if not all, of the recently departed rigs will likely continue their active utilization outside of the Norwegian market, we expect this region to remain tight for the foreseeable future. In addition to the fact that our customers are fixing contracts with start dates two years in the future, the broader fundamentals also support our views of a sustained industry recovery beyond the 18-month time horizon. RISD recently reported that oil inventories in developed countries are approximately 115 million barrels below their five-year average, while the International Energy Agency reported global crude stocks have also fallen to their lowest level since 2017. Meanwhile, the IEA forecasts increasing oil demand through 2028, while OPEC projects a steady increase through at least 2045. These predictions are supported by population and GDP growth projections, particularly for developing nations, where renewables infrastructure is in its infancy. We continue to believe that much of new hydrocarbon development will come from deepwater basins, as these have consistently shown to yield superior investment returns and produce some of the lowest carbon intensity barrels available today. Reliable third-party analysis suggests upstream offshore capex will increase materially over the next several years, crossing $200 billion next year and reaching $234 billion by the end of 2027. In summary, our outlook for a prolonged offshore deepwater drilling recovery remains firm, and we will continue to manage our rig portfolio to maximize value. As always, we will continue to place paramount importance on the safe and flawless execution of our operations to minimize the conversion, to maximize the conversion. In this regard, I'm just truly a team member, and I extend a sincere thank you to the entire transition team for their commitment every day to provide safe, reliable, and efficient operations. I'll now turn the call over to Mark.