Q3 2021 Transocean Ltd Earnings Call

November 2, 2021

Good day, ladies and gentlemen that you're currently on hold for the Q3 2021 Transocean earnings Conference call.

We're currently awaiting the arrival of additional participants in the conference will be starting shortly thank you for your patience and please continue to hold.

[music].

Good day and welcome to the Q3 2021 Transocean earnings Conference call. Today's conference is being recorded at this time I would like to turn the conference over to Allison Johnson Senior manager of Investor Relations. Please go ahead.

Thank you Mary Ann Good morning, and welcome to Transocean third quarter 2021 earnings conference call a copy of our press release covering financial results, along with supporting statements and schedules, including reconciliations and disclosures regarding non-GAAP financial measures are posted on our website at deepwater dot com.

Joining me on this morning's call are Jeremy Thigpen, President and Chief Executive Officer, Mark Mey, Executive Vice President and Chief Financial Officer. He went out and then executive Vice President and Chief Operations Officer, and Roddie Mackenzie Senior Vice President of marketing innovation and industry relations.

During the course of this call Transocean management may make certain forward looking statements regarding various matters related to our business and company that are not historical facts.

Such statements are based upon current expectations and certain assumptions and therefore are subject to certain risks and uncertainties.

Many factors could cause actual results to differ materially please refer to our SEC filings for forward looking statements and for more information regarding certain risks and uncertainties that could impact our future results.

Also please note that the company undertakes no duty to update or revise forward looking statements.

Following Jeremy and Mark prepared comments, we will conduct a question and answer session with our team. During this time to give more participants an opportunity to speak please limit yourself to one initial question and one follow up thank.

Thank you very much I'll now turn the call over to Jerry.

Thank you Allison and welcome to our employees customers investors and analysts participating in today's call.

As reported in yesterday's earnings release for the third quarter Transocean delivered adjusted EBITDA of $245 million on $683 million and adjusted revenue, resulting in an adjusted EBITDA margin of over 36%.

Additionally, our quarterly free cash flow of $104 million represents the sixth straight quarter of positive cash generation.

During the quarter, we matched a company best revenue efficiency of 98% for the second consecutive quarter and we've maintained a revenue efficiency of 97% or higher for six sequential quarters due to our consistently safe reliable and efficient operations across our operating fleet. Indeed.

Indeed, it was a true team effort globally supported in addition to other transition initiatives by our smart equipment analytics system, which helps us monitor critical pieces of equipment and systems to identify anomalies and signs of degradation such that we can prevent and potentially predict unplanned failures and resulting downtime.

The same system allows us to track and trend fuel burn energy consumption and emissions in real time, helping to optimize energy efficiency in our operations, providing us a powerful tool in delivering our 2030 goal of a 40% reduction in our greenhouse gas emission intensity versus 2019.

Now turning to our fleet starting in the Gulf of Mexico in August we announced the $252 million to face contract, we signed with Beacon offshore energy for the deepwater Atlas following the final investment decision of Beacon and the Shenandoah working interest owners to sanction the previously announced project in the U S Gulf of Mexico.

The Atlas, which is nearing completion at the <unk> shipyard will be one of two eight generation 20000, Psi ultra deepwater drillships and the Transocean fleet.

In addition to the 20000 Psi well control equipment, the Atlas and the deepwater Titan also incorporate other state of the art technology and features including a gross hoisting capacity of $3 4 million pounds.

Efficient completion setup with dedicated well test and off loading areas and a hybrid power drill, Florida flattens peak loads on the engines and reduces fuel consumption.

Staying in the Gulf I am pleased to share that Chevron has exercised the two $335000 per day options, we announced on our last earnings call for the deepwater Conqueror, bringing the firm duration to three wells.

The additional term will commence in direct continuation of the current contract and in total the three will contribute over $100 million of backlog.

These premium rate options reinforce our belief that our customers continue to acknowledge the tightening of the market for readily available high specification ultra deepwater assets as well as the recognition of transactions ability to consistently deliver safe reliable and efficient operations.

Also in the Gulf, We signed a one well extension with BHP on the deepwater invictus the.

The extension is expected indirect continuation of the prior well and carries a day rate of $295000 per day.

The rig is now expected to remain on contract through June of 2022.

And finally rounding out the Gulf based upon our knowledge of the responses to several recent tenders. We expect awards to be made in the near future at day rates of approximately $300000 per day, reflecting as we've discussed the increasing tightening of this market.

Heading down to Trinidad following a successful filing the calypso appraisal well bounded III drilled by the DD three BHP exercise the one well option at a day rate of $220000 per day to complete the appraisal.

She is now expected to remain on contract through November.

We remain encouraged about the future prospects for this ultra deepwater semisubmersible and are actively bidding the rig for multiple opportunities in various regions across the globe. Following the conclusion of operations in Trinidad.

Jumping over to the Asia Pacific region, the deepwater Nautilus had a one well option exercise by Posco.

The option will keep the rig after three December before she begins mobilization to the commencement of our next campaign in February 2022.

And finally, the kg too has begun contract preparations for her one well campaign in Brunei with shell.

Looking forward based upon conversations with our customers and supported by increasing utilization and day rates. We are growing increasingly confident that the recovery is now gradually accelerating for ultra deepwater and harsh environment markets.

Oil prices remain highly supportive as Brent crude has remained in the low to mid $80 per barrel range since the beginning of last month.

Moving forward. We expect this trend will continue largely as a result of significant and prolonged underinvestment and traditional sources of energy.

Moreover, OPEC plus recently announced its intent to maintain its gradual production plan and the U S Department of energy has decided to leave the strategic Petroleum reserve untapped.

Both of these decisions support a continued supply deficit outlook heading into the end of the year and possibly beyond.

At the same time, we continue to see a tightening of the offshore market unfolding across multiple regions.

And utilization of the global floating rig fleet is nearing 80% to 85%, which has historically been the inflection point at which material increases in day rates are triggered.

Notably active utilization in the Golden Triangle, which as you know consists of the U S. Gulf of Mexico, South America and Africa currently sits in the 90% range.

In a few moments I will provide more specifics surrounding the outlooks for each of these regions.

Globally offshore rig count contract awards have been on the rise for four consecutive quarters and are beginning to exceed levels seen before the pandemic.

Average tinder duration increased in the third quarter with a particular uptick in the length of the option periods.

This reinforces our belief that our customers see the signs of a rising market and are recognizing the importance of securing the highest specification asset for longer periods of time.

Project sanctioning is also recovered to near pre pandemic levels and is projected to reach 129 <unk> in 2022, a significant increase from 2019.

Indeed, all the signs point towards a positive outlook for our sector.

Taking a closer look around global market environment, starting in the U S. Gulf of Mexico, We continue to see high utilization of active floaters with the current active fleet essentially at full utilization.

Some of this contracted activity is shorter term, but we expect that if the trend continues the regional fleet will be fully utilized by year end 2022.

In the near term with the majority of active floaters booked we have recently encountered several time sensitive pop up requirements for operators unable to complete their work due to a shortage of cable and available capable and available rigs.

While we have yet to see a large volume of long term requirements and region. We firmly believe that these are on the horizon.

Third party intelligence organizations also see tightening utilization and increasing demand with one organization recently predicting a 66% increase in demand growth by 2023.

In recent months multiple ioc's at specified the Gulf is a key region for their businesses and critical to meeting their ESG goals through lower carbon intensity metrics and more attractive economics that help fund their ESG projects.

Specifically, one IOC noted the carbon intensity in the Gulf of Mexico at approximately seven kilograms of Cotwo barrel as compared to a global average in the high <unk> or low <unk>.

While another IOC indicated breakeven prices for its Gulf assets to be as low as $30 per barrel.

The combination of these two metrics make the Gulf of Mexico, a logical choice for future investment by our customers in exploration and development.

Staying in the U S Gulf of Mexico, We look forward to the deliveries of our two eighth generation Newbuild Drillships the deepwater Atlas in the deepwater Titan both expected to commence their projects with beacon offshore energy and Chevron respectively.

The outlook for these rigs and the 20 K market remains very positive.

In addition to the potential for follow on work with Beacon. Following the initial firm term on the Atlas. The 20 K landscape extends to prospective opportunities with shell, Ecuador, BP and incremental 20, K prospect with Chevron as well.

We're encouraged that the commencement of the first 20 K projects will serve as a catalyst to greenlight future prospects are significant cost barriers have been eliminated with the introduction of the technology required to safely drill and complete these high pressure wells.

Looking to Brazil, we've seen 10 rig years awarded by Petrobras in 2021 for commencement in the next 18 months and we anticipate this trend will continue with.

With an ambitious national goal to become the fifth largest exporter in the world, Brazil needs to double production by 2030.

Accordingly demand growth or offshore rigs is projected to remain strong.

Approvals of 16, Fid's are anticipated between 2021, and 2022 and known requirement support. The addition of one to two incremental rigs per year through the end of the decade.

While Petrobras continues to dominate near term commencement multiple ioc's also have requirements over the next several years in fact, one IOC has an ongoing tender with an anticipated total duration nearly two years expected to commence in late 2022.

We believe we are well positioned to capitalize on these opportunities given our strong long term presence and record performance in the region as evidenced by the fact that we recently advanced to the number two overall position and Petrobras is performance based on <unk> rankings.

True Testament to the teamwork across our three rigs operating in Brazil.

Moving over to Norway, we expect a relative balance in the market through 2022, however, based on customer conversations and third party reports projected demand in 2023 could search to 25 floating assets, which would outstrip the current marketable supply.

As we discussed on prior calls the favorable tax incentives passed in 2020 have helped foster an attractive environment for our customers to progress their operations and are available to projects sanctioned by December 2022.

It follows that we will see an uptick in requirements. During this time period.

Moreover, similar to the U S. Gulf of Mexico, Norway has also been cited by our customers is having relatively low carbon intensity reservoirs, therefore make it a more attractive area of investment in their respective portfolios.

Recently contracted day rates continue to hover around $300000 per day before performance bonuses and are projected to climb as we begin to approach the rebalancing of the market.

As much of the Norwegian fleet is booked well into 2022, we're growing increasingly confident that projections, we will continue to track as expected.

Nearby in the U K the outlook remains positive and we are actively engaged in a number of discussions for opportunities commencing in 2022, both through tenders and through direct negotiations.

A dozen programs are expected to commence in the region over the next 18 months. If this happens the available active fleet in the U K is insufficient to meet the expected demand.

And it's likely the market will remain under supplied as the cost of reactivating cold stacked rigs is still prohibited in the current price environment.

Consequently, we may see one or more rigs potentially rigs within the Transocean fleet depart the Norwegian continental shelf for work in the U K.

In West Africa, we're seeing a number of opportunities emerge for both short and long term work from various Isps.

Previous previous prohibited fiscal policy in certain African countries has improved and there is a large push for government investment.

Near the beginning of the pandemic several locations such as Angola experienced significant challenges from the effects of Covid and.

In Q2 2020, the offshore rig count in the country went to zero as contracts were either suspended or terminated.

Looking forward to 2022, we anticipate the Angolan rig count to be north of seven rigs, while Ghana, and Nigeria have similar outlooks.

Ongoing tenders, including the long term Exxon and hotel Energy's prospects in Angola are set to add over four rig years of firm work commencing in 2022.

More broadly regional utilization has doubled from this time last year and is projected to increase again by year end.

Indeed, the region is expected to experience some of the highest growth globally over the next three years and we believe we are well placed to benefit from incremental demand given our long standing presence in the region.

In the Asia Pacific Region, which includes Australia, we see numerous short and long term tenders for work set to commence over the next 18 months.

The steady flow of opportunities in the region is encouraging and we are actively responding to several inquiries.

To summarize to summarize we believe that the industry recovery is solidly underway. We are encouraged by the sustained improvement in the macro environment as it affects our industry specifically offshore drilling.

Our view is supported by ongoing conversations with our customers and backed by third party market outlooks.

Many of our competitors have emerged from restructuring in the past year with another anticipated to emerge from its second filing around the end of the year.

Additionally, the first major transaction between two of these parties noble in Pacific drilling closed earlier this year driving much needed consolidation in our space.

We believe that further consolidation is required and we also believe that these actions will assist in encouraging disciplined bidding behavior that helps drive the day rates needed to support our industry and its investors.

This includes incremental retirement or cold stacked assets contracting practices that support value creation and financial justification to reactivate idle rigs.

Recent behavior suggest the obligation to return value to shareholders as a growing importance across our peer group and we're encouraged by the developing trend.

Transocean has remained committed to all its stakeholders throughout this challenging cycle, including from a financial perspective.

On numerous occasions, we have seized opportunities to reduce our debt and extend our liquidity runway.

Since 2016, we have completed $9 8 billion of liability management transactions, including the repurchase of $1 7 billion of debt.

We will continue to look for and take advantage of opportunistic situations to further improve our capital structure as they arise.

In conclusion transition has taken deliberate action throughout the downturn to position ourselves as the industry leader in offshore drilling.

We have assembled the highest specification floating fleet in the industry, while simultaneously preserving shareholder value.

Our 27 ultra deepwater floaters soon to be 29, and 10 harsh environment floaters comprise the most technically capable fleet in the industry positioning us well to capitalize as the market improves.

Our industry, leading high quality seven 1 billion backlog provides us with visibility to future cash flows, enabling us to continue to invest in the training of our employees the proper maintenance of our assets and new and differentiating technologies and initiatives that will enable us to deliver even safer more reliable and more efficient services to our customers while simultaneously.

Helping us to deliver our 2030 emissions goals.

Needless to say we are very encouraged by what we are observing in the market and will continue to prioritize delivering the results required to drive value for the company and shareholders Mark.

Thank you Jeremy and good day to all.

During today's call I will briefly recap our third quarter results and provide guidance for the fourth quarter and conclude with preliminary expectations for 2022 including our latest liquidity forecast.

As is our practice group required more specific 2022 guidance when we think about 2021 year end call in February of next year.

As disclosed in our press release for the third quarter of 2021, we reported a net loss attributable to controlling interest of $130 million.

Or <unk> 20 per diluted share.

Highlights for the third quarter include adjusted EBITDA of $245 million, reflecting robust fleet wide revenue efficiency.

This contributed to another quarter of healthy 36% EBITDAR margin.

Fleet wide revenue efficiency exceeded 98% again this quarter, reflecting continued operational excellence and the conversion of drilling contract bonus opportunities into revenues.

And we generated approximately $141 million in operating cash flow.

Additionally, we raised approximately $75 million during the third quarter and another $17 million in early October.

<unk> sale of our equity using our ATM program as reflected in our Form 10-Q. This brings our total equity proceeds under the program in 2021 to approximately $158 million evidencing, our continuous efforts to improve liquidity.

Looking closer at our results as Jeremy mentioned during the third quarter, we delivered adjusted contract drilling revenues of $683 million in average day rate of $367000, reflecting strong conversion of contractual backlog mentioned above.

Operating and maintenance expense in the third quarter was $398 million and these favorable.

Two our guidance, resulting from mobile overtime costs due to optimizing our use of labor pools, and a decrease in <unk> related personnel expenses.

We also had lower project costs as the deepwater mykonos and Transocean enabler projects were completed ahead of schedule.

We also had to postpone some in service maintenance expenses into the fourth quarter due to the timing of activities, we performed on the rigs.

We ended the third quarter with total liquidity of approximately $2 $7 billion.

Including unrestricted cash and cash equivalents of approximately $900 million.

Approximately $365 million of restricted cash for debt service and $1 3 billion from our Undrawn revolving credit facility.

I will now provide an update on our expectations for the fourth quarter.

We currently expect to generate adjusted contract drilling revenue of approximately $670 million.

Based upon an average fleet wide revenue efficiency of 96, 5%.

The slight quarter over quarter decrease in revenue attributable to a lower day rate on the deepwater Skyros, which is starting a new option and no activity on the Transocean Barents.

Lloyd.

We expect O&M expense to be approximately $403 million the sequential.

The increase is attributable to the timing of anticipated maintenance spend across the fleet and the <unk> twos returned to operation in the quarter.

We expect G&A expense for the fourth quarter to be approximately $46 million slightly above our third quarter.

Due to incremental consulting fees and it expenditures.

Interest expense for the fourth quarter is forecast to be approximately $104 million Chris.

This includes capitalized interest of approximately $15 million.

Capital expenditures for the fourth quarter, including capitalized interest.

Our forecast to be approximately $96 million. This includes approximately $78 million for newbuild drillships under construction and $18 million.

Of maintenance Capex.

Cash taxes are expected to be approximately $10 million for the fourth quarter.

Now I'd like to provide a brief.

A review of our financial expectations for 2022.

We currently forecast adjusted contract drilling revenues to be between $2, six and $2 8 billion.

Furthermore, we believe our full year 2022 operations and maintenance expense will be between one six and $1 $8 billion.

Finally, we expect G&A costs to be between one point.

<unk> $175 million and $185 million.

Our total liquidity as of December 31, 2022 is forecasted to be between $1 8 billion and $2 billion, including restricted cash for debt service of approximately $300 million and the potential securitization of a deepwater toxin.

This liquidity forecast includes an estimated remaining 2021 capex of $96 million in 2022 cap expectation of $1 3 billion.

As always our guidance excludes any speculative <unk>.

<unk> rig reactivation were upgrades.

In conclusion as Jeremy mentioned, we are absorbing incremental improvement in demand for high specification ultra deepwater and harsh environment floaters. We believe this will continue supported by the strength in oil prices.

And while we are encouraged by the progression of utilization and day rates, we will remain highly disciplined not criteria for experiences we will assess <unk> assets on a case by case basis and.

And we will not reactivate a rig without a contract that provides an adequate return.

We will also remain diligently managing costs associated with preparing a warm stacked rig for its contract.

As we have demonstrated we will continue to focus on enhancing our liquidity and proactively managing our balance sheet opportunistically, taking advantage of the capital markets to improve liquidity and reduce our debt.

Accordingly, we will work closely to examine our capital expenditure requirements and avenues to reduce costs, while maintaining a high level of operational integrity and a focus on safety.

This concludes my prepared comments I'll now turn it back to Alison.

Thanks, Mark Mary Ann we're now ready to take questions. As a reminder to participants please limit yourself to one initial question and one follow up question.

Thank you if you would like to ask a question. Please press star one on your telephone keypad.

Ladies and should the mute function on your phone is switched off today your signal to reach our equipment. If you find that your question has been answered you may remove yourself from the queue by pressing star two again. Please press star one to ask a question we will pause for just a moment hello, everyone to signal for questions.

We will take the first question is from Greg Lewis from BTG. Please go ahead.

Yes, Thank you and good morning, everybody.

Jeremy just kind of.

Trying to parse up very some of your prepared comments it seems like.

You laid out the details of the market is definitely getting going in the right direction.

As we as you think about 2022.

Yes.

I'm trying to kind of understand do we kind of view that more as a little bit more of another transition year or it almost sounds like we're going to start to see incremental day rate growth and pricing get going here maybe.

As rigs start to get fixed in the back half of 'twenty. Two is that kind of the right way to think about it and just.

Thank you Beth.

Hi.

Yes.

Do you want to finish up there sorry, I thought you were done with the question.

Yes, no I was going to say and then just in thinking about that tying that into Mark's comments about not reactivating a rig without without some some term work.

There have been we have started to see some multiyear contracts being fixed.

Maybe the rates are those leading edge spot rates, you're referring to but nevertheless, some attractive EBITDA being generated.

Is that kind of is that how we should be thinking about how 2022 unfolds where.

We're going to have some opportunities to fix a multiyear rigs on contracts.

Yes, I think that is the right way to think about it and I'll turn it over to Roddie here in just a second but I will say I think the roadmap that you've laid out feels about right contracting activity to continue to pick up as we exit this year and enter next for work that will commence kind of in the back half of 2022, and then in 2023 and as long as is.

We all recognize the utilization for high spec assets in these various markets.

We'll then go up I think we'll start to see longer terms that were starting to have those conversations with customers now.

Just a little anecdote before I hand, it over to Roddie, it's been interesting that many of our customers have approached us with direct negotiations.

As opposed to putting things up for tender and they've also approached us to revisit our business model and look at something that's more of a partnering approach that can survive upturns and downturns and so I think it's a good sign that everybody sees the market recovering in the space and that the availability of really high spec assets that are currently marketable.

Is is limited and so with that I'll hand to hand, it over to Brian for some more comments.

Yes, Greg.

I think I would attack this kind of on a regional basis. So.

Is how you should think about 'twenty two so it depends on where you are you will see this as you say this kind of transition year that we start to plug a few gaps on the white space lines and get.

Get a closer and closer to that 100% utilization of the marketed assets.

Certainly.

Places like.

Norway harsh environment.

You have a few gaps in 'twenty two.

Exiting 'twenty, two and going into 2000, and he starts to look a bit better 2000, and the summer is really really strong.

24 and beyond.

As many high spec assets as they've as they've ever had and projected utilization. So I think you will see this kind of transition where term starts to.

The increase we've seen that in the numbers so far that this quarter is yet another uptake not only in the number of awards, but the duration of the awards the number of programs available and the number of rig years.

Out to tender at the moment, so all of those metrics are pointing in the right direction and it.

And as Jeremy had mentioned in his comments.

We're seeing that translate directly into increased day rates, so, especially in the U S Gulf of Mexico, which seems to be the hottest segment at the moment.

We've seen those rates push up to that.

300, Mark.

If at one customer told me the other day that it's going to be a case of musical chairs and somebody is going to find themselves of that rig. So I think when you view that kind of sentiment then there's certainly a lot of optimism about the.

The value of the of the rigs in terms of getting what you need and I think the other really big one just now we'd have to describe as in Brazil.

As we mentioned is about 27 years of work have already been awarded this year for the floater market in Brazil.

And as we look at the project approvals that are to be sanctioned in 'twenty two 'twenty three 'twenty four those combined three years will.

Sanction somewhere in the region of 28 to 30 projects. So that the follow on effect on the rig count is going to be substantial so I think thats. It just increased utilization and then.

Not locking in for long term at the lower rates, but really trying to split that strategy between a bit of backlog in.

<unk> ability to add some really solid EBITDA numbers and just to cut it.

Touch on the reactivation piece of our customers know that theyre going to have to pay for that either.

Either through large onetime mobilization fees and or through higher day rates and longer terms that would justify the significant investment is going to take for all drilling contractors.

Reactivate these these assets a bit soft for quite some time.

Okay, Great and then just I wanted to follow up a little bit on Brazil, I mean, clearly Petrobras has been active but as we kind of try to parcel out multiple.

Projects that are going on in Brazil.

Without getting into specifics is there any kind of way to think about how much of that is Petrobras and how much of that is also isc's because.

And correct me, if I'm wrong, but I kind of get the sense that it's going to be the IOC is driving price in Brazil, maybe not Petrobras <unk>.

Tends to always be able to get a desk discounted rate.

Yes, so really interesting so Petrobras has obviously seen what's coming.

They.

They moved very quickly.

<unk>.

Despite.

The relative bureaucracy.

And Petrobras for awarding contracts they've been prolific in the contracts that were awarded this year. They have taken the lion's share for sure and whats really interesting in the chart that we show in terms of those project approvals.

The past.

Couple of years has all been Petrobras, but moving forward, it's kind of an even split between the Ioc's and Petrobras in fact next year I think.

Eight or nine of the expected project approvals for sanctioning our non Petrobras So Petrobras still very active and as we've described before there are kind of turning over the rig fleet.

Renewing them as they come available and that incremental demand is really being pushed by the IOC switches over and above for Petrobras is doing so yes.

And somebody is kind of like a 50 50 split going forwards on iOS versus pet.

Petrobras Awards.

Okay perfect Hey, Thank you all for the time.

As a reminder to ask a question. Please press star one.

We'll now take the next question from Connor Lynagh from Morgan Stanley.

Yes. Thanks.

Wanted to ask about the.

The topic of the day, which is inflation just curious what you guys are seeing in terms of labor availability.

Needs to raise your wages either on the rig or more shore based costs.

Speaking how are we thinking about that.

Hi.

<unk>.

A timely question and also a good question I mean, the market's improving so that said that's good yes, we are seeing a bit of wage inflation, we are bringing two new builds onto the market.

And next year and so.

Finding crews after seven years of a pretty desperate market, where we've lost a lot of people in the industry at two other other industries other careers.

Finding the right talent and getting them back in.

And getting trained to the standard that transitions are accustomed to is is one of our chief concerns. There is no. There is no doubt about it I would like to ask keelan since he's sitting here and he is living this each and everyday to talk a little bit about what we're seeing out there.

Yeah, Thanks, Jeremy Conor I would say similar to the last answer from Audi and the market is regional base at the moment.

The cost structure, the way to the pressure on labor.

We are seeing in the Gulf of Mexico in certain positions offshore.

There are other opportunities for those people to work outside of our sector, even and so with the increase in reactivation.

And new builds coming in and the general increase in activity in the Gulf of Mexico, We're definitely seeing some wage pressure. There I think also on the supply chain side for running our rigs.

We're starting to see some some cost inflation from our suppliers in that area as well.

Got it and let me from from the South of it. It sounds like you think you have the ability to pass on most of this cost increase yes.

Yes, yes, we would do that car.

Okay got it.

One last one sorry.

Is it just going to say several of our contracts have adjustments in them.

<unk>, Canada.

Change in the environment to do with them labor, but also the cost of equipment.

General oilfield service costs. So we have several of the major contracts that we have particularly the longer tier ones have those adjustments built into them. So it's a means for us to protect our EBITDA margin.

Got it got it.

Sort of an unrelated follow up here, just thinking through you've seen more cold stacked rig activations.

<unk> been also interested to see some of the bareboat charter arrangements.

Some of your competitors have been executing with yards I mean, how do you think about that altering the balance and the market does that does it bareboat charter rigs compete favorably with a cold stacked rig.

How do you think about that influencing market dynamics here.

Yes, I think Kevin so what we what we see now is with.

A lot of the restructured drillers not having a tremendous amount of cash on hand, the true cost of reactivating rigs has to be taken into account. So certainly in terms of what it cost to bring the rigs out.

It's not cheap.

Substantial equipment costs to do with overhauls, but theres also the opex associated with rig crews and ramping up.

Going through your various procedures to bring the rig to market and mobilize. It. So look I mean, we've seen them the operators paying for a lot of those things in terms of.

Being competitive.

So no reason why a.

Cold stacked asset can't perform well, but it's been the industry's experience that the hard assets performed far better.

The cold stacked assets can eventually get up to that level of performance, but there is always some teething issues, bringing them out. So there is a very strong preference at the moment for securing rigs that are hot and active OA.

We expect that that's going to continue but certainly as we get to that sold out realization on the active fleet theres going to be no other choice, but to bring out more cold stacked assets, but of course, we believe the economics of the jobs are going to support that decision. So we cautiously look forward too.

Getting to that point of being 100% utilization for the hot rigs.

Alright, Thanks, I'll turn it back.

We will now take the next question from Taylor Zurcher from Tudor Pickering Holt.

Hey, Thanks, and good morning, guys, Jeremy I just wanted to.

Follow up on one of your earlier responses in Q&A you talked about.

More customer direct negotiations, but also more customers looking to revisit our partnership approach with you.

I'm just I'm curious what you mean by a partnership approach to me.

Maybe some longer term contracts, which help to smooth out the cycles for you at least at the rig level, but just curious what you are seeing and hearing when it comes to different business models that your customers are open to.

Yes, I think it varies by customer I think the primary message.

See value in keeping up the annuity.

It definitely improves operations from a safety reliability and efficiency standpoint, and so I think some of them are recognizing that and so instead of going out to tender every drilling contractor and service provider on the planet.

It's narrowed down to a couple that are that are qualified and work closely with them to more safely reliably and efficiently deliver wells I think there is also an element of it around let's make sure day rates don't get too high.

And let's come up with a model, where we're both drilling provider service provider and an operator can all benefit and the ups and downs of the cycle and continue to thrive.

But it's interesting we didn't really have these conversations on the way down.

Yes, yes, I think I'd add Steve.

It really is about efficiency right. So clearly if we are able to deliver superior service then.

With the commodity prices, where they are.

Many of the big guys having.

Very solid returns at the moment.

Increasing dividends kind of stands to reason that.

There is enough in the system for all of us to do well so.

It's around focusing on making sure we get those win wins.

I've said that kind of tongue in cheek, but it is encouraging to see a different approach where it is more of a partnering relationship where they recognize that continuity is important.

So that's encouraging for us and it's also a sign we think that they see the market improving and want to make sure that they're well positioned for it in terms of not only having the highest spec assets, but working with the best providers.

Yeah understood good to hear and my follow ups on the U K. This is the second straight quarter, you've talked pretty positively about the outlook in the U K 2022, and beyond and potentially pulling some rigs from Norway to.

To satisfy that demand.

When I look at your fleet I mean, most of your rigs in Norway are pretty well contracted particularly the softness stanga rigs in.

Just curious the way you see it right now which rigs in your fleet are most likely to service that demand and you do have a couple that have some holes in 2022, which probably would be well suited for that work, but when it comes to shift in rigs from from Nora into the UK.

I was hoping you could just provide a little bit more color on what your exit we should be thinking about there.

Yes, I'll take that one so when we've got if you look at the UK. The struggle in the UK is actually equipment. So long leads on wellheads and casings and various other bits and pieces.

Kind of stalling them at the moment.

The demand or the optimism about going ahead with projects is certainly there. It's just that's why it's not here right now they basically can't pull the trigger on at the moment, because we don't have.

The site to the equipment and they need to complete the wells so.

That's kind of what's driving this uptake.

Uh huh.

It happens to be coincidental with the uptick this predicted in Norway and a lot of the uptick in Norway is off the back of the tax incentive schemes that were put in place last year and are now.

Reaching the point of fruition where those.

Include putting rigs to work in developing these these assets so from.

From that point of view, we expect there's going to be pretty high demand for the rigs and in Norway, especially the higher specification, which is that which is there.

The choice certainly for <unk> and some of the other bigger operators, but.

In the meantime, as you point out there's a few gaps here and there. So I think you could you could see us look at some of the the rigs that have gaps as potential candidates for going to the UK. We did this in the past with the likes of the Spitsbergen and a couple of other older assets.

But it will be interesting to see which segment moves the quickest.

Because they are going to be the ones that pick up the best rigs.

Got it thanks for the answers.

As a reminder to ask a question. Please press star one.

As there are no further questions I would like to hand, the call back over to Allison for closing remarks.

Thank you Mary Anne and thank you everyone for your participation on today's call. If you have further questions. Please feel free to contact me.

Look forward to talking with you again, when we report our fourth quarter 2021 results have a good day.

Thank you that will conclude today's conference call. Thank you for your participation ladies and gentlemen, you may now disconnect.

[music].

Thank you Mary Ann Good morning, and welcome to Transocean third quarter 2021 earnings conference call.

Copy of our press release, covering financial results, along with supporting statements and schedules, including reconciliations and disclosures regarding non-GAAP financial measures are posted on our website at deepwater dot com.

Joining me on this morning's call are Jeremy Thigpen, President and Chief Executive Officer, Mark Mey, Executive Vice President and Chief Financial Officer, <unk> Executive Vice President and Chief Operations Officer, and Roddie Mackenzie Senior Vice President of marketing innovation and industry relations. During the course of this call Transocean.

Management may make certain forward looking statements regarding various matters related to our business and company that are not historical facts.

Such statements are based upon current expectations and certain assumptions and therefore are subject to certain risks and uncertainties.

Also please note that the company undertakes no duty to update or revise forward looking statements.

Thank you very much I'll now turn the call over to Jeremy.

Thank you Allison and welcome to our employees customers investors and analysts participating in today's call.

Additionally, our quarterly free cash flow with $104 million represents the sixth straight quarter of positive cash generation.

During the quarter, we matched the company best revenue efficiency of 98% for the second consecutive quarter and we've maintained a revenue efficiency of 97% or higher for six sequential quarters due to our consistently safe reliable and efficient operations across our operating fleet. Indeed.

The Atlas, which is nearing completion at the <unk> shipyard will be one of two eight generation 20000, Psi ultra deepwater drillships and the Transocean fleet.

Efficient completion setup with dedicated well test and off loading areas and a hybrid power drill floor that flattens peak loads on the engines and reduces fuel consumption.

The additional term will commence in direct continuation of the current contract and in total the three will contribute over $100 million of backlog.

Also in the Gulf, We signed a one well extension with BHP on the deepwater invictus the.

The extension is expected indirect continuation of the prior well and carries a day rate of $295000 per day.

The rig is now expected to remain on contract through June of 2022.

Heading down to Trinidad following a successful fine in the Calypso appraisal well bounded III drilled by the DD three BHP exercise the <unk> option at a day rate of $220000 per day to complete the appraisal.

She is now expected to remain on contract through November.

We remain encouraged about the future prospects for this ultra deepwater semi submersibles and are actively bidding the rig for multiple opportunities in various regions across the globe. Following the conclusion of operations in Trinidad.

Jumping over to the Asia Pacific region, the deepwater Nautilus had a one well option exercise by Posco.

The option will keep the rig active through December before she begins mobilization to the commencement of our next campaign in February 2022.

And finally, the kg too has begun contract preparations for her one well campaign in Brunei with shell.

Oil prices remain highly supportive as Brent crude has remained in the low to mid $80 per barrel range since the beginning of last month.

Moving forward. We expect this trend will continue largely as a result of significant and prolonged underinvestment and traditional sources of energy.

Moreover, OPEC plus recently announced its intent to maintain its gradual production plan and the U S Department of energy has decided to leave the strategic Petroleum reserve untapped.

Both of these decisions support a continued supply deficit outlook heading into the end of the year and possibly beyond.

At the same time, we continue to see a tightening of the offshore market unfolding across multiple regions.

Utilization of the global floating rig fleet is nearing 80% to 85%, which has historically been the inflection point at which material increases in day rates are triggered.

Notably active utilization in the Golden Triangle, which as you know consists of the U S. Gulf of Mexico, South America and Africa currently sits in the 90% range.

In a few moments I'll provide more specifics surrounding the outlooks for each of these regions.

Globally offshore rig count contract awards have been on the rise for four consecutive quarters and are beginning to exceed levels seen before the pandemic.

Average tinder duration increased in the third quarter with a particular uptick in the length of the option periods.

This reinforces our belief that our customers see the signs of a rising market and are recognizing the importance of securing the highest specification asset for longer periods of time.

Project sanctioning is also recovered to near pre pandemic levels and is projected to reach $129 <unk> in 2022, a significant increase from 2019.

Indeed, all the signs point towards a positive outlook for our sector.

Some of this contracted activity is shorter term, but we expect that if the trend continues the regional fleet will be fully utilized by year end 2022.

While we have yet to see a large volume of long term requirements and region. We firmly believe that these are on the horizon.

Third party intelligence organizations also see tightening utilization and increasing demand with one organization recently predicting a 66% increase in demand growth by 2023.

In recent months multiple ioc's have specified the Gulf is a key region for their businesses and critical to meeting their ESG goals through lower carbon intensity metrics and more attractive economics that help fund their ESG projects.

Specifically, one IOC noted the carbon intensity in the Gulf of Mexico at approximately seven kilograms of Cotwo barrel as compared to a global average in the high <unk> or low <unk>.

While another IOC indicated breakeven prices for its Gulf assets to be as low as $30 per barrel.

The combination of these two metrics make the Gulf of Mexico, a logical choice for future investment by our customers in exploration and development.

The outlook for these rigs and the 20 K market remains very positive.

We're encouraged that the commencement of the first 20 K projects will serve as a catalyst to greenlight future prospects at significant cost barriers have been eliminated with the introduction of the technology required to safely drill and complete these high pressure wells.

Looking to Brazil, we've seen 10 rig years awarded by Petrobras in 2021 for commencement in the next 18 months and we anticipate this trend will continue with.

With an ambitious national goal to become the fifth largest exporter in the world, Brazil needs to double production by 2030.

Accordingly demand growth or offshore rigs is projected to remain strong.

Approvals of 16, Fid's are anticipated between 2021, and 2022 and known requirement support. The addition of one to two incremental rigs per year through the end of the decade.

We believe we are well positioned to capitalize on these opportunities given our strong long term presence and record of performance in the region as evidenced by the fact that we recently advanced to the number two overall position and Petrobras is performance based on <unk> list rankings.

True Testament to the teamwork across our three rigs operating in Brazil.

It follows that we will see an uptick in requirements. During this time period.

Recently contracted day rates continue to hover around $300000 per day before performance bonuses and are projected to climb as we begin to approach the rebalancing of the market.

As much of the Norwegian fleet is booked well into 2022, we're growing increasingly confident that projections, we will continue to track as expected.

Nearby in the UK the outlook remains positive and we are actively engaged in a number of discussions for opportunities commencing in 2022, both through tenders and through direct negotiations.

A dozen programs are expected to commence in the region over the next 18 months. If this happens the available active fleet in the U K is insufficient to meet the expected demand and it's likely the market will remain under supplied as the cost of reactivating cold stacked rigs is still prohibited in the current price environment.

Consequently, we may see one or more rigs potentially rigs within the Transocean fleet depart the Norwegian continental shelf for work in the U K.

In West Africa, we are seeing a number of opportunities emerge for both short and long term work from various Isps.

Previous previous prohibited fiscal policy in certain African countries has improved and there is a large push for government investment.

Near the beginning of the pandemic several locations such as Angola experienced significant challenges from the effects of Covid.