Transocean Ltd. (RIG) Earnings Call Transcript & Summary

Good day, and welcome to the Transocean Newbuild Update Conference Call. Today's conference is being recorded. [Operator Instructions] At this time, I would like to turn the conference over to Lex May, Manager of Investor Relations. Please go ahead.

Thank you, Olivia. Good morning, and welcome to Transocean's newbuild update conference call. We issued a press release earlier today, which is available on Transocean's website at deepwater.com. Additionally, we have posted on our website under the Investor Relations home page, a presentation that highlights the newbuild update. We will refer to these slides during our call. Joining me on this morning's call are Jeremy Thigpen, President and Chief Executive Officer; Mark Mey, Executive Vice President and Chief Financial Officer; Keelan Adamson, Executive Vice President and Chief Operations Officer; and Roddie Mackenzie, Senior Vice President of Marketing, Innovation and Industry Relations. During the course of this call, Transocean management may make certain forward-looking statements regarding various matters related to our business and companies that are not historical facts. Such statements are based upon current expectations and certain assumptions 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 our forward-looking statements. And for more information regarding certain risks and uncertainties that could impact our future results. Also, please note that the company undertakes no duty to update or revise forward-looking statements. Following Jeremy's prepared comments, we will conduct a question-and-answer session. [Operator Instructions] Thank you very much. I'll now turn the call over to Jeremy.

Thank you, Lex, and welcome, everyone. I'm extremely pleased to announce that Transocean has entered into multiple agreements related to our newbuild drillships, the Deepwater Atlas and Deepwater Titan, currently under construction at Sembcorp's Jurong shipyard in Singapore. As Lex mentioned, a brief slide deck containing some key information on the shipyard agreements is available on our website. The Deepwater Atlas and Deepwater Titan, both Jurong Espadon design drillships will, without question, be the world's most capable offshore drilling rigs and the industry's first eighth generation drillships. These assets are truly state of the art and that among other efficiency and [ hefting ] features, these are the only rigs in the world to feature a 3 million pound hook-load capacity, enabling our customers to achieve greater well construction efficiency and productivity by providing the ability to run larger, high-pressure casing string deeper, thereby facilitating the installation of larger wellbore production tubing strings that can maximize well production. In addition to their extraordinary and unique well construction capabilities, these 2 state-of-the-art rigs are also designed and equipped to optimize fuel consumption, reduce emissions and drive down the associated carbon footprint of each well. The vessels are configured for high reliability, closed best operations, allowing for fewer number of engines operating. Furthermore, the drill floors are equipped with hybrid energy storage systems to harvest and reuse spent energy from the hoisting system, further reducing fuel consumption. Finally, these ships are also outfitted with selective catalytic reactors, which can remove up to 95% of the NOx emissions from the engine exhaust, delivering Tier 3 IMO compliance, which is well above industry standard. In combination, these features provide for meaningful reductions in fuel consumption and greenhouse gas emissions, making the rigs amongst the most efficient in the world. This is great news for our customers and stakeholders alike by not only reducing the cost of producing oil and natural gas but also driving down our carbon footprint through reduced emissions. This is yet another example of Transocean aligning with our customers' interest of providing reliable energy in the most responsible manner possible. As previously disclosed in our recent fleet status report, due to construction delays related to, among other things, the COVID-19 pandemic, the Atlas is now scheduled for delivery from the shipyard in December of this year and the Titan is now scheduled for delivery in May of 2022. We have entered into an agreement with Sembcorp, whereby in exchange for certain changes in the construction agreement, we have waived our termination rights for late delivery, and we'll take acceptance of each rig on a revised schedule. Importantly, the revised agreement with Sembcorp provides liquidity-enhancing payment terms for Transocean. Looking first at the Atlas, in exchange for accepting late delivery of the rig, we entered into a secured financing arrangement with Sembcorp. In summary, we will pay approximately $50 million upon delivery. We will make quarterly payments beginning 12 months after delivery, and the remaining 90% or approximately $370 million of principal will amortize over the next 5 years at a very favorable interest rate of 4.5%. A summary schedule of the new principal payment terms is provided in the slide deck. Of note, we entered into this arrangement because we believe that there will be considerable demand for this asset in the coming years, which we will discuss momentarily. But as it relates to the Atlas' initial contract, based on our almost daily conversations with Beacon, we believe that they remain fully committed to moving forward with the Shenandoah project, and we expect them to make a final investment decision next month. Turning to the Titan. The Titan is now expected to be delivered in the second quarter of 2022 and commence operations in the first quarter of 2023. As a reminder, the Chevron contract is for 5 years, include a day rate of $455,000 per day and contribute $830 million toward our backlog. It is important to note that these new agreements do not, in any way, impact the duration, day rate or backlog contribution of this contract. Upon delivery of the Titan in 2022, we will pay approximately $350 million and will defer 20% or approximately $90 million to be paid in installments over 5 years. In addition to this deferred payment arrangement, we still expect to approach the debt capital markets to raise approximately $350 million in secured financing for the rig once it begins commercial operations for the customer in 2023. In aggregate, these agreements with the Shipyard help improve our liquidity over the next 18 months by over $450 million. Looking at Slide 4, you can see that our expected liquidity at year-end 2022 has increased and is now between $1.5 billion and $1.7 billion. Turning to Slide 5, you'll see a summary breakdown of the new payment schedule to the Shipyard for our newbuilds. As discussed, the schedule assumes we will take delivery of the Atlas in December of this year and the Titan in May of 2022. For clarity, this schedule does not include any payments related to owner-furnished equipment, including upgrades for 20,000 psi well control systems or capitalized interest expense. As part of our agreement with the Shipyard, we've also negotiated terms, affording us greater financial flexibility in the unlikely event that either rig is delivered to us without an initial drilling contract. However, we feel the scenario is improbable as these eighth generation drill rigs will be the most [ sought after ] drillships for not only 20,000 psi operations, but for 15,000 psi work as well, thanks to the 3 million pound hook load and robust energy-efficient features. That being said, we remain encouraged by the growing list of prospects requiring 20K technology. Over the past 2 years, we've witnessed several of our long-term customers position themselves to be part of this new frontier. We believe our investment in these 8 generation drillships offers us yet another clear competitive advantage as these 2 rigs are currently the only rigs with this technology and hook load. In fact, we started initial discussions with multiple IOCs and NOCs for 20K projects in the Gulf of Mexico, as our customers are eager to unlock high-quality reserves in these challenging reservoirs. Now I'd like to take a moment to discuss some additional contracts we've recently won since our first quarter earnings conference call on fleet status report. As further evidenced that we are entering an up cycle, the dual activity Discoverer Inspiration was recently awarded a 9-well contract at $215,000 per day. This is an encouraging day rate as this campaign is for plug and abandonment work with a 6 gen ultra-deepwater drillship in single activity mode, which again speaks to the strong track record of Transocean and the Inspiration in the Gulf of Mexico. Staying in the Gulf of Mexico, an additional 1-well option was exercised for the deepwater Invictus. Importantly, this option is priced at a day rate of $260,000 per day, another very positive market rate. And another important data point corroborating our observation that the Gulf of Mexico is experiencing a surge in activity, resulting in increased day rates for premium contractors with premium assets. Additionally, as you may recall, the Deepwater Skyros was named Total Energy's rig of the year last quarter. And I'm pleased to announce that this superior performance has led Total to exercise its 370-day option on the rig. The Deepwater Skyros Will now be on contract through the fourth quarter of 2022. And finally, just this past week, the Transocean Spitsbergen had two 1-well options exercised by Equinor. The rig is now expected to be on contract through September of 2022 with Equinor in Norway. These awards and extensions add almost $190 million in contract backlog, providing us with additional visibility to future cash flows and additional support for our belief that we are solidly in recovery mode. Indeed, in just over 2 weeks, we've received multiple LOAs from both IOCs and NOCs for new and incremental work that we hope to firm up in the coming months. Thus, the pipeline for work looks strong and provides us with more confidence as we enter the up cycle. In conclusion, we are seeing multiple data points that confirm our belief that a full-scale recovery in the deepwater market is taking hold, including multiyear highs for utilization in all major offshore basins. Our customers are also taking note of this as evidenced by the increasing number of tenders and bids, and more importantly, the increasing number of contract awards. Exploration drilling is also starting to return, which is an important sign in all up cycles. Currently, just over 40% of floater activity is associated with exploration, and this is continuing to trend upward, thanks to favorable offshore economics and oil price stability. Recall that at its peak, exploration activity in the last cycle consumed approximately 60% of floater supply. Thus, we're very encouraged by the improving metrics. As we mentioned on our last call, we are seeing a tightening market across all regions and in particular, in the U.S. Gulf of Mexico, and now see only 1 available rig in this region by year-end. We anticipate this market might be completely sold out of rigs as we enter 2022 with more jobs and available assets. Needless to say, we're excited about the opportunities unfolding and look forward to providing more details as we progress through the remainder of this year. This concludes my prepared remarks, and I'll now turn the call back over to Lex.

Thanks, Jeremy. Olivia, we're now ready to take questions. [Operator Instructions]

[Operator Instructions]. Our first question comes from Ian MacPherson with Simmons.

So the main question I had was that you've updated this with the new spending to the Shipyard, but the rest of the spend for these 2 ships for the equipment and capitalized interest on the rest, that's a considerable amount as well that's not addressed. So how should we think about or specifically model the cadence for the remaining spend that's not addressed by the Shipyard agreement?

So Ian, this is Mark. I'll take that one. So I'm assuming you're asking about the timing of the payments for the 20K, BOP, the [ move ], the capitalized interest, et cetera, et cetera. Is that correct?

Yes. And I'm really just trying to square today's guidance with the total newbuild spend that you put in the 10-Q, which had about $1.45 billion remaining through -- mainly this year and next year and a little bit into 2023.

Yes. So for the Atlas, you're going to have the vast majority of that spent in the second half of this year. It will be another $147 million in total for the Atlas in 2022 and then $41 million on mainly BOP in 2023. For the Titan, you're going to have $19 million spent -- actually, $136 million spent this year, $614 million next year and then $15 million in 2023.

Got it. Okay. And then are you -- I assume, just based on the tightness you've described in the Gulf of Mexico, evaluating work for these ships ahead of Beacon in Chevron between delivery and those contracts.