Transocean Ltd. (RIG) Q2 2017 Earnings Report, Transcript and Summary

Good day, and welcome to the Second Quarter 2017 Transocean Ltd. Earnings Call. Today's conference is being recorded. And at this time, I'd like to turn the conference over to Mr. Brad Alexander, VP, Investor Relations. Please go ahead, sir.

Thank you, Aaron. Good morning, and welcome to Transocean's Second Quarter 2017 Earnings Conference Call. A copy of the press release covering our financial results, along with supporting statements and schedules, including reconciliations and disclosures regarding non-GAAP financial measures, are posted on the company's website at deepwater.com. Joining me on this morning's call are Jeremy Thigpen, President and Chief Executive Officer; Mark Mey, Executive Vice President and Chief Financial Officer; and Terry Bonno, Senior Vice President, Industry and Community Relations. During the course of this call, participants 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 the current expectations and certain assumptions of management and are therefore subject to certain risks and uncertainties. Many factors could cause actual results to differ materially. Please refer to our SEC filings for more information regarding our forward-looking statements, including the 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. [Operator Instructions] I'll now turn the call over to Jeremy.

Thank you, Brad, and a warm welcome to our employees, customers, investors and analysts participating in today's call. As I did last quarter, I'll begin by recognizing and thanking the entire Transocean team for achieving more than 15 months without a single lost time incident. We're obviously very proud of this ongoing achievement, and we'll remain vigilant as we continue our relentless drive towards an incident-free workplace. In addition to our outstanding safety record, we have started the first half of the year with very strong operational results. As reported in yesterday's earnings release, for the second quarter, the company generated adjusted normalized EBITDA of $347 million on $751 million in revenue. So despite a sequential decline in revenue, our adjusted normalized EBITDA margins actually increased from 48% to 49%. This result was driven by a combination of strong uptime performance with revenue efficiency across our fleet of 97.4% in the quarter and continued cost controls, with sequential reductions in operating and maintenance expenses as well as general and administrative expenses. We are once again pleased with these results as they reflect our unwavering focus on continuous improvement across the enterprise. Having said that, we recognize that there is always more that we can do. To that end, we have heightened our efforts to eliminate downtime and materially reduce the time required to construct a well so that we can deliver both a more predictable and lower-cost level of service to our customers. As many of you may have read or heard last week, we recently entered into a new 10-year care agreement with NOV, designed to maximize uptime while simultaneously reducing the total cost of ownership for NOV-supplied components and systems on 15 of our rigs. This agreement covers risers and critical drill flow components, including our roughnecks, drawworks and top drives. We now have a long-term agreement in place with GE, Cameron and NOV that: a, assure us of lower and more predictable maintenance and repair costs over the term of the agreement; and b, aligns us around the common objective of reducing equipment-related downtime. In addition to maximizing our uptime performance, we continue to utilize data to analyze our operational subprocesses to realize efficiencies in the well construction process. Since the implementation of our performance dashboards earlier this year, we've enjoyed a marked reduction in our tripping times across the fleet, which, on an ultra-deepwater rig, is where a disproportionate amount of time is spent. We've also driven a meaningful reduction in both the frequency and duration of nonproductive black spots. And we continue to actively measure and streamline our other critical processes, all of which are helping us to consistently beat drilling curves, which provides us the confidence necessary to offer performance-based contract incentives to our customers. Turning now to our fleet. We just recently announced the fifth floater reactivation associated with new contracts since the start of the downturn. The Development Driller I will commence operations in the first quarter 2018 offshore Australia. This was an especially important win for Transocean and that marks our return to the Australian market where we have past prudent success. It also puts us in position to secure future work in Australia as the DD1 will be the most technically capable asset in that region. In a few moments, Terry will tell you about a contract that we were awarded last week, which will mark our sixth floater reactivation. Speaking of reactivations, the harsh-environment semi Transocean Barents is expected to commence its 15 month contract in Canada next week after a successful warm stacked reactivation. The Barents joins the Henry Goodrich in this key harsh environment market, and based on past experience, we fully expect it to perform at a very high level. Additionally, the reactivations announced last quarter for the Deepwater Asgard in the Development Driller III are now completed. And the rigs are each operating and performing exceptionally well for our customers. We have previously spoken with great conference about efficiently and cost-effectively returning our idled and stacked assets to operating mode. This is based on the extreme level of care we have taken to meticulously detail and rigorously adhere to our stacking procedures and reactivation processes. Recently, during multiple pre-contracting inspections, our customers have recognized the superior condition of our stacked assets and have concluded their inspections with confidence that Transocean will provide reactivated assets and crews that will perform to their high standards from day one. In addition to the reactivation of assets, we continue to welcome new contract-backed, high-specification assets into our fleet. On Tuesday, the Deepwater Pontus departed Korea en route to the Gulf of Mexico, where she will commence her 10 year contract with Shell early in the fourth quarter. The Deepwater Pontus is our fourth contract-backed, newbuilt ultra-deepwater drillship to commence operations over the past two years. And given the outstanding performance of her predecessors, the Deepwater Thalassa, the Deepwater Proteus and the Deepwater Conqueror, we look forward to seeing what she can do. While we are certainly excited about these additions and reactivations and the future revenue and earnings that they represent, we also recognize the need to continually reevaluate the composition of our fleet. Consistent with our fleet renewal strategy, during the quarter, we classified two additional midwater floaters, the Transocean Searcher and the Transocean Prospect, as held for sale. This brings our total floaters removed from our marketed fleet since the beginning of the downturn to 33. As always, we will continue to objectively evaluate our assets as the market unfolds. And as previously demonstrated, we will continue to recycle those rigs that we believe will struggle to be competitive as the market recovers. As you can imagine, our process for evaluating rigs is routinely refined based upon our ever-evolving assumptions for market trends, overall floater demand and customer preferences. In addition to the retirement of two midwater floaters, during the quarter, we also finalized the divestiture of the jackup fleet. As a result, our fleet is now exclusively comprised of floating rigs, with a strong bias toward the ultra deepwater and harsh environment markets, where our high quality assets, unmatched operational experience and trusted customer relationships represent a significant competitive advantage for Transocean. Finally, we continue to evaluate opportunities outside the company to upgrade our fleet through both corporate M&A and individual asset purchases. However, in the current environment, we view rig capability and the impact of near term liquidity as equally important. Therefore, existing backlog, visibility to future contracts, cash on hand and the timing of maturities are all critical factors that we consider in gauging any prospect. Transitioning now to the macro environment. Despite OPEC's May agreement to extend their previously announced production cuts, oil prices retreated below the $50 per barrel level where they've remained until just recently. In spite of this, we're encouraged that the recent tendering for projects requiring deepwater floaters has continued to progress as previously expected and is well ahead of last year's pace. Additionally, the total floaters under contract worldwide have increased over the last month, with total fixtures year-to-date exceeding the 12-month total for 2016. We're also encouraged to see that global demand for oil remains at record levels, which, along with a well-recognized and significant underinvestment in new resources, points towards longer-term supply constraints. To illustrate this point, from the peak in early 2016, global surplus barrels of oil have declined approximately 50% and are currently expected to be below 100 million barrels by late 2018. As such, as long as demand for oil remains strong at some point in the not too distant future, we will likely see a significant tightening of supply and demand, which should send oil prices higher and motivate our customers to once again invest capital in offshore exploration and development. In the near term, we continue to focus on the things that we can do to make offshore more competitive. We're consistently hearing from our customers that our ability to outperform their internal drilling curves is allowing them to beat their AFEs and significantly reduce their breakeven costs across their portfolio of projects. As a testament to this fact, breakeven costs in multiple deepwater basins around the world are consistently coming in below $50 per barrel and are now often around, if not below, $40. And it's important to note that many of our customers are achieving these lower breakevens with rigs that were contracted during the last up cycle, when day rates were 2 to 3 times higher than current market rates. Therefore, we believe that much of the cost saving is structural and sustainable. Assuming this is true, then deepwater breakevens are starting to compare favorably with onshore, which, by the way, is now experiencing some fairly significant price inflation across most products and services. As such, we think that there could soon be a shift in capital from land to offshore as the delta in cost per barrel narrows and the need for reserve replacement becomes increasingly critical. As we await this eventual shift, we'll continue to take the necessary steps to further strengthen our financial position, continue to realize opportunities to streamline our business and continue to manage our operations in a manner that consistently delivers the safest, most reliable and most efficient operating results in the industry. In closing, I would like to once again thank all Transocean employees for delivering another great quarter. As a team, we continue to deliver exceptional uptime and revenue efficiency, strong EBITDA performance and solid cash flow generation, all with a continued focus on realizing the long-term strategy of the company. Most importantly, we are delivering these results while never losing sight of our most sacred responsibility: the safety of our operations and our people. I'll now hand the call over to Mark.

Thank you, Jeremy, and good day to all. During today's call, I will briefly recap the second quarter's results and provide an update to our 2017 guidance. I will also discuss our recent jackup divestiture and numerous liability management transactions and, finally, present our end-of-year 2019 liquidity forecast. For second quarter 2017, we reported a net loss attributable to controlling interest of $1.7 billion or $4.32 per diluted share. As detailed in our press release, second quarter results included net unfavorable items, principally related to previously announced $1.6 billion loss in sale of the jackup fleet and impairment of $113 million on our midwater floaters. Excluding net unfavorable items, adjusted net income was $1 million during the quarter. As a reminder, the jackup sale was consistent with our goal of enhancing liquidity and focusing our strategy on the leading and technically demanding areas, including ultra-deepwater and harsh environments. We received approximately $320 million in cash, and the transaction removed the remaining financial obligations of approximately $1 billion related to the five jackups under construction in Singapore. Turning back to the second quarter results, we achieved another outstanding quarter of revenue efficiency at 97.4% and continue to demonstrate that we could successfully convert our industry-leading backlog into cash flow through our consistent operating performance. Other revenue was $46 million, which included $40 million associated with early termination fees for the Deepwater Asgard. This compares with the $47 million in the prior quarter that included early termination fees of $37 million. The second quarter's operating and management expense was $333 million. This compares with $343 million in the prior quarter, which included favorable litigation matters totaling $8 million. Second quarter operating expenses are below our expectations due to ongoing cost control initiatives and favorable adjustment to value-added taxes. As Jeremy mentioned earlier, our adjusted normalized EBITDA margin was 49% in the second quarter, about 100 basis points increase from the prior quarter. Once again, quarterly models will be maintained or increased in a declining revenue environment, a very impressive result from our operating and technical teams who continue to deliver safety performance as well. Cash flow from operating activities was $319 million compared with $184 million in the prior quarter. The improvement was due primarily to increased collection of outstanding receivables. During the second quarter, we conducted several balance sheet-enhancing transactions. On May 5th, we successfully placed a private offering of $410 million of senior notes due in 2022. These funds will partially finance the construction of the ultra-deepwater drillship, Deepwater Conqueror, currently operating for Chevron in the U.S. Gulf of Mexico. During the second quarter, we opportunistically repurchased debt in the open market, totaling $131 million, focusing on near-term maturities. Additionally, in mid-June, we conducted a successful cash tender after repurchasing existing notes totaling $1.2 billion. This tender also targeted near-dated maturities between years 2017 and 2021. Following these proactive financing transactions, we ended the quarter with liquidity of $5.5 billion while reducing our near-term debt by $1 billion. Over the past year, we reduced our net debt position by approximately 20% or $1.2 billion while consistently maintaining a cash balance of more than $2 billion. I'd like to note also that we continue to remain comfortably within our revolving credit facility's debt-to-cap ratio, recognizing this quarter's results and the financing actions. I would now provide an update to our financial expectations for the third quarter and then full year 2017. Other revenue for third quarter 2017 is expected to be approximately $10 million. We expect third quarter 2017 O&M expenses to range between $350 million and $360 million. This includes increased operating costs related to activity on rigs that we have recently reactivated and mobilization costs associated with our recycled assets, offset by lower costs related to our former jackup fleet. In short, we expect 73 additional operating days in the third quarter. We expect third quarter G&A expense to revert to our run rate target of $40 million. Capital expenditures for the third quarter are expected to be approximately $150 million, primarily related to the completion and mobilization of newbuild Deepwater Pontus, ongoing construction of the Deepwater Poseidon and strategic upgrades on the Discovery in the year. Turning to full year 2017 guidance. Operating and management expenses for the full year 2017 are expected to range between $1.375 billion and $1.4 billion. The decrease is primarily due to lower costs associated with the former jackup fleet, partially offset by reactivation costs and increased activity-related costs. We expect to incur approximately $25 million of costs associated with the reactivation of the Development Driller I, mostly in the fourth quarter, most of which is expected to be expensed. Additionally, we expect costs of approximately $10 million associated with the recent mobilization to Australia to be incurred in the first quarter of 2018. Let me emphasize that we have taken a strategic view on rig reactivations. Where we believe we have a high probability for follow-on work with a strategic customer on a specific geographic region, we will reactivate assets, recognizing the initial contract cash flow may be insufficient to fully recover the reactivation and mobilization costs. As the market recovers, however, these investments are expected to create superior returns through the next cycle. We expect full year G&A expense to range between $155 million and $160 million, which now includes certain IT system enhancements mainly in the fourth quarter. Full year 2017 depreciation expense is reduced to approximately $855 million due to the divestiture of the jackup fleet. Full year 2017 net interest expense is expected to be between $465 million and $475 million, which includes our recent liability management and rig divestiture transactions. Net interest expense includes capitalized interest of $115 million and interest income of $20 million. We expect a portion of our consolidated earnings attributable to noncontrolling interest to be approximately $30 million for the year. Capital expenditures for 2017 are expected to be approximately $500 million, which includes $420 million related to our newbuild drillships. Turning now to our financial position and projected liquidity as of December 31, 2019. Excluding any assumption for a new extended revolving credit facility to our -- replace our current RCF expiring in mid-2019, our end-of-year 2019 liquidity is estimated to range between $900 million and $1.3 billion, comfortably above the minimum level of cash necessary to successfully operate the company. These assumptions include our second quarter operating results, recent financial transactions and the jackup divestiture. Renewing or extending the RCF remains a priority which we expect to complete during 2018. Also and similar to the secured financing achieved from the Deepwater Thalassa, Proteus and Conqueror, we have the Deepwater Pontus and Poseidon that have the potential to provide us with an additional estimated $1.2 billion of secured financing capacity. Other assumptions include revenue efficiency of 95% through 2019, a limited number of new contract awards with day rates assumed to be at or near breakeven through 2018, with marginal dayrate improvement in 2019 and those speculative reactivations. In 2018, we expect CapEx of approximately $165 million. This includes approximately $65 million in newbuild CapEx and $100 million for maintenance CapEx. In 2019, we expect total CapEx of approximately $190 million. This includes approximately $90 million in newbuild CapEx and $100 million in maintenance CapEx. To summarize, we are very pleased with our operational results, including an outstanding revenue efficiency and ongoing cost control efforts. We are also very comfortable with our balance sheet and liquidity position. We will continue to challenge the status quo and strive for improved performance to help mitigate the effects of the current low day rates and utilization environment. I will now turn the call over to Terry for an uplifting view on the market.

Thanks, Mark, and good day to everyone. While the macro delights us when oil rises above the $50 barrel mark, we remain determined to contract business in any market and deliver extraordinary performance and service to our customers. As evidence of this commitment, we have been very busy reactivating and extending rigs while creating opportunities to work with old and new customers. Our teams are working around the clock to restaff rigs, deliver flawless start-ups with reactivation, deliver ready-to-drill newbuilds from shipyards, manage seamless entry into new countries and efficiently executing contracts. It is beginning to feel a lot like we are moving off bottom. We are extremely proud of Team Transocean's execution and look forward to more greatness from our high-performing team. The past three months have been extremely busy, with 32 industry fixtures awarded during this period. And year-to-date, the industry has almost passed the floater fixtures executed during the two previous years. Should this pace continue, we will eclipse the total of '15 and '16 combined. Transocean has executed 12 contracts and/or extensions year-to-date and added $221 million of contract backlog. As of July 25, our backlog remains industry-leading at $10.2 billion, more than 3 times that of any of our non-distressed competitors. Just last week, after issuing our Fleet Status Report, we added two more awards to our backlog. We are very excited with the award for the Deepwater Nautilus for our work offshore Asia for a four well drilling campaign. After a sharp move and full crewing of the rig, she will commence operations in the fourth quarter of 2017. The Nautilus has been working for Shell for 17 years offshore Gulf of Mexico, and we are very pleased to have her now working in the Asia Pacific region. The second new award is for the Paul B. Loyd. She has received a new contract for two wells plus options on the Lancaster development in the UK with Hurricane Energy. Drilling is expected to start April 2018, and we are very pleased to place another rig with a great customer. Returning to the Asia Pacific region and as Jeremy previously mentioned, we are bringing the GSF Development Driller I out of a cold-stacked condition and returning her to work in Australia in the first quarter of next year for Quadrant Energy. This will mark Transocean's return to the Australia market, where customers are very excited to see us return to the region. The DD1 is an ultra-deepwater, highly-capable semi with both DP and mooring capabilities. Our third award in the Asia Pacific region is with Woodside who executed two, one well options for the Dhirubhai Deepwater KG2. This will keep her working offshore Myanmar through at least the end of the year. The rig also has more options, which, if exercised, will keep her working well into 2018. As we expected and alluded to on our last quarter's call, we have reactivated the Deepwater Asgard from a warm stacked condition and put her to work in the Gulf of Mexico with Deep Gulf Energy. With great team effort, the reactivation was executed in less than a month, and she was now -- and she has now been operating for two months. We are very pleased to be returning these 4 world class assets to the market. Our customers, with our support, have done a tremendous job of improving the economics on their projects. And we look forward to continuing our collaboration with them as we jointly work to make offshore projects economically viable at lower oil prices. We are confident that our reactivated assets will find follow-on opportunities as customers are placing a premium on operating assets with well-established contractors. We also see multiple bidding opportunities globally where we have identified almost 60 floater programs that could begin within the next 18 months. As you can see from these awards and consistent with our prior comments, opportunities are coming from all parts of the world. We continue to have productive dialogue with our customers regarding additional opportunities. Customers recognize the importance of assuring rigs are available for their projects, and they are requesting more information on the readiness of crews and availability of floaters. We're continuing strengthening of our customers' balance sheets and cash flows and expect more sanctioning of deepwater projects. Should the macro continue to strengthen and oil remain above the magic $50 level, we believe this will occur in 2018. Modulation below $50 a barrel will likely cause reevaluation and further push of demand to the right. On a positive note, for the first half of '17, 15 projects were sanctioned compared to 12 for all of 2016. These are primarily for Brownfield expansion on existing field tiebacks or satellite development, which require less investment than Greenfield developments and provide faster returns. However, we also saw ExxonMobil proceed with Liza, a significant Greenfield opportunity in Guyana as continuous reengineering has resulted in project economics that are extremely compelling. Now I'd like to turn to Brazil. As we've previously discussed, interest continues to grow from both the majors and independents regarding multiple bidding rounds in 2017 and 2018. With flexibility of local contract requirements and the extension of the special customs regime, REPETRO, operators are now waiting for environmental licensing solutions. With the 14th round scheduled for September 27, there continues to be a positive business sentiment and growing expectation from the bidders. Brazil must continue to do everything possible to spur exploration activity as thus far, only 7 exploration wells have been drilled in Brazil in 2017. This compares with only -- over 200 exploration wells in 2012, indicating the extreme level of underinvestment that is now occurring. We expect to see more activity following the recent tenders of Total, Statoil and Chevron as they continue to develop their portfolio of drilling opportunity in this key area in 2018 and beyond. We are participating in multiple bids and seeing more opportunities in other parts of the Latin America, including Trinidad, Colombia, Guyana and Suriname as a number of operators have programs that should begin in the next 12 to 18 months. In addition to the FID approval for ExxonMobil's Liza development offshore Guyana, Tullow recently signed a 10-year lease for the Orinduik Block in the Guyana-Suriname Basin. We are also excited about deepwater opportunities in Mexico, including the recent large discovery of the Zama field by the Talos JV. With the second licensing round for deepwater blocks to occur in December as well as this exciting discovery, we expect activity offshore Mexico in 2019 to continue accelerating. Looking now at the eastern hemisphere, we are also encouraged by the recent contract awards in Nigeria, and the activity in West Africa will begin to proceed and gather some momentum. We should see some pickup in activity in Ghana, Côte d'Ivoire, Equatorial Guinea and East Africa. Senegal also is taking steps to improve their petroleum and natural gas legal framework in Angola to support further development of Angola's natural resources. The Asia Pacific region has been very active, with multiple offerings and awards in Australia, Malaysia, Myanmar and India. We expect to see 30 floater opportunities over the next 18 months in these markets. With a positive result for the Woodside campaign offshore Myanmar with the KG2, we expect to see activity ramp up with customers holding leases in the two discovery areas. Turning to the UK and Norway market. We're excited to see that our prediction of a tightening market is happening sooner than expected. Increased demand for spring 2018 commencement of work in the UK is now causing customers to consider a 2017 winter drilling season. This is certainly the best-leading indicator of improving market conditions for the UK market. Norway has also been very active with recent tendering awards. The availability of high-specification, harsh-environment rigs for drilling offshore Norway is tightening quickly. Robust discussions are ongoing with customers, and we look forward to the next round of tendering opportunities. We are now seeing more operators in all markets express an emphasis on drillers' contractors' financial stability, by including financial metrics in recent tenders, are simply eliminating challenged competitors during the bidding process. This is narrowing the pool of suitable competitors for upcoming work. With the pace of current contracting, we could see the high-specification floater availability for suitable drillers dwindle faster than anticipated. Our customers have ramped up activity in the first half of 2017. The opportunities in front of us for 2018 and beyond are taking shape. In conclusion, we will continue to focus and improve on our already high level of service delivery, continue to exceed all stakeholders' expectations and win new contracts. This concludes my review of the market, so I will turn it over to Brad.

Thanks, Terry. Aaron, we're ready to take questions. [Operator Instructions]

[Operator Instructions] And we'll go first to Blake Hancock with Howard Weil.

Jeremy, first, let's dig in a little bit on the OEM agreements now that we have set up -- you signed three of them. Can you kind of help quantify now what you guys think the total savings could be, now having NOV on board in house for you guys over these 10-year contracts?

Yes. I'm not sure we're prepared to go into that level of detail. What I will tell you, though, is these are over a 10-year life and are specifically focused on eliminating the five-year and 10-year overhauls. And so what you'll see is in the first couple of years, not a lot of difference with respect to cost savings. Hopefully, we will see improved uptime related to that equipment, which will certainly help us with our revenue efficiency and certainly help us with our customers. But as you start to get into the year four and five and as those overhauls will be due, that's when you'll start to see a pretty meaningful reduction in costs. So it's really in year five and then beyond as you get out into year 10. And I don't -- Mark, I don't know if you want to add anything to that.

No, I think that's exactly right. I just want to guide you that it will be five years from now because some rigs are 2 or 3 years into their 5 years, So we'll start seeing the savings in the SPSs and the [new worlds] sooner than 2022.

That's great. I appreciate it. And then, Jeremy, on the last call, you talked about -- you guys brought the Asgard back to kind of get it hot because there are some future opportunities. As we think about that rig and, call it, the DD3, can you talk -- can you speak to the opportunities now that are still there? Is the Asgard opportunity still persistent? Or can you give us an update on maybe those two rigs?

This is Terry. Yes, I can actually talk to that in a bit more. So I know that there's a concern -- there always is a concern about contract rollovers, especially when you're in such a competitive market. But as I look at our contracts and our rigs that are rolling over, you just heard that we're putting the Nautilus back to work. Asgard, we've already talked about. And yes, there are follow-on opportunities. This rig is an incredible machine. She is one of the highest-efficiency rigs that are currently in the market today, and there are numerous customers that would be delighted to have this rig. So as we look further afield, we can see multiple opportunities for all of our rigs that will be rolling over. And there's 12 of them that will be rolling over in the next 12 months.

We'll go next to Greg Lewis with Crédit Suisse.

So Jeremy, just listening to Terry, in prepared remarks, your prepared remarks, I mean, clearly, you guys seem like you've had a little bit more pep in your step today than maybe you did 3 to 6 months ago, reactivating rigs, contracting opportunities. Just as you think about that and you think about the potential for consolidation M&A, you kind of alluded to it briefly, how should we be thinking about how this plays out in the industry? Are there opportunities for Transocean to do much to sort of build out the fleet? Or just looking at the ability to reactivate rigs, is that how we should be thinking about it more? Or could there be some opportunities out there for rig?

Yes. So a couple of different thoughts there kind of come to mind. So first, in terms of our sentiment and pep in the step, if you will, I mean, investors that have been around our space has been, I mean, as low as I can remember it. Yet for us, we think the things that we're doing internally, we're getting better every day, it's showing up in our results. And we're seeing a lot more interest from customers today than we saw 12 month ago. So for us, there is -- it's all relative, but there is more enthusiasm from our side right now than there was certainly 12 months ago. So that's one piece of it. The other piece of it is, is there opportunity for rig to continue to upgrade its fleet through acquisition? The answer is absolutely yes. I will point to, we're looking at the quality and technical capability of the rigs, specifically in ultra-deepwater and harsh environment, and we are very conscious of the fact that, hey, we don't really know at this point in time how long this downturn is going to last. It's looking more promising today than it was 12 months ago, but it's still pretty competitive out there. So more contracting opportunities but still really competitively bid. So we're still thinking pretty -- I mean, we're still very focused on making sure that we don't compromise near-term liquidity. So we are looking at assets. If it's a stranded asset in a shipyard right now, if we go out and acquire one of those assets, you can bet we could feel really confident that we're going to be able to put it to work very -- in very short order. And from a company M&A standpoint, again, we're really focused on near-term liquidity. So it'll need to be a company that has some backlog, that doesn't have much in the way of near-dated maturities, where we've got some runway. And we're not compromising that piece of it on our end?

Okay, okay, great. And then, Terry, just as you're mentioning these opportunities, clearly, your rig, you saw an opportunity to reactivate some previously stacked rigs. How difficult is it to be bidding against hot rigs in this market? And the reason I asked is one of the things that we kind of were thinking was that a hot working rig was going to be in a much better position than a stacked rig that went to work. Yet as I look at you, you've been successful in actually reactivating some rigs. So just trying to understand, were there nuances to these contracts? Where they special situations? Or is customers really just willing to take reactivated rigs?

Well, I think you have to look to our teams, first of all. I mean, the rigs are incredibly high-specification rigs, and customers know certainly the experience and the past history of the performance of the rigs. But let's get down to what really sell these rigs is our people. We are very blessed to have such a high-performing group of teams that make this company sing. And our customers know it. So there have been multiple opportunities, and we can look back to the Spitsbergen and the Barents. We were competing against actually rigs that were operating in country, that were hot and ready to go. And the customer said, "No, we want those, we want Transocean, and we want those rigs." So in most of these circumstances, there's not -- all of them we have bid out are rigs that were operating and hot. So again, it's the testament of our people being able to execute and continue to execute in a very professional and high-performing manner.

And just to add to that, Terry's exactly right, but to add to that, it's a combination of factors. It's the asset quality. It's the faith in the crews and the technical support onshore. It's the financial stability vis-à-vis some of the competitors out there. And I know we've maybe oversold this in your minds, and you may not care as much about it. But if you go and see the condition of our stacked assets and our customers go and they see the condition of our stacked asset, it gives them absolute confidence that these rigs are going to work as and when intended. And so it's a combination of all of that that's really selling Transocean.

We'll go next to Ian MacPherson with Simmons.

There seems to be competing narratives, I think, between a lot of your competitors that are still -- they're more cautious with regard to the trajectory of rig count and the overwhelming cascade of contract expirations against the demand, the visibility that they tout. And maybe everyone has their own agenda to keep the trade secrets. But you're clearly in full throttle, reactivation market share mode, and you're doing that pretty well. But is there a limit to this strategy or to your view of how much is a good amount of capacity to reactivate versus, "Let's see if we can get the -- if the market is really improving, let's see how quickly we can get tightness sufficient to drive better rates, maybe not in two or three years but better rates in one to two years?" Is there a conversation about that tension within the organization?

Ian, let me address that on two fronts if I could. Number one, we're not declaring victory yet. It's still a very competitive marketplace. The opportunity we are seeing, while certainly more than we saw last year, are primarily of short-duration work and very competitively bid. And so we're not saying that, Hey, this the start of a great upturn. It's going to last three, four years. We don't know yet. It's still very uncertain to us. What we're saying is today looks better than yesterday. So that's the first piece of it. With respect to our approach to reactivation, our approach to any contract, we look at it in 3 different -- from 3 different perspectives. We look at profitability, we look at contract risk, and we look at strategic importance. And so we evaluate every opportunity under -- through those lenses, if you will. So from a profitability standpoint, you obviously look at the reactivation costs. You look at the mobilization -- the mob costs. You look at the day rate versus our operating costs and our shore-based costs. And you can pretty easily calculate how this is going to impact us financially. And you weigh that against what it costs to actually stack that asset over a period of time. And so that's one piece of it. But then we look at kind of the follow on opportunities as well and the opportunity then to increase that day rate over time. And so we take all that into account as we're looking at each of these opportunities. And so no, it's a very -- it's not just a market share grab. It's a very thoughtful approach to which asset do we want in which markets with which customers? What are we positioning this asset to do after this contract? And so it's really a long approach. And yes, some of that is speculative, there's no doubt, but it's based in a lot of customer discussion. And so it's not blind speculation; it's an informed speculation. Hope that answers the question.

Yes, that's really helpful. And then maybe I could drill it down a little bit more into the fleet. The Development Driller rigs have the dual activity capability, and as you said, they certainly have a particular niche. And then Nautilus has not been stacked, so it has the advantage of seamlessly rolling from a hot state. Are there other fifth-gen assets in your fleet, a number of them that are still on the radar for potential reactivations?

Yes.

Could you bracket the number?

No.

We'll take our next question from Kurt Hallead with RBC.

So yes, I'm just curious, what do you think has changed the most here in the recent months that the market is now or the customer base is now willing to take a serious look at cold stacked or stacked rigs? Because the narrative up to this point had been very much that the customer base wanted the hot rig or the one that was most recently working. So I'm just looking for a little more color on that.

Yes. I think that narrative was all driven by you guys, not us. We've said all along that customers value asset quality and performance of crews and technical support and financial stability and that we were going to put cold stacked rigs back to work. And we have demonstrated that quarter-after-quarter. And so that's never been our narrative. That has always been your narrative. So I don't know how else to answer it.

So, in the dynamic from here, do you think that the situation where rigs are going to get scrapped, is that game over now, and everybody's going to hold on to these assets for the optionality?

Absolutely not. You've seen here, just over the last couple of weeks, more announced recycling of rigs from some of our competitors as well as us. I think, like we described our approach to recycling, every month, it seems there are new data points that we will analyze to say, hey, listen, are these rigs that are currently stacked in our fleet? Do we still think that they're going to be marketable as this market recovers? And if not, let's not waste another dollar stacking them. Let's go ahead and recycle them, put them away. So I think you're going to continue to see rigs being recycled by us and by others. I'd also caution you to not get too wrapped up in the total supply number that you see on an Excel spreadsheet. There are a lot of those rigs where they're owned by contractors that that's all they have, are these older rigs. These older, less capable assets, they're never coming back to the market. Whether they're announced to be recycled or not, they're just not coming back. Our customers today have their pick of assets. They're getting the highest-quality, most technically capable assets in the industry, and they're seeing the efficiencies that come from them. They're not going to want to go back to that old iron. So I know everybody gets caught up in that total supply number. That's not real. So I think you are going to see that total supply number come down, but it's still going to be inflated because a lot of those rigs are never going to see the light of day again.

And we'll go next to Haithum Nokta with Clarksons Platou Securities.

I think I'll try to ask Ian's second question a slightly different way. Do you sense that the market for kind of fifth-gen semis is much better than fifth-gen drillships from a capability standpoint?

What do you think, Terry?

I think it just depends on the application and the part of the world. I mean, if you want a semi in a part of the world, a drillship can't work because of currents, and it's going to be more favorable there for development work. So it just depends. There's different rigs for different applications.

And Jeremy, you brought up the point that a lot of the cost cuts kind of called out in the industry for deepwater projects have been kind of despite utilizing rigs contracted at peak rates. Curious if you have an estimate of -- or range of how much the kind of fully mark-to-market cost of a deepwater project has fallen now from, call it, the 2014 level.

Yes. I mean, if you talk to some of our customers, they would tell you that they weren't earning very much -- and you guys know this -- very much in the way of a return when oil was trading at $100 a barrel, and now it's half of that, and they're able to generate a return at $50 a barrel that's fairly consistent with what they had at $100 a barrel. So you could almost say that they cut by almost 50%. And I asked our customers, and it's been probably three to six months since I last asked this question to a customer, but I asked, "How much do you think is sustainable and just structural cost saving change?" And most of them kind of land in that 50% to 64 -- 60% that's actually true cost saving and sustainable even as the market improves. They recognize that day rates are going to go up, and service costs and equipment costs are going to go up as the market improves. But we've made, as an industry, some real structural sustainable cost savings.

We'll take our next question from David Smith with Heikkinen Energy Advisors.

Looking at the UK and Norwegian floater market, I'm looking at 33 marketed rigs, about 23 under contract this quarter. And it strikes me that even if demand were to stay flat into mid-'19, that's going to require putting 30-year-old-plus floaters through the five-year special surveys. And I was just wondering if it's -- is it fair to think about that as a clear catalyst for day rates? Or do you think contractors would be willing to undergo $20 million to $30 million-plus surveys even for day rates near current levels?

Well, I think you have to look at, first of all, we've just announced that we're going to go ahead and sell two of our floaters in the UK and Norway sectors. So for that very reason, they're not economical. We believe that the market is not -- in any time frame that we're looking at, is going to be back to the rates that we were that would support seeing that kind of money. So we think that, that probably should be the case for others. So we do believe that some more rigs will be cut up. But if you also look at the total fixtures that we are projecting for 2017, so the rig years that were fixed, just as an example, for '16 were around 30. So now we can see that for 2017 estimation that there's 70 rig years out there. So you're almost doubling those rig years, and you're not going to be able to drill all of this work in '17 unless you start drilling in the winter months. So this is the kind of thing that we look to in this environment that demonstrates that the market is picking up.

That -- and that market is tightening in a hurry, and we're starting to see it in customer sentiment and behavior. They're trying to lock up rigs as quickly as possible, and day rates are becoming less of a conversation -- pressure on those is becoming less and less as we're moving forward.

Absolutely.

Appreciate it. And a quick follow-up. Just on the 10-Q, there was a comment that you all ceased the capitalization of interest costs on the 2 uncontracted newbuilds due to a pause in construction. I was just wondering how long that pause was expected to last.

So David, this is based upon the production schedule that the shipyard produces. So their schedule indicate when they will go back to constructing those rigs. So when that occurs, we'll obviously start capitalizing on that point. It won't be later this year, though.

And we'll go next to Colin Davies with Bernstein.

I would like to delve in a little bit further, if I may, on the reactivations. I mean, clearly, yourselves and others in the industry are starting to engage around this. To what extent is it a race against time in some ways? And the costs so far have been within the range that you previously guided. But is it a situation if -- around the industry, if we don't position these rigs now, those costs -- the view is that those costs start to move up with the longer they are stacked, and therefore, it's a sort of now-or-never decision?

I don't think that plays into the decision-making at all, Colin. It really is, what is the opportunity with which region -- in which region with which customer, and what's the follow-on opportunity? It's not just about the first contract opportunity to reactivate a rig. And we're not going to reactivate a rig for a 3-month, 6-month project if we don't see some kind of visibility to the next contract. Now that contract, that next contract may not materialize, but if we're reactivating a rig, it's because we feel fairly confident that we're going to have some follow-on work to that particular asset.

That makes sense. And just one follow-up. We have heard some comments in the industry around -- clearly, in the trough cycle, that some of the Ts and Cs on the new contracts get a little bit harsher, things around risk and risk management sides of things. Could you perhaps elaborate on that a little bit and perhaps give some color on where Transocean's red lines would be, where would you walk away from opportunities with regards to recent announcements?

So I won't give you a range because I just don't want to, and I think that's kind of commercial. But I will tell you that -- I said before, we look at profitability, we look at the contracting terms, and we look at strategic importance. We're not going to do anything that ever compromises this entity. So we are capping our risk, and others in the space may not be, but rest assured that we are.

We'll go next to Byron Pope with Tudor, Pickering, Holt.

Jeremy, I was -- just sticking back to the organizational charters that were put in place shortly after you got to Transocean a couple of years ago and you guys are clearly making strides on all of those charters. But the one that relates to customers, I know you guys have talked about shifting the commercial model to be better aligned with -- that you understood your customers. And I think it seems like some of your recent contract wins speak to that. But as you think the opportunities on the horizon on the floaters side going forward, how would you frame, either in percentage terms or just in qualitative terms, the opportunities that might have some of these performance incentives that you've talked about in the past?

Today, I would say it's probably a fairly low percentage of all of our rigs on contract today. And some customers just don't want to enter into performance-based contracts. They want a fixed day rate. I think some of the independents are more receptive than, say, some of the super majors, if you will. So for some of these shorter-duration projects with some of the independents where they want to kind of get that low-guarantee day rate and are willing to pay for improvements in performance, then this has been very well received. So I don't know over time whether this is going to be something that the entire industry delivers, but I think there are going to be niche opportunities for us at least in this current market and probably going forward as well with certain customers in certain regions.

We'll take our next question from Scott Gruber with Citi.

Mark, if I heard you correctly, I think the maintenance CapEx guide for '18 and '19 should be around $100 million. Is that correct? And if so, I believe this is down from somewhere around $200 million and north of $200 million, if my notes are correct. How are you guys achieving the reduction in the maintenance CapEx in light of the reactivations on the come?

So Scott, if you recall the comments I made earlier with regard -- and Jeremy made earlier as well with regard to our care contracts, the operating costs, the run rate of costs for these rigs do not come down much, if any at all, for these care contracts. The savings occur during new worlds and during SPSs. So that is going to directly affect our maintenance costs for these rigs. In addition, we're doing more and more of these SPSs while the rigs are working, so you're not seeing any out-of-service time associated with that. So we've just recently improved our five year model, reflecting the impact of these care agreements and what you see now in our CapEx guidance as a reflection of this cost reduction effort.

Got it. And in some of the OEMs, I will argue that there need to be a catch-up period on maintenance CapEx, though maybe not next year but sometime '19, '20, '21. Is that something that you're then forecasting as well? Or do you think that the $100 million run rate on spread across the rig fleet on a per rig basis, is that fair? Or will there need be a catch-up period down the road?

Well, I think if you look at our operating performance, our safety performance on these rigs, it's hard to point to a fact that we're under maintaining the rigs. So we don't subscribe to the fact that we're jeopardizing maintenance of the rigs now for a catch-up in the future. So when we give you our cost guidance and give you our CapEx guidance, we're fully reflecting the amount of maintenance that we think is required to maintain these rigs in a proper way.

We'll go next to J.B. Lowe with Bank of America Merrill Lynch.

Kind of touching on Colin's question in terms of the -- kind of the contracting that we're seeing now, the contract terms, are you guys walking away from any bids given that competitors are offering contract terms that you guys just wouldn't agree to?

Yes.

Okay. And then my other question -- that was easy. My other question was on the -- you guys made some comments on the financial requirement that some operators are placing on some of the rig contractors. Can you guys quantify how much that could be affecting the supply in the market given that there are several distressed drillers out there?

So if you look at some of the tendering that goes on in -- with the NOC, so ONGC actually has a financial formula that they apply in their bids. I don't have -- I mean, I can't tell you what it is off the top of my head, but there is one that they apply. And so for any tenders, if they don't fit the formula, they're not allowed to tender. We also know that -- from just conversations with our customers, they've told us that two they've eliminated in particular tenders. So I won't get into the specifics, but we do know that they are carefully considering who they want to work with over a multiple-year time frame. And they want to make sure that those companies have the wherewithal to stand up to their responsibilities.

Ladies and gentlemen, this does conclude the question-and-answer session. I'd like to turn the conference back to Brad Alexander for closing remarks.

Thank you to everyone for your participation on today's call. If you have further questions, please feel free to contact me. We will look forward to talking with you again when we report our third quarter 2017 results. Have a good day.

Ladies and gentlemen, this does conclude today's conference. We thank you for your participation. You may now disconnect.