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…

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,…

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…

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.