Transocean Ltd. (RIG) Earnings Call Transcript & Summary

Hello, and welcome, everyone, joining today's Q2 2026 Transocean Earnings Call. [Operator Instructions] Please note this call is being recorded, and we are standing by. It is now my pleasure to turn the meeting over to David Keddington, Vice President and Treasurer. Please go ahead.

Thank you, Madison, and good morning, everyone. Welcome to Transocean's Second Quarter Earnings Call. Leading today's call will be Transocean's President and Chief Executive Officer, Keelan Adamson; Keelan will be joined by Chief Financial Officer, Thad Vayda; and Chief Commercial Officer, Rodie Mackenzie. In addition to the comments that will be shared on today's call, we'd like to direct you to our earnings release, fleet status report and associated 8-Ks filed yesterday that contain additional information, all of which is available on Transocean's website at www.deepwater.com. [Operator Instructions] I'd like to remind everyone that today's call will include forward-looking statements, which are subject to risks and uncertainties that could cause actual results to differ materially. With that, I'll hand the call over to Transocean's CEO, Keelan Adamson.

Good morning, everyone. Thanks for joining us. This is what I will cover today. First, I'll summarize our operational performance. Next, I'll provide some thoughts on the industry and market and why we continue to see strong demand for our assets. And lastly, I will update you on our Valaris acquisition, which we expect to close later this year. Let's get started. The Transocean team again delivered exceptional operational performance in the second quarter, beating our guidance on both revenue and costs and generating a solid adjusted EBITDA margin of 32%. During the quarter, our fleet uptime was an exceptional 98%, an important driver in our continued focus to deliver superior customer service. At quarter end, net debt approximated $4.3 billion, a significant decrease of nearly $1.7 billion in the past 18 months. We also strengthened backlog by about $300 million, securing work for several of our assets with near-term availability. This figure excludes the $1 billion in prospective backlog awarded by Equinor and pending approval by its partners, which we expect to receive in Q3. Including this Equinor work, we have added $3.1 billion in contracts this year so far, a very positive indication. With the exception of the KG2, which is currently bid on multiple opportunities, all our active drillships are now on contract or mobilizing to new contracts, improving our coverage to 94% for the remainder of 2026 and 81% for 2027. In the U.S. Gulf, we recently extended the Deepwater Conqueror with its current customer at the same rate. The Deepwater Proteus, which was briefly idle, is now contracted and has commenced operations. As we had speculated on our Q1 earnings call, in the context of higher commodity prices, this E&P operator has taken advantage of an open period on this high-performing rig to accomplish more work in 2026 than originally planned. Both rigs are expected to continue working in the U.S. Gulf into early 2027. Finally, the Deepwater Skyros has been extended by her customer to perform additional appraisal work on a recently announced discovery in the Ivory Coast. This work allows the rig to move directly to our next contract in Australia with limited off-hire time related to contract preparation and mobilization. In addition to drillship utilization tightening in 2027, the outlook for high-specification harsh environment assets is very robust well into 2028, supported by the announcement of new fixtures for several of our rigs. In Norway, the Transocean Norge was awarded a 5-well contract by Harbour Energy, adding about $149 million of backlog. The program is expected to commence in the first quarter of 2028. Notably, we entered into an agreement with Equinor for 7 years of work on 3 of our Cat D harsh environment semis, the Transocean Enabler, Transocean Encourage and Transocean Endurance. We are pleased to have the opportunity to strategically relocate the Endurance from Australia to Norway. For these fixtures, the base day rate, excluding third-party services, will likely exceed $400,000 a day when the contracts commence as a result of escalation provisions. The Transocean Spitsbergen is now the only Transocean harsh environment semi available in Norway before 2029, and she is scheduled to complete her existing contract at the end of 2027. In Australia, the Transocean Equinox was awarded a 2-well contract with Santos, adding approximately $36 million of backlog. The program should commence in the second quarter of 2027. If all options are exercised, this rig continues with this customer through most of 2027 as well. We are encouraged by the fact that operators are beginning to make awards for multiyear offshore programs. Importantly, they are doing this while remaining disciplined, but with a reprioritization of capital towards offshore and deepwater activities, supporting our constructive outlook. As rig availability tightens, we expect customers to continue securing rigs for longer durations to ensure they have access to the required rig capacity for their upcoming programs. Once again, this supports our view that we are in a constructive period for the deepwater drilling sector. Operators are also starting to allocate more rig time to exploration and appraisal activities. Rystad Energy recently cited that the number of countries with at least 1 exploration well is on the rise from 35 in 2025 to an estimated 51 by 2028, a 65% increase. This geographic expansion is significant, and we expect customers to grow their portfolios in less developed regions in the coming years. Our customers select suppliers offering products and services that best align with their value creation objectives. This is where Transocean is distinctly advantaged, offering the optimal combination of differentiated assets, people and processes to deliver exceptional service in the form of highly reliable, efficient operations that consistently exceed customer expectations. We look forward to delivering similar performance across a broader fleet and a customer base when the Valaris transaction is concluded. I'll now take you through an overview of market opportunities around the world. We saw a high number of contract awards and tendering opportunities in the first half of the year. S&P Petrodata cited almost 100 rig years added year-to-date and operators are evaluating approximately 40 open tenders, representing another 75 to 80 additional rig years. These statistics underpin our expectation for deepwater utilization to approach 100% by the end of 2027, with several rigs relocating from well-established areas to emerging regions to meet incremental rig demand. Looking first at the U.S. Gulf, long-term demand fundamentals remain constructive with several operators securing capacity for future activity. As demand levels rise globally, we are also seeing strong overseas interest in U.S. units that currently don't have long-term commitments. We believe the number of deepwater rigs in the U.S. will continue to decline in the short term with 2 to 4 units already scheduled or expected to depart the region. This redistribution of global rig supply will satisfy increasing contract requirements in other geographies. In Brazil, Petrobras recently completed one of its largest contracting cycles in years and continues to evaluate future rig requirements for its major development projects. Supported by IOC demand, the overall rig count in Brazil is expected to remain stable between 30 to 33 rigs over the next 5 years. Africa is reestablishing itself as a key deepwater region. Operator activity continues to grow across multiple basins, which should drive the rig count from roughly 15 units to at least 20 to 25 units over the next 18 months. Multiyear awards are expected in Ghana, Mozambique, Namibia and Nigeria, fueled by an uptick in recent discoveries and work resulting from successful exploration campaigns over the past few years. In the mid, with recent contracts for drilling programs starting in 2027 and a number of new discoveries that will call on rig capacity, we expect the future rig count to increase to around 10 to 12 units. In Southeast Asia and India, we expect domestic exploration and production initiatives to drive a material increase in activity beginning in 2027. Indonesia, for example, could potentially add 10 rig years across 5 rig lines to a region that currently has only 1 rig operating. India is expected to expand activity by up to 4 drillships in 2027, potentially adding around 10 incremental rig years. In Norway, utilization of high-specification harsh environment semisubmersibles is strong through 2028, supported by recent awards from Var Energi, Equinor and Aker BP. Most operators are already in the market to secure capacity from 2028 onwards, suggesting that future utilization for this region should remain near 100%. Additionally, work in Canada for Equinor and Cenovus could further tighten harsh environment supply in 2028 onward. In summary, the combination of sanctioned development programs, increased exploration spending and major discoveries continues to drive a compelling outlook for deepwater and harsh environment offshore drilling. Now a quick update on the Valaris transaction, which is expected to close in the fourth quarter. We continue to operate as separate companies, but are rapidly advancing integration planning and have recently achieved some key milestones. In June, we received CFIUS approval, satisfying an important U.S. national security clearance condition. Recall that we required regulatory clearance from a total of 7 jurisdictions, and we have previously received clearance from Saudi Arabia and Trinidad and Tobago. In July, we received clearance from Egypt and Australia. And just yesterday, we received clearance from Angola. Currently, we continue to await clearance in 2 countries, Brazil and the U.S., both are progressing as expected. We continue to believe that this combination will benefit customers and shareholders alike. I'll now hand the call over to Thad for comments on the quarter and our guidance. Thad?

Thanks, Keelan, and good day, everyone. As Keelan highlighted, our second quarter financial results reflect strong operating performance and also exceeded the guidance we provided to you in May. Revenue for the second quarter was $966 million at the upper end of our guidance range and primarily the result of the Deepwater Skyros continuing to work the entire quarter, 1 month longer than we forecast and additional recharge revenue. Contractual cost escalation provisions becoming effective for certain rigs also contributed. O&M expense was $608 million and capital expenditures were $24 million, both below the low end of our guidance ranges, primarily due to timing and deferrals in maintenance and out-of-service expenditures. At $56 million, G&A exceeded our guidance. However, this figure includes about $11 million of acquisition costs associated with the Valaris transaction. Adjusting for this expense, our result is in line at a quarterly run rate of about $45 million. Our adjusted EBITDA was $312 million, implying margin of about 32%. Free cash flow of $212 million carried a margin of 22%, which while primarily the product of strong operational performance was complemented by favorable changes in working capital. Recall that last quarter's cash flow was detrimentally affected by the timing of both collections and payments. Our trailing 12-month net debt-to-EBITDA ratio, inclusive of restricted cash primarily for debt repayment, is now 2.8x, a more than 2 turn improvement when contrasted with the 5.2x ratio at the beginning of 2025. We finished the quarter with about $510 million in unrestricted cash, up sequentially from $330 million. Our total liquidity, inclusive of the undrawn revolving credit facility, was approximately $1.3 billion. We intend to use some of this cash to reduce leverage and continue to simplify the balance sheet. In this regard, we expect to call the remaining $200 million of outstanding principal on our 8% Deepwater Aquila notes at the end of the third quarter after the next reduction in the notes call premium. Including this early retirement, which will save approximately $22 million in interest expense through maturity, we expect to end the year with less than $4.8 billion of gross debt. We also forecast our total liquidity to be $1.25 billion to $1.35 billion. Over the next 12 months, we will consider refinancing additional secured debt into unsecured instruments, reflecting improved debt capital market conditions and the tight trading levels observed in our debt complex over the last several quarters. As you probably know, we recently earned ratings upgrades from both S&P and Moody's to B- and B2, respectively, and we're on positive outlook for further upgrades pending the closing of the Valaris acquisition. You'll note in our earnings release that we've increased our 2026 revenue guidance to reflect contract extensions on several rigs that we previously expected to roll off this year as well as the new contract on the Deepwater Proteus. Similar to last quarter, the upper end of our guidance range assumes that existing contracts continue longer than shown in our fleet status report with the low end reflecting certain contractual options not being exercised by our customers. As a result of this incremental activity, we have also increased our full year cost guidance slightly. G&A guidance of $170 million to $180 million for the full year is unchanged since the last update. However, this range ignores transaction-related costs, which would typically be excluded from adjusted EBITDA. I also note that our full year interest expense guidance of approximately $475 million consists of Q1 and Q2 results that include the rather unpredictable mark-to-market effect of the bifurcated exchange feature and our 2029 exchangeable bonds plus our forecast for second half interest expense, approximately $113 million per quarter, which is unadjusted for any effects of these bonds. Revisiting a topic we discussed last quarter, we are observing only minor inflationary frictions, mainly in logistics and fuel despite the persistent conflict in the Middle East. Fuel costs remain 20% to 40% above pre-war levels, but I remind you that we are typically only responsible for fuel when our rigs are off-hire, limiting the impact on our costs. Logistics costs have also increased slightly, but are not materially affecting our O&M expenditures. Finally, while we will monitor the effect of the latest view of tariffs, at the present time, we do not anticipate that they will have a meaningful impact on our cost structure. This concludes my prepared remarks. Keelan?

Before opening the line for questions, let me recap today's highlights. Transocean is executing exceptionally well today across the enterprise. Our people continue to provide our customers with superior service from the industry's high-spec fleet. As a result, we have successfully filled most of our open availability in 2026, allowing us to enhance our full year outlook. Supply disruptions around the world, continued growth in oil and gas CapEx and strong demand for our rigs all reinforce our view that we are in a multiyear upcycle for offshore drilling. The combination of Transocean and Valaris will further enhance our ability to provide superior service to our customers in all key oil and gas producing regions and deliver exceptional value to shareholders. We'll now open the line for questions.

[Operator Instructions] And we will take our first question from Eddie Kim with Barclays.

So your outlook was very constructive with the expectation to see utilization of high-spec rigs exceeding 90% next year and approaching 100% by the end of next year. It also feels like leading edge day rates are now firmly in the sort of mid-400s as indicated by your recent contract announcements as well as from your peers. Is there any reason to believe that leading edge day rates shouldn't continue to move higher next year just given the tightness in the market? And if not, what would be the potential roadblocks from preventing that from happening?

Eddie, this is Roddie. Yes. So the first thing that we're seeing now is the kind of the filling of white space and that diminished availability. And then the second kind of thing that we're in the mode of here is we're beginning to observe a lot of repositioning of the fleet, as Keelan mentioned in his comments. And that's really going to help get the rigs in the right spots for the long term. And as those 2 things happen, then clearly, we enter like an improved business environment. We also get to lower cost because we've got rigs in the right places, and we're not moving rigs anymore. So I think you're going to see an improved business environment in general over the next 12 to 18 months.

Yes,. Maybe just a quick add for myself. Our customers are obviously very focused on project execution. They want to ensure that they're working with partners that can deliver against those expectations. We're well positioned in that regard with our fleet and the way we perform. And as the market tightens, and we're looking at utilization to stack and see how the fleet, the industry fleet looks over a period of time. And it's a supply and demand balance. It's when the customers want to come for the work. And at the end of the day, we'll see where that takes us when it comes to rigs.

Got it. Great. Speaking of repositioning of rigs, I just want to touch on the Cat D rigs that you signed up with Equinor. So a few years ago, you moved a couple of those Cat D rigs from Norway to Australia. Now they're moving back to Norway. Is this a sign of increasing demand in Norway or softening demand in Australia or maybe a little bit of both?

Yes. I think the movement in the first place was because the Norwegian market had gone soft, no question. So several years ago, that was a reality for us. The beauty of this fleet is they are genuinely attractive all over the world. So it's the nature of running a fleet of this level of specification. Specifically, those rigs that are coming back, this is an indication of how strong the market is in Norway. It's a very attractive market for us for many years, but particularly now as the -- this is kind of the beginning of seeing so many more long-term contracts on offer. So strategically moving the rigs back to long-term contracts is great. We're very excited about the deal and so is our customer. The headline rate was very important to them, but there was also some pretty significant improvements for us. So we think about these kind of long-term opportunities as making sure they generate as much cash as possible. So contract improvements, escalation provisions and the exclusion of any third-party services in those numbers, plus the fact that it's 7 years of backlog make that an extremely attractive move for us. So it's definitely a case of Norway is offering some very attractive terms and conditions and duration of contract at the moment.

Yes. Maybe just one more piece on that. I mean, obviously, Equinor has objectives to maintain production at current levels right through to 2035 against the backdrop of declining production. So there's a lot of work in Norway, and that's definitely been a pickup since we moved those rigs out of the area. So it really is about Norway and not the rest of the world.

And we'll move next to Greg Lewis with BTIG.

I wanted to talk a little bit more about the opportunity set in Southeast Asia and India. It sounds like we could see multiple rigs start -- multiple floaters start up in that part of the world. I mean, I guess my question is around really, clearly, there's a bifurcation between sixth and seventh gen rigs. Traditionally, India and parts of Southeast Asia have been sixth gen. It looks like the sixth gen market is about to get pretty tight pretty quickly as those go higher. So I guess what I'm wondering is, could we start to see sixth-gen, seventh-gen pricing converge.

That's a very interesting question. So you're probably well aware, Greg, that our strategy has been to make sure that we fully utilize those sixth-gen assets. Of course, the fixtures that we made in Brazil earlier this year were a very solid step on that track. Yes, traditionally, Southeast Asia has indeed consumed a lot of sixth-gen rigs. But I think at this stage in the game, it doesn't really matter between sixth and seventh gen where they go. I think they're capable of going anywhere in the world, and we've performed well on all of these prospects. So to your point about Southeast Asia, I mean, there's a lot of stuff going on. Indonesia has multiple tenders; Malaysia, Brunei to mention just a few. And of course, India being a very big opportunity here. ONGC just opened their multi-rig tender and there aren't that many rigs on offer. So I think it's already tightening up. I don't think you see a huge difference in those day rates. Certainly, from our point of view, we're very keen to perhaps be slightly countercyclical here that it would be great in this upturn that we're in to have some of the higher specification rigs available to us to take advantage of that later in the game. As you know, traditionally, a lot of high-spec rigs are the first to get booked up. But we're trying to balance that out a little bit because we have a very, very capable sixth-gen fleet. They're doing a fantastic job for the customers, and they're very fit for purpose. So to your point about Southeast Asia, it really is blowing up in terms of contracting, and we're very pleased if we have the opportunity to place some more sixth-gen rigs there.

Okay. Great. And then realizing we're not disclosing rates on -- there's like price or a price option. I guess what my question is around, as we think about priced options and whether we're -- let's assume we're not disclosing those rates, which is why we -- which is why I asked the question. I mean, I guess at a minimum, when we think about priced options, should we assume that they're flattish or more likely up? Or could we actually be seeing priced options in out years at lower rates?

Yes. I wouldn't necessarily say they're flattish. I can't really say a lot about that for obvious reasons. But I would think about it in terms of the provisions and what have you in the contracts mean that those options are going to be very satisfactory to us in the long run. I'll just kind of leave it at that.

And we will move next to Keith Beckman with Pickering Energy Partners.

I just kind of wanted to ask around -- and you guys gave very helpful commentary kind of around the globe, but I wanted to ask maybe more particularly around the Gulf into next year. You guys did a really good job at winning some awards here this year to fill up capacity. Some of that stuff rolling off in early '27. I think you guys expect the Gulf to be down a little bit from commentary very earlier into next year. Where do you think those rigs potentially land? Do you think they move to West Africa or potentially some of yours in particular, potentially get extended? Just trying to get a sense of maybe how you're thinking about your fleet and then maybe more macro-wise as well.

Yes. So I think to your point there, we're very pleased to extend a couple of rigs in the Gulf this quarter. Again, a lot of those things are kind of in the pipeline for some time. We do think that the fleet that's in the Gulf is typically very, very attractive in any basin. So what we're seeing is that as long as those rigs are performing well, they've got solid opportunities elsewhere. So if we get towards the end of these programs, then it's a relatively easy pivot to move them on to the next location. So that's kind of the point that Keelan was making about the redistribution of the fleet is that we've already seen that. So even with a couple of our rigs, we've moved these high-spec rigs to other jurisdictions, and we expect them to do real well there as well. Certainly, there's the potential for more of that to happen in the Gulf as a few of them are rolling off. Although I did see, I think, just this week, there was another -- one of the Seadrill rigs was extended to stay here, which is good. But I think you see a little shuffling of the deck there. But I don't think we are going to experience much white space on that at all. So we're quite happy to see that happen.

Yes, Keith, I mean, it's we've got rigs moving out. We've got rigs moving in. I mean the long-term prospects for the U.S. Gulf are very strong, obviously, with Paleogene and many of the prospects that are out there. So it will always be a good basin. I think it's just a bit of a timing thing more than anything else. West Africa is picking up and Asia and India and that area is picking up as well. And so there's only -- these assets that have availability will move to satisfy those requirements. So as we said, it's a little balancing. But long term, it's still a very productive area to be very constructive area to be in the U.S. Gulf.

Awesome. I really appreciate that. And then my follow-up question is just, are you guys seeing any change in operator behavior kind of assuming the stronger 2027 recovery that we agree with here? Are they trying to lock in rigs for longer term potentially what may be better day rates? And then the follow-up to that is, do you think energy security is still kind of a topic of conversation with a lot of these NOCs here? And has that potentially pushed projects up the pipeline from what you guys have seen at all or maybe a little bit more urgency there?