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Edited Transcript of RIG earnings conference call or presentation 29-Oct-02 3:00pm GMT

Q3 2002 Transocean Inc. Earnings Conference Call

ZUG May 30, 2019 (Thomson StreetEvents) -- Edited Transcript of Transocean Ltd earnings conference call or presentation Tuesday, October 29, 2002 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jeff Chastain

Transocean, Inc. - V.P. of Investor Relations and Communications

* Robert Long

Transocean, Inc. - President, CEO

* Greg Cauthen

Transocean, Inc. - SR. V.P., Treasurer, CFO

* Kurt

Transocean, Inc. - Marketing Manager

* Yan Ross

Transocean, Inc.

* Ricardo Rosa

Transocean, Inc. - V.P. Marketing

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Conference Call Participants

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* Scott Gill

Simmons and Company

* Doug Becker

Banc of America Securities

* Ken Sill

CS First Boston

* Michael Urban

Deutsche Banc

* Pierre Connor

Hibernia Southcoast

* Mike Lamont

J.P. Morgan

* Terry Darling

Goldman Sachs

* Akiba Cohen

Morgan Stanley

* Magnus Fear

Jeffries and Company

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Presentation

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Operator [1]

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Good day, everyone. Welcome to the Transocean third quarter 2002 earnings conference call. Just a reminder, today's call is being recorded. For opening remarks and introductions, I would like to turn the call over to the Vice President of Investor Relations and Communications, Mr. Jeff Chastain. Please go ahead, sir.

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Jeff Chastain, Transocean, Inc. - V.P. of Investor Relations and Communications [2]

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Thank you, Rose, and good morning. Welcome to the review of third quarter 2002 results of Transocean. The press release covering results for the quarter including an income statement, balance sheet, cash flow statement and selected operating statistics, is posted on the company's website at www.deepwater.com. Also issued this morning and available on the company's website is the monthly fleet update dated today, October 29th, and covering the current contract status of Transocean's mobile offshore drilling fleet. You can access the report by going to the Investor Relations link and selecting financial reports.

This morning's conference call includes participation from the following Transocean senior managers: Bob Long, President and Chief Executive Officer; Jean Cahuzak, Executive Vice President and Chief Operating Officer; the Chief Executive and President of R&B Falcon Corporation which constitutes the company's U.S. Shallow and Inland Water business. Greg Cauthen, Senior Vice President, Chief Financial Officer and treasurer; Ricardo Rosa and Mike Unsworth, Vice President of marketing. Bob Long will provide the opening comments followed by a question-and-answer period. Before Bob begins, I should remind you that during the course of this conference call, participants may make certain forward-looking statements regarding various matters relating to our business and company including future financial performance, operating results and the prospects for contract drilling business and these are not historical facts.

As you know, it is inherently difficult to make projections in a cyclical industry since the risks, assumptions and uncertainties involved in these forward-looking statements include the level of crude oil and natural gas prices, rig demand and operational and other risks which are described in the company's most resents Form 10-K and other filings with the Securities and Exchange Commission. Should one or more of these risks and uncertainties materialize or should underlying assumptions prove incorrect, actual results may differ materially from those indicated. And thank you for your patience. With that I'll now turn the call over to Bob Long.

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Robert Long, Transocean, Inc. - President, CEO [3]

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Thanks, Jeff. And thanks to all of for joining us. What I'm going to do is make a few comments about the quarter and then talk a little bit about what we see going on in the market and how we see the fourth quarter shaping up. I do not intend to give any guidance for 2003 at this point, we only have about 45 percent of our rig time in the international and deepwater fleet committed for next year, and virtually nothing in the Shallow and Inland Water segment so the uncertainty is such that I don't think that we could really give you much meaningful guidance.

If you take a look at our quarter, we had a pretty good quarter. We reported $.78 cents a share for earnings, but to get a comparable number to expectations, you have to exclude the $176 million tax benefit that we pointed out in the press release and I'd like to stress the fact that that tax benefit related to non-U.S. restructuring efforts that we undertook and it had nothing to do with the inversion debate that we spent so much time talking about last time related to U.S. axis. You also need to exclude the $26.6 million after-tax impairment charge that was pointed out. That impairment relates to assets that we were carrying as held for sale; specifically, I think it was eight rigs and some surplus assets under some accounting rules that went into effect this year. If we determine that it is unlikely that we will succeed in selling those assets within a year, then we have to take them out of held for sale and when you do that, adjust the carrying value to market value. We made that determination on these assets in the quarter and that's why you saw the impairment charge. If you adjust for those two items, we reported $.33 cents a share, which is still above the street expectations which was $.27 cents. Looking at some of the significant items on the income statement, revenue is up almost $50 million. That was primarily the result of an increase in activity.

But we did also have in the revenue line about $15 million which related to the netting of several legal issues which were resolved and/or provided for. If you look at our operating costs, at $381 million, that's at the low end of the range which we had guided people to in our last call. I think we had said 380 to 390. But in fact, if you look at activity, the Shallow Water costs were up six million dollars quarter to quarter driven solely by activity and in addition, we had about nine million dollars of additional costs in there related to restructuring charges.

We undertook a number of efforts that consistent with our efforts to reduce costs going forward, we consolidated and downsized one of our regional offices overseas. We consolidated our engineering support group into one location here in Houston. And we initiated some significant reorganization efforts in our support structure -- on shore support structure for the Shallow and Inland Water business. All of that we expect to see some pretty rapid payback for. So if you adjust for that, our costs on a comparable basis are in the $372, $373 million range, which is somewhat below the guidance we had given you before. So overall, we had a pretty nice quarter. We generated a lot of cash, about 300 million of cash, bringing down our net debt correspondingly. Before I turn to the comments on the markets, two other things which I should comment on. -- I guess, are, first, the effect -- the dilutive effect of the convertible debentures which we had outstanding.

We had the converts outstanding for some time now, but the earnings level has not been high enough that it caused dilution. When we make the calculations prior to this they had been anti-dilutive and, therefore, had no effect. Primarily because of the significant increase in earnings as a result of the $176 million tax benefit I mentioned earlier, earnings were high enough that the converts did cause dilution this quarter. The other item is the impairment of goodwill that was mentioned. As you remember, we took a $1.4 billion impairment charge in our Shallow and Inland Water segment earlier in the year when we instituted provisions of FAS 142.

At the same time, we told you that under the requirements of FAS 142, we have to do an annual impairment test and that we had selected October 1st as the date when we would do that test. When we look at what's happened to the stock price between January and October 1st, it has come down from about $34 a share to about $20. There's a significant reduction obviously in the market capital company. The application of 142 requires us to value the market value of the business segments. Now, the combined value of the sum of the business segments should approximate the market cap of the company overall.

The fact that the market cap is come down dramatically as a result of the drop in the stock would indicate that there is going to be a significant impairment of the goodwill. We are not able to quantify that at the present time because we have to go through a fairly detailed calculation and analysis and get that debted by a third party. So we're not prepared to comment on the exact size but it is going to be significant. However, I do want to point out that this is a non-cash charge. It will have no impact on the company. It has no impact on our debt covenants and the rating agencies are not concerned about it so no impact on our ratings.

So I don't think it's a significant item regardless of exactly where the amount comes out. We turn now quickly to the markets. I'm going to make some general comments in three different segments. The deepwater, midwater floaters and the jackups when we open it up to questions, if anybody has some specific questions on any individual region, we have a number of people here who can answer your questions. First, I'll talk about the jackup market. The international jackup market, that's the easiest market to comment on right now, it is very strong. We're seeing almost 100 percent utilization in that market. India is in the process of evaluating bids for I think it's seven more jackups that will go to work out there. We expect to see rates for the jackups in the international market stay in the $60 to $70 thousand dollar range. The North Sea has seen a little bit of softness and people have moved a number of rigs out. We've moved one of our two rigs to India. It's on its way there now. We expect to move the other one probably by second quarter of next year to Africa. There has been some softness talked about in the Nigerian jackup market recently, and we are seeing as a result of (indiscernible) and NNPC budget constraints, some cutbacks there.

But we have seen this before. We think at least we're hopeful that it's going to be temporary and that the cutback in activity there is not going to have a very big effect on the international market as a whole. If you look at the Shallow and Inland Water business, it's a little bit different story. We saw a significant runup in activity in late second, early third quarter, but since then, activity is pretty much been going sideways. If anything, rates are maybe softening a bit. But with 29 jackups having exited the gulf in the recent past, four dollar gas price and decline in gas deliverability, we remain optimistic that that market is going to turn around at some time in the future and when it does, we think it's going to turn around very rapidly. As an aside, before I comment on the other markets, I'll tell you where we are on our previously announced IPO of the Shallow Water business. We at this point expect to complete our S-1 and have it filed by the end of the year. And when we will then go forward with the IPO, we'll be strictly a function -- when we will go forward with the IPO will be strictly a function of the market. We're hopeful that we'll be able to do that sometime next year but we can't really say until we see how the market's going to develop.

To go to the other end of the spectrum and go to the Deepwater Market, right now, the Deepwater Market is pretty good. If you look at the Ultradeepwater Market, it's very good. We have a couple of rigs that effectively are competing in the spot market. The Millennium and the Cajun Express, we have been successful in keeping both of those rigs busy. In the $165 to $180,000 range, we've got a couple of wells committed to for the Millennium during the six-month period that we have to market the rig. So overall, that segment continues to be good.

Short-term contracts, not long term, but the rates are holding up very nicely. At the lower end of the Deepwater Market, the 4500 to 6,000-foot, things are a little bit softer. I'd characterize the dayrate range there as about $75,000 a day for 4500-foot capable rigs in the Gulf of Mexico to $135,000 a day for 6,000-foot DP rigs. We have actually seen some improvement in that market here over the last couple of months and we see a lot of prospects going forward. The Richardson we have been successful at keeping busy in the lower end of that dayrate range in the Gulf of Mexico, that's a 4500-foot-capable rig. A sister rig, The Rather, which is about 5,000-foot-capable we expect to put to work on a term contract in West Africa in a rate that's in the middle of that dayrate range. And then we have the Seven Seas which is a 6,000-foot DP rig in Brazil which is coming off contract we expect it to be down about the first of December. We have a number of prospects to bid that rig on in Brazil and India and the Far East, but we do have to put the rig in the shipyard for a special survey and some upgrades and enhancements. And I think that you'll see that rig out of service for approximately six months. If I look at the last segment, the midwater segment this continues to be the weakest segment in the business. There are available rigs in virtually every market.

The North Sea has led this market down because there are so many rigs there the North Sea and Norway. At the present time, we have seven rigs in that area, five in the UK and two in Norway, which are idle. I'm not particularly optimistic that we will get any of those seven rigs back to work in 2003. However, we have seen some improvement in that market. It's better than what we thought it would be a couple of months ago and at this point, we're hopeful at least that we'll be able to keep the rest of the rigs that we have in that market running. So... overall, take a look at what all that means for the fourth quarter, we think that the fourth quarter is going to be down somewhat over the third quarter.

We've had three rigs in the North Sea, the Winna, the Prospect and the McClaine come idle that worked in the quarter with the Seven Seas going down in December and we have a couple of jackups in West Africa that we'll be shutting down for approximately three weeks each for special survey work. All of which will tend to bring the quarter down somewhat below the third quarter. At this point, I think street consensus is at about $.26 cents a share. And we don't see any reason to really change that thinking at this point. With that, I will open it up to questions.

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Questions and Answers

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Operator [1]

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Thank you. Today's question-and-answer session will be conducted electronically. If you would like to ask a question, please signal by pressing the star key followed by the digit one on your touch-tone telephone. We will proceed in the order that you signal and we will take as many questions as time permits. Again, to ask a question today, please press Star one. And we'll pause for a moment to assemble the roster. Our first question today comes from Scott Gill with Simmons and Company.

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Scott Gill, Simmons and Company [2]

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Yes, good morning, Bob.

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Robert Long, Transocean, Inc. - President, CEO [3]

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Good morning, Scott.

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Scott Gill, Simmons and Company [4]

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Bob, you may have gone through this before, but can you give us some idea of the $381 million of direct cost? How much of that is fixed and how much of that is variable?

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Robert Long, Transocean, Inc. - President, CEO [5]

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UM... I don't think I have gone through it before, Scott. And I don't think that we have a crisp definition of what is fixed and what is variable. A significant part of the cost structure is variable and you could argue that most of it is depending on how you want to stack your rigs.

But it's a little bit difficult to quantify if you stack a simple rig like a barge, you can pretty comfortably take most, if not all, of the people off it and get costs down very low. If you have a rig like the Richardson or the Cajun Express or big rig go idle you're very reluctant to take a lot of the highly technical trained crews off it and, therefore, you might wind up with half of your cost still there. So I can't really give you an answer to that question.

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Scott Gill, Simmons and Company [6]

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Okay. Maybe if I ask the question a little bit differently here. If we, you know, look at your cost-cutting moves, one could argue that that's positive for earnings and cash flow. I guess the other side of the argument would be your outlook for activity is probably somewhat more subdued than it has been in the past. Talk to us a little bit about your cost-cutting strategies, what the rationale has been for making these moves, and are you looking at activity in '03 to be down, flat or up versus '02?

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Robert Long, Transocean, Inc. - President, CEO [7]

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Well, we have a number of cost-cutting efforts going on in the company, Scott, that we talked about before. Both in our procurement and maintenance efforts, which are fairly long-term efforts and our nationalization efforts. We have actually made some nice progress, particularly in Brazil, but also in the Far East in terms of replacing commuting expatriates with national people the full benefit of the cost savings there isn't being seen right now because part of the nationalization effort requires us to hire and train national people, and we're carrying a fair number of extra people in the process of doing that. I think right now we have about 60 or 70 extra people in a training program in Brazil, and pretty close to 100 people in the Far East in various stages of the training program.

Longer term, you are going to start seeing some nice savings in costs if we continue to operate in those areas like we expect to. The cost the -- restructuring efforts that I talked about earlier in the call, specifically -- were specifically taken in third quarter related to primarily to our shore-based organization supporting the rigs and the North Sea is one area where we are making some significant efforts to downsize the support organization with the number of rigs that is have gone idle and we're not very optimistic, as I said, that we're going to see a ramp-up in activity there anywhere near where we were. So if those seven rigs remain idle as I think there is a pretty good chance they will, then the support organization had to be downsized.

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Scott Gill, Simmons and Company [8]

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So, Bob, it's fair to assume with that comment that the $370 million roughly run rate, it will be less than that in the fourth quarter and the early part of '03?

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Robert Long, Transocean, Inc. - President, CEO [9]

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Um... I wouldn't conclude that, Scott. I think that it depends somewhat on what happens in Shallow Water activity. And there are a lot of different moving parts in this right now. At this point, I think that our guidance on the operating costs would probably drop from the 380 to 390 range to the 370 to 380 range. But I'm not sure that you are going to see a significant difference from that. Again, depending on what the utilization actually turns out to be.

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Scott Gill, Simmons and Company [10]

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Okay. My last question, I'll let others get online here, give us some guidance for your capital spending plans into '03 and perhaps your use of free cash if that has changed.

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Robert Long, Transocean, Inc. - President, CEO [11]

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Capital spending is actually coming down, I think at this point, Greg, correct me if I'm wrong here, we spent $115 million of capital this year and contrary to what we thought at the beginning of the year when we thought we might spend $200 million, we're probably going to come in around $150 million range for this year.

And at this point, we have not really completed our budget cycle. We're just getting into it. My sense is that next year's Cap Ex will be no higher than the $150 million, maybe lower, unless we get some significant project where our customer is willing to pay us some significant payback. The use of cash is going to continue to be what it has been. We will pay down debt or we'll just put the cash on the balance sheet to be available to pay down debt.

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Scott Gill, Simmons and Company [12]

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Okay. Thank you, Bob.

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Robert Long, Transocean, Inc. - President, CEO [13]

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Okay.

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Operator [14]

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Our next question today comes from Kurt Hally with RBC.

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Greg Cauthen, Transocean, Inc. - SR. V.P., Treasurer, CFO [15]

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Yes. Good morning.

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Robert Long, Transocean, Inc. - President, CEO [16]

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Good morning, Kurt.

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Greg Cauthen, Transocean, Inc. - SR. V.P., Treasurer, CFO [17]

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I just want to get a general sense on two things. First, you mentioned the Ultradeepwater Market remaining pretty firm. I was wondering if you could give us some idea of what the perspective rate structure for those rigs are going into next year? And I know that you've been very aggressive in marketing your efficiency factor and want to see how your -- you know, you're marketing that with the oil companies and in terms of the pricing structure.

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Robert Long, Transocean, Inc. - President, CEO [18]

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Okay. Kurt, I think I'll let Mike Unsworth who runs our marketing here answer that question.

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Greg Cauthen, Transocean, Inc. - SR. V.P., Treasurer, CFO [19]

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Good morning, Kurt. Kurt: Good morning. We currently are marketing the high speck fifth generation rigs going into next year. As Bob mentioned, somewhere between between $170 and $180,000. When we're in deepwater we are achieving these rates.

And when we mean deepwater we mean over five and a half, six thousand feet of water. Because the supplies there are still limited for those water depths. And we're expecting that rate to be maintained for deepwater operations with the high spec deepwater rigs. In addition to that, the deepwater rigs are exhibiting efficiency improvements, significantly above the fourth generation fleet. And corporations are taking this into account. If we're competing with the fourth generation rig depending on the program and sequence of events, we can achieve significant premium over fourth generation competition and this has been outlined more recently when we signed a job with the Cajun Express a $150,000 a day when it was in competition with a fourth generation rig in -- just over 3,000 feet of water. So the premium there was acknowledged by that customer to be about $70,000 a day.

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Scott Gill, Simmons and Company [20]

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All right. Do you have structure that you are getting paid base rate plus a bonus based on efficiencies, is that kind of the game plan going forward?

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Greg Cauthen, Transocean, Inc. - SR. V.P., Treasurer, CFO [21]

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Well, some customers have basically acknowledged that the rig is going to be that much more efficient and they have just decided to pay a straightforward dayrate for that, Kurt. But there are other customers who are in fact linking an efficiency bonus to the contract. So if you take, for example, the [INAUDIBLE] Express in Brazil, the contract substitution was to substitute the Express for the Seven Seas but linked to that substitution we have an efficiency bonus whereby we will earn a significant bonus if we achieve the efficiencies that we think we can achieve. So, yes, we are working at both camps on that.

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Scott Gill, Simmons and Company [22]

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Okay. And then my follow-up question is on the Gulf of Mexico, we're looking at the jackup market, there seems to be some element of differentiation so far in the year-to-data basis, the premium rigs are achieving 90 to 95 percent utilization, the commodity rigs are achieving substantially less than that. I was wondering if you -- somebody might be able to address that and put it in a context of whether or not this is a structural change in the industry or whether or not it's just a temporary change based on the spending.

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Greg Cauthen, Transocean, Inc. - SR. V.P., Treasurer, CFO [23]

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I think Yan Ross who is running that business for us will be happy to answer that for us.

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Yan Ross, Transocean, Inc. [24]

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Good morning, Kurt.

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Kurt Transocean, Inc. - Marketing Manager [25]

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Good morning, Yan.

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Yan Ross, Transocean, Inc. [26]

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I think it's temporary. You know, demand and supply in the Gulf of Mexico jackup market fluctuates dramatically. The good news in the Gulf of Mexico is that supply is down. We've seen 29 rigs leave and we have a net outflow of 22 rigs in the last 18 months. Internationally, we have close to 100 percent utilization like Bob said.

So if the U.S. Gulf of Mexico continues to be poor, and it's natural gas-driven, it shouldn't be at this time, but it is. If it continues, I think we'll see more rigs leave the Gulf of Mexico. And at some point in time, we are going to get closer to an equilibrium and the market should improve for all segments of the Gulf of Mexico. You know, we are going to see more and more deep-gas drilling and that's going to have an impact on the commodity rigs that we are operating, as well. So at some point in time, it's going to improve.

Right now, we have 89 rigs working out of 120 that are marketed. That gives us 74 percent utilization. We need to see approximately 85 percent utilization before dayrates start to move and that's 12 rigs. And that can happen in weeks. So it's going to recover. I just don't know exactly when.

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Scott Gill, Simmons and Company [27]

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Okay. Great. Thank you.

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Operator [28]

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And now we'll move on to Doug Becker with Bank of America Securities.

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Doug Becker, Banc of America Securities [29]

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Good morning. I was hoping to get a better understanding of what type of restructuring were you doing in the non-U.S. businesses that allowed you to take the tax benefit? Has this been ongoing or is this something more specific to the quarter?

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Robert Long, Transocean, Inc. - President, CEO [30]

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It's actually something that's been ongoing for a while that we finally got resolution of in the quarter. But I don't think that we really want to comment in any detail on our tax planning strategies whether they're foreign or U.S.

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Doug Becker, Banc of America Securities [31]

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Okay. Fair enough. To you could get some commentary on the asset market. You are having difficulty selling assets. Does this in any way impact your debt paydown expected in 2003?

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Robert Long, Transocean, Inc. - President, CEO [32]

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No, it doesn't really impact the debt paydown. As we indicated, you know, we continue to generate a significant amount of cash. Right now, we have over $1 billion on the balance sheet which is about equivalent to I think our required debt repayment -- assuming the convertible is put back to us in May is $1.1 billion for 2003. So we essentially already have enough cash on the balance sheet to meet all of our debt obligations in '03 and we continue to generate at this point we are generate building $300 million a quarter in cash based on the last quarter.

So we don't see any need to sell assets in order to satisfy debt requirements. And we have said that all along. One of the reasons that we have not succeeded in selling some of these assets is the fact that we don't have to sell them and we're not willing to take fire sale prices. So with the softness in the market, we have been willing to accept prices that people have been willing to pay and that's why it's taken us longer to sell them

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Doug Becker, Banc of America Securities [33]

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Okay. And then just one housekeeping item t looked like the effective tax rate was up a little bit in the quarter. Is 15 percent still a good number to be using going forward?

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Robert Long, Transocean, Inc. - President, CEO [34]

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No, in fact, I'm glad you mentioned that. I forgot to point out our effective tax rate if you take out the restructuring charge is 13.9 percent at this point which is down slightly I think at the end of second quarter we were estimating it would be 14 something percent so it's down a little bit.

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Doug Becker, Banc of America Securities [35]

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And that's the number we should be using going forward?

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Robert Long, Transocean, Inc. - President, CEO [36]

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At this point, it's a little bit difficult to say. That, of course, is our best estimate of what we think the effective rate will be for this year. Without having finished our budgets or knowing exactly what 2003 is going to look like, it's tough to say what the effective tax rate will be. But I think it's fair to say that we do not expect it to go out of the mid teen area, whether it goes up a couple of percent or down a percent is hard to say at this point.

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Doug Becker, Banc of America Securities [37]

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Okay. Thank you.

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Operator [38]

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And again, if you would like to ask a question, please signal by pressing Star one or if your question has been answered, you may remove yourself from the que by pressing the pound key. And next we'll hear from Ken Sill with CS First Boston.

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Ken Sill, CS First Boston [39]

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Good morning, gentlemen.

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Robert Long, Transocean, Inc. - President, CEO [40]

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Good morning, Ken.

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Ken Sill, CS First Boston [41]

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Couple more housekeeping questions. Um, the $15 million that you mentioned of kind of neting this and that and the other segment, I'm assuming that's not going to be repeated as we go forward? And does that account for the, you know, the kind of anomaly of the $55,000 a day dayrate word in that segment?

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Robert Long, Transocean, Inc. - President, CEO [42]

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I think it's fair to say that it's unlikely to see that level of the number going forward, though we will continue to have various dispute issues come up. So you might see some number there off and on. Buy I'm -- but I'm not sure the $55,000 a day. That excludes, I'm told, the $15 million.

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Ken Sill, CS First Boston [43]

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Yeah, I was just a little bit curious when you looked at the dayrates that were reported, they were up for both segments and yet the overall dayrate for the fleet was as a whole was down. I can deal with that with Jeff offline. I'm sure it's just something in how the numbers come together. Um and another, kind of housekeeping question. You had a $2.9 million gain on sale of assets. What tax rate do you tax those at?

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Robert Long, Transocean, Inc. - President, CEO [44]

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Well, it varies. I don't know -- I don't recall specifically which assets we had at the -- the tax rate that's applied is a function of the owning companies. So if a U.S. company sold an asset, there would be a 35 percent tax rate. If a foreign company sold it, depending on exactly where the rig was setting, it may be zero, it may be small.

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Ken Sill, CS First Boston [45]

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Yeah. I mean, it looked like this was Rig 41, which, was that one of the Venezeula land rigs that got sold in the quarter?

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Robert Long, Transocean, Inc. - President, CEO [46]

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Ricardo? No. In fact, it was, some insurance proceeds in respect of some equipment that had been damaged on the Trident 9 and is therefore not the 35 percent tax rate does not apply.

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Ken Sill, CS First Boston [47]

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Okay. And then you know, G&A expenses came in pretty much straight with where they were. I know we had thought there might be a little bit of increase in the G&A costs because of the, you know, potential IPO filing. Is that run rate -- does that run rate look like it's going to be pretty good going forward here?

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Robert Long, Transocean, Inc. - President, CEO [48]

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At this point, I think the run rate is probably about right. The IPO -- any IPO-related costs are actually I think being deferred and will come out as a reduction in proceeds of any stock -- of anything that we get on the IPO. So it won't have any impact on the G&A going forward, whether we continue to spend money on it or not.

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Ken Sill, CS First Boston [49]

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Okay. Thank you very much.

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Operator [50]

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And now we'll hear from Michael Urban with Deutsche Banc.

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Michael Urban, Deutsche Banc [51]

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Thank you. You mentioned about the jackups being tended for in India. Is there anything or any interest there in the Deepwater Market?

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Robert Long, Transocean, Inc. - President, CEO [52]

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Actually, yes. There's a couple of deepwater prospects in India both with ONGC and Reliance and I'll let Mike Unsworth fill new on those.

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Greg Cauthen, Transocean, Inc. - SR. V.P., Treasurer, CFO [53]

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We have had the (indiscernible) full before with reliance over in India most of the year. And it's been drilling an expiration campaign and I'm sure some you have have seen the announcements that it's kind of fairly good expiration campaign and that's resulted in Reliance saying they will drill 20 wells sometime next year. They are talking about sometime mid-year next year with some appraisals and development wells.

ONGC are out looking for three deepwater rigs. One is probably an incumbent rig. A rig that's already working for them so it's a net increase of two. One in ultradeepwater over 2,000 meters. And that -- I understand that there are discussions going on between ONGC and another operator, another contractual operator with respect to a rig for that program. On the other unit, which is a 7,000-foot water depth unit, that is ideally placed, if you like, for something like [INAUDIBLE]. So a net increase of two rigs in India. On ONGC and one on the way.

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Michael Urban, Deutsche Banc [54]

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Great. And in the Gulf of Mexico Shallow Water business, I guess you said you didn't have a sense of timing there, obviously, as to when that might recover. But has there been any change in the dynamics there in terms of interest from customers or talk about various rigs or projects getting started up?

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Greg Cauthen, Transocean, Inc. - SR. V.P., Treasurer, CFO [55]

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Yan?

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Yan Ross, Transocean, Inc. [56]

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No. You know, if we look back, we have to look back to last year. Last year, we had basically 100 percent utilization through May. And then the market came down to 55 percent utilization and gradually started to recover again January through July.

And July this year, we came up to 85 percent utilization and dayrates started to move for our Shallow Water equipment pretty rapidly from 20 to $25,000 per day. Since then, the market's come down. And we don't get a strong sense from our customers really what they are going to do. I think it depends on several factors. The weather, the inventory -- natural gas inventories, and the economy in general. I think we are going to get some clue of where we're heading in the next couple of months. It's budget times for our customers and that should give us a clue.

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Michael Urban, Deutsche Banc [57]

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Okay, great. Thank you.

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Operator [58]

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Our next question today comes from Pierre Connor with Hibernia Southcoast.

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Pierre Connor, Hibernia Southcoast [59]

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Good morning, guys.

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Robert Long, Transocean, Inc. - President, CEO [60]

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Good morning.

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Pierre Connor, Hibernia Southcoast [61]

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Couple of questions. First, Bob, North Sea, there is some recent discussion about potential tax law changes in the Netherlands that is came to light I understand that they're associated with the ability to write off capital investment potentially changing. What's your thought there? Do you have any insider feedback from potential customers in the Netherlands area?

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Robert Long, Transocean, Inc. - President, CEO [62]

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We actually haven't been very active in the Netherlands and that's all jackup country and with only one jackup left in the North Sea and pretty committed to take that down to west Africa as soon as its current program is done, I'll note the fact that there was a proposed tax law change. We haven't really got much of a headache about it because I don't think it's going to impact us.

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Pierre Connor, Hibernia Southcoast [63]

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Great. Recent announcement of some discovery offshore Ireland in the deeper water now. Any potential follow on there or is it too early to say?

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Robert Long, Transocean, Inc. - President, CEO [64]

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Mike?

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Greg Cauthen, Transocean, Inc. - SR. V.P., Treasurer, CFO [65]

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Yeah, I think there is interest going back into Ireland next year. And there are some programs discussed. But I don't really want to say any more at the moment.

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Pierre Connor, Hibernia Southcoast [66]

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Okay, no, that's fine. I understand. And then, Yan, a little more and I don't know how much you want to talk about relative to what is your sort of current thinking in terms of any strategy changes, cost-saving changes. What are you doing to the current Shallow Water and Inland business unit that you kind of want to work on here in the next, you know, several quarters? Is there anything you can point out yet, or do you want to share?

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Yan Ross, Transocean, Inc. [67]

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Well, just a general thought. We are running commodity jackups, so we are going to see a dramatic fluctuations when the market is good, it's going to be very good. And when it's poor, it's going to be darn poor. You know? And that's what we have to live with. What we need to see is that we run our rigs as inexpensively as possible. We got to have a pretty rigorous cost-cutting program here and I'm working on that.

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Pierre Connor, Hibernia Southcoast [68]

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Okay.

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Yan Ross, Transocean, Inc. [69]

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That will enable us to run more rigs in a poorer market, keeping our crews continuously on our rigs, and prepare ourselves for the market when it turns.

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Pierre Connor, Hibernia Southcoast [70]

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Mm-hm. I understand. Let's see. One -- sort of couple quick things here. Any prospects, Bob, that you can share with us on the Arctic?

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Robert Long, Transocean, Inc. - President, CEO [71]

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At this point, there are one or two projects that we see coming up in Norway longer term that we think the Arctic could be particularly well suited for. But nothing in the immediate future. So I think that the prospects of putting that rig to work before the middle of next year are virtually nil, and I wouldn't give a high probability next year at all.

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Pierre Connor, Hibernia Southcoast [72]

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Okay. Great. And one final simple one maybe for Greg. Just a housekeeping. Was there some interest add-back on the convert? Could you tell us how much, if so?

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Greg Cauthen, Transocean, Inc. - SR. V.P., Treasurer, CFO [73]

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Yes, there was some interest add-back on the two converts. And it was about $5.3 million for the quarter.

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Pierre Connor, Hibernia Southcoast [74]

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Okay. Great. Okay. Thanks for touching base on all those questions. I'll turn it back to the moderater.

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Greg Cauthen, Transocean, Inc. - SR. V.P., Treasurer, CFO [75]

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Okay.

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Operator [76]

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Thank you. And our next question today comes from J.P. Morgan, Michael Lamont, please go ahead.

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Mike Lamont, J.P. Morgan [77]

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Good morning, guys.

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Robert Long, Transocean, Inc. - President, CEO [78]

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Good morning.

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Mike Lamont, J.P. Morgan [79]

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Question on the asset divestiture and the decline in asset values. Bob, I was wondering if you had at any point or are at any point considering as you go through this process of rationalizing the fleet, actually retiring equipment as opposed to trying to sell it and see it comes back at you from a competitive standpoint?

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Robert Long, Transocean, Inc. - President, CEO [80]

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That's a question we wrestle with all the time, Michael. And it's a difficult one to conclude that you actually ought to go ahead and scrap a unit if you think that somebody will pay you some cash for it. At this point, we've not decided to do that. You saw us sell a couple of rigs to Noble a while back.

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Mike Lamont, J.P. Morgan [81]

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Mm-hm.

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Robert Long, Transocean, Inc. - President, CEO [82]

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I think there are several rigs that are candidates that we are giving some serious thought to whether or not we should just go ahead and scrap it. I don't think you'll see us make those decisions for -- very early in next year, but sometime next year we might reach that point. But I don't think you should expect to see a very significant number of rigs that we would decide to go ahead and scrap.

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Mike Lamont, J.P. Morgan [83]

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Okay. And then on the IPO of R&B Falcon, is there anything that would keep you from proceeding with that IPO in 2003?

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Robert Long, Transocean, Inc. - President, CEO [84]

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I think the only thing that will keep us from proceeding with it is if the market doesn't improve to the point where we think that we can get near the proceeds that we think we would like to get. This goes back to the fact that we don't really need to do something here to raise cash. So it's just a function of how do we create the most value and when do we create the most value? If we decide that it looks more likely that a significant upturn would happen in '04 and that we should wait for that, then we would do it. At this point, given all the fundamentals, some of the things that Yan mentioned, I'd frankly be surprised if that market isn't going to recover strongly enough that we will be successful in doing something in '03.

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Mike Lamont, J.P. Morgan [85]

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Okay. And then, Yan, sort off to that point, if you look at the economics and cash losses that business has sustained in the last few quarters, I think could you argue that part of the reason why the Gulf of Mexico's remained as tight is because Transocean having cash flows coming from other markets and other sources is able to absorb those losses more substantially. You mentioned being the low-cost producer effectively in the Gulf of Mexico. Have you looked at utilization levels in terms of really what would keep an independent company viable?

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Yan Ross, Transocean, Inc. [86]

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Yes, I have. And I believe that we will be able to run with the current number of rigs with a positive cash flow in the Gulf of Mexico.

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Mike Lamont, J.P. Morgan [87]

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Okay.

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Yan Ross, Transocean, Inc. [88]

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But we are going to work on lowering our costs further and that will enable us to get more rigs out and buy a little utilization.

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Mike Lamont, J.P. Morgan [89]

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Okay. And then lastly, just an accounting housekeeping item, if you -- just looking at the share count for the fourth quarter, it's fair to assume that both converts were triggered because of the tax benefit not having that in the fourth quarter, they will then both come back out, is that correct?

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Yan Ross, Transocean, Inc. [90]

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That is correct.

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Mike Lamont, J.P. Morgan [91]

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Thank you.

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Operator [92]

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Our next question today comes from Terry Darling with Goldman Sachs.

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Terry Darling, Goldman Sachs [93]

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Thanks, good morning. I had a couple of followups. First, Bob, on your indication on the cost side for next year, on the $370 to $380 million range, are you building into that assumption an increase in your insurance costs, and if not, what might that number look like for next year?

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Robert Long, Transocean, Inc. - President, CEO [94]

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Well, the 370 to 380 range is really based on the current levels of activity continuing and our current cost structure. We do have indications that insurance costs are likely to go up significantly next year. In fact, I think that if we renewed our program exactly as it is, you -- there are indications that other people are receiving doubling in rates. We do not intend to allow that to happen.

If we have to restructure the program and assume some more self-insured retention, we'll do that and I think with our balance sheet and the size of the company, we are -- that we can afford to assume that additional risk. So it's a little bit difficult to tell you exactly where we think the insurance costs will come out until we look at exactly how we'll restructure the program because we are looking at potentially pretty radically restructuring it. But I think it's fair to say that increases on the order of 25 to 50 percent could well be seen.

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Terry Darling, Goldman Sachs [95]

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And then you would have an increase in your essentially your self-insurance accrual on top of that?

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Robert Long, Transocean, Inc. - President, CEO [96]

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Well, there's only -- you can't really accrue for the self-insured retention when you look at something like the Hull policy until you actually have an incident, you can't accrue for it. In the P&I, what we do is accrue for losses that have been -- that have occurred but have not been reported. So the concept there is that there's already been an incident, just with so many people, we don't necessarily know that it has occurred and, therefore, you can accrue for it. In the Hull policy, you can't do that. You actually will know when and if something happens.

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Terry Darling, Goldman Sachs [97]

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And the 25 to 50 percent increase, what's the base off of which you might see that kind of an increase? Where are those costs, you know, this year?

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Robert Long, Transocean, Inc. - President, CEO [98]

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Total insurance costs this year, around $66 million.

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Terry Darling, Goldman Sachs [99]

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Okay. And just to make sure I understand the increase sequentially and the other revenue segment, it was 15 million from an insurance item. Was that 100 percent of the answer?

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Robert Long, Transocean, Inc. - President, CEO [100]

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No. No. Go ahead, Ricardo.

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Ricardo Rosa, Transocean, Inc. - V.P. Marketing [101]

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The insurance item does not affect the 55,000 in other. I think one of the major elements that's -- (indiscernible) included $55,000 is a demobilization fee that was paid on one particular swamp barge.

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Terry Darling, Goldman Sachs [102]

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I'm actually talking about the $40 million of revenues, not the dayrate. But same answer presumably?

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Ricardo Rosa, Transocean, Inc. - V.P. Marketing [103]

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Talking about the overall increase in revenue?

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Terry Darling, Goldman Sachs [104]

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I'm looking at the other revenue segment going from, you know, $23.5 million to $40 million sequentially.

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Robert Long, Transocean, Inc. - President, CEO [105]

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Ricardo, do you have a breakdown of what's involved in that?

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Ricardo Rosa, Transocean, Inc. - V.P. Marketing [106]

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No.

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Robert Long, Transocean, Inc. - President, CEO [107]

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Terry it will take us a few minutes here.

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Terry Darling, Goldman Sachs [108]

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I'll just follow up after the call, but bottom line is there a couple of items there?

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Robert Long, Transocean, Inc. - President, CEO [109]

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Yes.

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Terry Darling, Goldman Sachs [110]

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Okay. Mike, you had talked about, you know, the incremental demand for ultradeepwater in India and North Atlantic, I guess, as well. Can you talk about any other opportunities you see in either Brazil or West Africa or Southeast Asia or anywhere else?

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Robert Long, Transocean, Inc. - President, CEO [111]

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I think that Mike overlooked something. Brazil we don't see a lot of pickup in deepwater activity right now. In fact, it pretty flat, although we do understand that they are coming out for an additional 4500-foot rig and later they will be coming out early next year to start late next year for a 6,000-foot DP rig. So it is a potential for a couple more rigs next year in Brazil, although there's also the potential that they might drop one of their lesser capability rigs. So net-net, you might see flat to possibly one additional deepwater rig. That's looking only at the petrograph side.

There's a lot of activity planned from the international operators but it all tends to be one or two or three wells. And there's a couple of rigs that have been generally been hopping around picking up that work. Whether or not any of those operators are successful and ramp up their plans is unknown at this time. But I think it's unlikely that you'll see too much of an increase from the international operaters in Brazil in '03. I think you're looking at more like '04 or even early '05 period before you'll see much increase from that segment. The West African market is actually looking better and better. There's a lot of activity planned, there's been a lot of success by a number of operators. A number of operators looking for additional capacity for rigs. And some of the development projects coming on, I think that, we're fairly optimistic that you're going to see a significant increase in activity in West africa, starting as early as '03. In the Far East, there are -- there is a fair number of deepwater prospects that none of them are long-term programs. But Murphy has had some success. Shell and TFE and Unical all have some plans for deepwater work.

Some of that we understand is going to be done with surface stack mode or they would like to do it with surface stack mode. So whether or not an additional deepwater rig goes out there, I think at this point more likely than not that the rigs in the area are going to be able to satisfy that demand. But again, if there's any success, that could change.

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Terry Darling, Goldman Sachs [112]

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And how about the Gulf of Mexico, Bob?

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Robert Long, Transocean, Inc. - President, CEO [113]

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Gulf of Mexico, I don't see any particular -- any big change in activity. They have had a lot of exploratory success there over the last year. But based on discussions with the operators and their plans, I think at this point we see it being pretty flat next year with this year.

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Terry Darling, Goldman Sachs [114]

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Okay. And the potential to see some of the lesser quality units in Brazil drop at some point next year, do you see some vulnerability in your fleet?

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Robert Long, Transocean, Inc. - President, CEO [115]

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Well, guess we have the P-1 that is contracted for some time next year, I think it's around June midyear. We're optimistic that we can keep that running but that would be one of them that would potentially be if they are going to cut back on their fleet, there are three or maybe four rigs of that technical capability that I think would be the ones that they would be looking to potentially pairing back if they are going to pair back on capacity.

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Terry Darling, Goldman Sachs [116]

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And one of your peers commented last week, they do not see any impact from the change in government in Brazil on Petroba's activity. It's early but do you have any view on that, as well?

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Robert Long, Transocean, Inc. - President, CEO [117]

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I think I would agree with that comment long term. There's always the risk that there's some disruption for a short period of time. I think most people feel that the change in government is likely to result in change in senior management at Petrobas. Whether or not that happens, we don't know. Whether or not that results in some slowdown in, for instance, this prospective tender for the 4500-foot rig or even the 6,000-foot rig that will come out later, it could slow that down but my sense is that the Petrobas in Brazil has been through this a number of times before and they have some pretty significant commitments to the self-sufficiency and if there is anything -- any impact, I think it will be relatively small and temporary.

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Terry Darling, Goldman Sachs [118]

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And then a couple of followups on the balance sheet. The first one is the swap receivable... did that balance change meaningfully on a sequential basis? Your press release, you're showing an increase year-over-year which helped in the net debt reduction. Is there a meaningful sequential increase there? And if so, what's driving that?

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Robert Long, Transocean, Inc. - President, CEO [119]

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Yes, there was. The balance was $192 million at the end of the quarter, up from around $60 million at the end of June 30 and $15 million December 31st. That's driven by the declining long-term interest rate environment. Those swaps are fixed to floating swaps. We about $1.6 billion of fixed to floating rate swap. That's been saving us the last couple of quarters about $14 million a quarter in interest expense. But as long-term interest rates decline, that under FAS 133, that causes us to mark that swap to market recorded as a receivable but there is a corresponding adjustment to our long-term debt, that's why you saw long-term debt go up in the quarter as well. So that's why in our net debt presentation we netted those because it's purely an accounting convention that you record the receivable and you gross up your debt by the same amount.

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Terry Darling, Goldman Sachs [120]

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I guess the longer term strategic issue on the balance sheet, Bob, you have pretty good visibility about paying down the billion one in the second quarter, as you indicated at this run rate, you know, you're in the 275, 300, type of range on cash generation per quarter. By historical measures you get a very cheap stock and I'm wondering where -- at what point, you know, post that pay-down of a billion one would you feel comfortable buying back the stock?

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Robert Long, Transocean, Inc. - President, CEO [121]

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First, let me make sure I didn't confuse you. The billion one is what our debt due over the entire next year is. In the second quarter, the convert coming back is about $540 million, I think.

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Terry Darling, Goldman Sachs [122]

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That's correct. Okay. Robert Long: It's not a billion one in the second quarter. I'm sorry. I thought the other items were also more or less around that May time period. Is that not correct? Robert Long: There is some significant payments. I don't remember the exact schedule.

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Greg Cauthen, Transocean, Inc. - SR. V.P., Treasurer, CFO [123]

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About $800 million is in the second quarter. There's some quarterly amortization payments and then there's a $100 million bond in the fourth quarter. The bulk of it is in the second quarter.

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Robert Long, Transocean, Inc. - President, CEO [124]

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Getting to your question on stock repurchase, I think that until we get debt paid down significantly, even after the $1.1 billion, we are still going to have a significant debt balance and I think until we get the debt down somewhat below that, we are not going to be considering stock repurchases. Now, depending on our level of cash flow generation, what happens with the Shallow Water business and how much proceeds we raise from that, if and when we are successful with the IPO, stock repurchases would be something that we've obviously would have to think about, particularly if the stock stays down around the levels is at now which I certainly hope it doesn't.

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Terry Darling, Goldman Sachs [125]

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Okay, thanks very much.

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Operator [126]

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And now we'll take our next question from Eve Seagal with Wachovia Investments.

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Akiba Cohen, Morgan Stanley [127]

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Thanks. Good morning. Two quick ones for you. Yan, could you say where the operating costs are now on the Shallow Water fleet and where you think you can get them on the cash costs?

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Yan Ross, Transocean, Inc. [128]

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Um... I think we can probably reduce them from the current level over a period of time -- it's not going to happen overnight, but let's say over the next year or so, approximately 15 to 20 percent.

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Akiba Cohen, Morgan Stanley [129]

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From what base level? Is it like 13, 14,000 or something?

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Yan Ross, Transocean, Inc. [130]

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You know, Eve, it depends what you include in operating expenses. To the extent you have G&A included and so forth. But if we take operating expenses without the G&A, we are currently around 17.

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Akiba Cohen, Morgan Stanley [131]

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Okay. Great. Well, good luck, Yan. Yan Ross: Thanks. Bob, in terms of -- there was a question earlier about asking if there was structural changes in the Gulf of Mexico. Do you think there have been structural changes in terms of the outlook for the midwater market? And the second part of that is just on cold stacking rigs, could you just suggest if you are thinking about cold stacking any more of the rigs, especially if you don't think they are going to come back in '03? What the impact of that might be?

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Robert Long, Transocean, Inc. - President, CEO [132]

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Well, I'm not sure on the first part of your question, the structural changes, I'm not sure I really understand the question, Eves.

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Akiba Cohen, Morgan Stanley [133]

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Well, I guess the question is, you know, the midwater market's been weak for a while now. Do you think it's going to come back or not?

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Robert Long, Transocean, Inc. - President, CEO [134]

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Well, in the Gulf of Mexico, we haven't seen a lot of indications of increased activity in that level. There's been a little bit -- there's been a little bit and there's been some prospects for work on some of those capable rigs maybe off Venezuela, maybe off Trinidad. But basically, I don't think we are seeing anything that would indicate there's going to be a significant change there. As far as the cold stack issue, we have been pretty aggressive in stacking our rigs -- the couple that we have stacked in the Gulf of Mexico, in that category.

Are cold stacked. And we are pretty much down almost to a watchman level in the crew size. The rigs that are -- have come down in the North Sea where we don't think they are going to go to work anytime soon, maybe not even in '03, we are getting down to minimum crew levels on the order of maybe as many as eight people assigned and in a couple of cases where the rigs have to be moored offshore, there are some statutory requirements that we keep a few more people on it, but basically we are getting the crews down to a absolute minimum level and just keeping the rig maintained by rotating the equipment and doing the minimum necessary.

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Akiba Cohen, Morgan Stanley [135]

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Thanks.

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Operator [136]

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And our next question comes from James Stone with UBS Warburg.

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Magnus Fear, Jeffries and Company [137]

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Thank you. All my questions have been answered.

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Operator [138]

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And again, if your question has been answered you may remove yourself from the que by pressing the pound key. And next we'll hear from Magnus Fear with Jefferies & Company.

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Magnus Fear, Jeffries and Company [139]

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Yes. Good morning. Just one follow-up questions on the Shallow Water market. For Yan, how many rigs -- barge rigs were you running in the third quarter? And how many are you running currently, if you can break them out into medium versus deep?

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Yan Ross, Transocean, Inc. [140]

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Right now, we are running 15 barges. I don't know what the average was for the third quarter. Do you guys know? About the same. We have been running around 15. We have been up to 16 in July/August and been running pretty constantly around 15 lately.

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Magnus Fear, Jeffries and Company [141]

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Okay. And I mean, if activity levels pick up, I mean, you know, what's the cost of bringing out these other ones that have been, you know, that have been stacked?

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Yan Ross, Transocean, Inc. [142]

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Um, it's actually relatively inexpensive to bring out the barges that we have. We have five that are more or less warm stacked where you have to invest less than a million dollars to bring them out on an average basis. Beyond that we have -- the rigs are cold stacked and then it would require investments up to $5 million a piece.

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Magnus Fear, Jeffries and Company [143]

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Okay. Great. Thank you.

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Robert Long, Transocean, Inc. - President, CEO [144]

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I think we probably will take one more question and then wrap it up for the day, if you all don't mind.

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Operator [145]

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Thank you. And our final question today comes from Akiba Cohen with Morgan Stanley.

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Akiba Cohen, Morgan Stanley [146]

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I had just a question on the cash flows. The $176.2 million tax benefit looks to be running through the income statement. I don't see any reversal of that in the cash flow. Did you take in cash from that benefit, or how are you accounting for that on the cash flow side?

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Robert Long, Transocean, Inc. - President, CEO [147]

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You'll see the reversal of that is split into two places. Part of it's in the deferred income tax reversal because a little over $120 million of it related to a deferred tax provision. And then the rest of it is in the income tax receivable payable reversal because the rest of it was a current benefit.

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Akiba Cohen, Morgan Stanley [148]

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Okay. Thank you.

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Operator [149]

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And that will conclude our question-and-answer session. I would now like to turn the call over to Mr. Bob Long for any additional or closing remarks.

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Robert Long, Transocean, Inc. - President, CEO [150]

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Just like to thank all of you for joining us today. We did have a pretty good quarter, and I hope we answered all your questions and I know we had a lot going on in the quarter and a lot of unusual items. But we look forward to talking to you again in the near future.

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Operator [151]

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That will conclude today's conference call. Thank you, everyone, for your participation.