Transocean Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 2, 2023

There are 12 speakers on the call.

Operator

Good day, everyone, and welcome to Q1 2023 Transocean's Earnings Call. At this time, all participants are in a listen only mode. Later, you will have an opportunity to ask questions during the question and answer session. Please note this call is being recorded. It is now my pleasure to turn today's program over to Allison Johnson, Director of Investor Relations.

Operator

Please go ahead.

Speaker 1

Thank you, Gretchen. Good morning, and welcome to Transocean's Q1 2023 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.com. Joining me on this morning's call are Jeremy Thigpen, Chief Executive Officer Keelan Adamson, President and Chief Operating Officer Mark May, Executive Vice President and Chief Financial Officer and Roddie McKenzie, Executive Vice President During the course of this call, Transocean Management may make certain forward looking statements regarding various matters related to our business Many factors could cause actual results to differ materially. Please refer to our SEC filings for our forward looking statements and for more information regarding certain risks and uncertainties that could impact our future results.

Speaker 1

Also, please note that the company undertakes no duty to update or revise forward looking statements. Following Jeremy and Mark's 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 you very much. I'll now turn the call over to Jeremy.

Speaker 2

Thank you, Allison, and welcome to our employees, Customers, investors and analysts participating on today's call. As reported in yesterday's earnings release, for the Q1, Transocean delivered adjusted EBITDA of $217,000,000 On $667,000,000 in adjusted contract drilling revenues, resulting in an adjusted EBITDA margin of approximately 33%. Our overall performance was supported by superb revenue efficiency of nearly 98% and is representative of our commitment to operational excellence. During the quarter, we booked nearly $900,000,000 of contract backlog, disrupting the Q1 Lowell observed in years past. In fact, this is more than double the backlog added in the Q1 of 2022 and more than 7 times what we added in the Q1 of 2021.

Speaker 2

We believe this is another clear indication of the sustainability of this constructive market environment, particularly in light of the record backlog we booked last year. Turning to the individual fixtures. In Lebanon, the Transocean Barrons was awarded a one well contract with Total Energies at a rate of $365,000 per day. The approximately 65 day contract is expected to commence in direct continuation of the rig's current program and provide for up 3 option wells at rates between $375,000 per day $390,000 per day. As discussed on our Q4 2022 earnings call, in January, the KG2 was awarded a 9 10 day contract in Brazil Approximately $439,000 per day including integrated services.

Speaker 2

The contract is expected to start in the Q3 of this year. In Australia, the Transocean Endurance was awarded a multi well contract for plug in abandonment work with an independent operator at a rate of $380,000 per day. The contract also provides for up to 5 option periods, the first of which has already been exercised at the same day rate. The remaining four options are at a rate of $390,000 per day. The contract is expected to commence in January of 2024 and including the exercise option, firm work now extends through February 2025.

Speaker 2

If all options are exercised, the rig may remain in Australia through at least the Q4 of 2025. On the Norwegian Continental Shelf, the Transocean Enabler was awarded a 19 well contract with Equinor for work on the Johan Castberg field in the Barents Sea At $377,000 per day as adjusted for currency exchange rates. The contract, which is expected to commence in April of 2024 Also provides for up to 8 option wells at $420,000 per day. Also in Norway, the Transocean Courage was awarded a 9 well contract with Equinor a rate of $350,000 per day as adjusted for currency exchange rates. The contract is expected to start in direct continuation of the rig's current program.

Speaker 2

And finally, in Norway, Wintershall DEA exercised 4 one well options on the Transocean Norge at rates of $338,000 per day, $358,000 per day, $358,000 per day and $408,000 per day, respectively, again, as adjusted for currency exchange rates. Following our latest fleet status report, Wetter Tail DEA exercised a 5th option well at $358,000 per day, keeping the rig working through the Q3 of 2024. Also subsequent to our latest FleetStats report, the Transocean Endurance was awarded a 2 well contract in Norway at a rate of $385,000 per day. The contract is expected to commence in July 2023. These harsh environment fixtures and the KG2 award complement The prolific ultra deepwater fixtures we announced in the second half of twenty twenty two and keep us on track to deliver yet another strong year of backlog additions.

Speaker 2

Moreover, these harsh environment fixtures highlight the predicted tightness in the supply of higher specification harsh environment semisubmersibles that we've anticipated for some time now. Of note, the Endurance is the 6th semisubmersible to depart the Norwegian continental shelf in the past 18 months, joining most recently the Transocean Verint, which is now operating in the UK. With the departure of the Endurance, there are now just 13 active semisubmersibles remaining in Norway that have the certifications required to participate in petroleum operations. And we currently expect at least 2 more rigs to leave the region within the next 18 months. As we've discussed on previous calls, demand for rigs Capable of drilling in harsh environments is no longer solely dependent upon geographic regions that have historically utilized harsh environment rigs.

Speaker 2

Rather demand is increasingly coming from other areas, Including Australia, the Mediterranean and Namibia. As we see multiple upcoming long term developments on the horizon in Norway, The departure of these assets from the region is meaningful. If demand continues to materialize as we expect, by the end of 2024, we anticipate that future projects in Norway We'll require several of these assets to return and to lure them back significant mobilization fees and higher day rates may be required. Perhaps the most interesting new market for our harsh high specification harsh environment semis is Australia. With numerous programs planned for overlapping operational windows, there appears to be strong competition among operators to secure the best and most capable rigs.

Speaker 2

As a result, we are observing an increased willingness from our customer base to pay higher mobilization and other contract preparation costs. And if current tenders proceed as expected, we could see 1 or 2 new contract awards in Australia by the end of the second quarter. Turning to the benign environment rig market. Over the last year, we've observed a marked increase in day rates for ultra deepwater drill ships, are now predominantly between $400,000 a day to $450,000 per day across the global fleet. We believe this demonstrates a more wide 6th and 7th gen drillship utilization remains at nearly 100%.

Speaker 2

We expect these utilization levels will be sustained as drillship demand is anticipated to rise throughout 2023 and we believe that as a result day rates will continue to trend upward especially for the higher specification ultra deboying. In fact, by the end of the year, we expect the leading edge rates to exceed $500,000 per day. Additionally, we've recently observed a change in the behavior of several of our customers due to their recognition of the increasing scarcity of high specification assets. The shift is occurring mostly behind the scenes through direct inquiry and negotiations as they seek to secure rigs for longer terms, in some cases, in excess of 3 years. We anticipate this trend will continue for certain customers as access to available desirable rigs becomes more difficult.

Speaker 2

Looking closer to each region, based on current activity and the open and plan Petrobras tenders, we believe Brazil will continue to be a large consumer of available rig supply. We anticipate Petrobras will secure 6 or 7 floaters under the Pool 2 and Buzios tenders, including up to 3 from outside the region. If these awards materialize as expected, access to active and warm stacked rigs for use in other regions will be further constrained, likely resulting in increasingly favorable contract terms for qualified floaters. This has already occurred in India following the award of the KG2 under the Petrobras pool tender in early January. We believe that the KG2's departure from the Far East further highlights the limited available local supply of assets To meet the requirements of upcoming drilling campaigns such as ONGC's 2 21 month opportunities in India.

Speaker 2

Consequently, we make the assets mobilized from other regions for this work. In West Africa, the Mediterranean floater demand is expected to trend upward over the next 18 months with multi year programs expected in Angola, Egypt and Cyprus. Additionally, incremental work is emerging in Namibia following recent discoveries by both Shell and TotalEnergies in the Orange Basin. Activity in the U. S.

Speaker 2

Gulf of Mexico has kept regional supply and demand largely in balance over the last several quarters. We're highly encouraged by the results of the lease sale concluded in late March In which the number of deepwater blocks receiving bids increased by 30% from the last lease sale held in 2021. We anticipate the region will continue to have strong activity for the foreseeable future. Year to date, 34 rig years have been awarded for the global floater fleet as compared to 22 rig years this time last year. The quantity of programs awarded with a duration of 1 or more years has also increased with 11 awarded year to date, up from 5 last year.

Speaker 2

The outlook remains strong for the foreseeable future as over 80 rig years of work are expected to be awarded in the next 18 months. In fact, industry analyst reports estimate the offshore sector We'll experience its highest growth in more than a decade with according to Rystad Energy more than $200,000,000,000 of new project investments during the next 2 years With offshore activity comprising nearly 70% of all sanctioned conventional hydrocarbons in 2023 2024. As demand continues to improve, we will ensure that Transocean is differentiated from our competitors by providing the highest value for our customers And developing and deploying innovative technologies that further enhance our already safe, reliable and efficient operations. Just last month, Utilizing a combination of various automation technologies, which we previously deployed within our fleet, the Transocean Encourage drilled an entire hole section For 21 consecutive hours in a fully automated mode. This achievement is an important milestone for Automation Technologies.

Speaker 2

We believe automation will further improve our operational performance, Improving the quality and consistency of the wells we drill for our customers, further enhancing the safety of our personnel, while also reducing emissions. As we continue to deploy automation technologies, we plan to aggregate and analyze the data to gain new insights into the performance of our equipment and processes to improve our overall operations. Congratulations to our team in Norway for the significant accomplishment. As we progress further into the sub cycle, we will We continue to deploy our portfolio of high specification ultra deepwater and harsh environment rigs to maximize value for our shareholders. Throughout the downturn, we practice a thoughtful approach We utilize different asset classes and we're patient So it's not to lock up our best assets on long term low day rate contracts.

Speaker 2

We continue to believe this is the correct approach and moving forward, we will continue to remain disciplined when contracting our fleet. With 12 total cold stacked assets, we have the most operational leverage within our peer group and significant upside potential in a rising market, particularly given the quality of our assets. There are only 13 remaining 6th and 7th generation cold stack drillships in the industry and 8 are in our fleet. 3 of these, the Athena, Apollo and Milos are 7th generation ultra deepwater drill ships that are well preserved in a relatively mild climate offshore Greece. We expect the economics of reactivations will be cost advantageous as compared to acquiring a stranded newbuild and preparing it for an initial contract.

Speaker 2

Recent stranded newbuild purchases suggest between $200,000,000 $250,000,000 to acquire the asset plus the cost to reactivate versus our current estimate of $75,000,000 to $125,000,000 to reactivate 1 of our existing cold stacked rigs. In summary, our outlook remains unambiguously optimistic, reinforced by increased market tightness in various regions around the world and the continued upward trajectory of day rates. Our industry leading backlog increased for the 4th consecutive quarter to currently about $8,600,000,000 Additionally, the average day rate on our working benign environment is beginning to reflect the high quality backlog we booked over the last 18 months and is projected to cross the $400,000 per day mark later this year. As more of our rigs transition to higher day rate contracts, we will begin to utilize cash generated from our fleet to fulfill our commitment to our broader deleveraging efforts. Our focus remains on delivering safe, reliable and efficient operations.

Speaker 2

With our strong year to date fleet uptime and revenue efficiency of nearly 98%, We continue to take positive steps toward ultimately strengthening our balance sheet and generating value for our shareholders. I'll now turn the call over to Mohan.

Speaker 3

Thank you, Jeremy, and good day to all. During today's call, I will briefly recap our Q1 results Then provide guidance for the Q2 as well as an update on our expectations for the full year 2023 and our liquidity forecast through the end of 2023. As reported in our press release, which includes additional detail on our results, for the Q1 of 2023, we reported a net loss attributable to interest of $465,000,000 $0.64 per diluted share. After certain adjustments as stated in yesterday's press release, We reported adjusted net loss of $275,000,000 During the quarter, we generated adjusted EBITDA of $217,000,000 Looking closer at our results, during the Q1, we delivered adjusted contract drilling revenues of $667,000,000 At an average day rate of $364,000 This is above our previous guidance, mainly due to strong bonus conversion on the Conqueror, Endurance And Spitsbergen higher than expected revenue recharge at earlier than forecasted commencement of operations for the DD3. Operating and maintenance expense for the Q1 was $409,000,000 This is below our guidance reflecting the delay of in service maintenance on our working fleet And other service maintenance on rigs that we are preparing for contracts commencing later in 2023, partially offset by increased related to the early commencement of operations for the GD3.

Speaker 3

Turning to the cash flow and balance sheet. Cash flow from operations was a negative $47,000,000 Resulting from lower collections from customers, reflective of reduced revenue due to certain risks completed in their contracts during the previous quarter, Disbursements incurred preparing several rigs for our next contracts and the timing of tax and interest payments. Our free cash flow of negative $128,000,000 in the Q1 reflects the contract preparations above and $81,000,000 of capital expenditures, Which are largely related to our 8th generation drillships, the Deepwater Atlas and Deepwater Titan. We ended the Q1 with total liquidity of approximately $1,700,000,000 including unrestricted cash and cash equivalents of approximately $747,000,000 Approximately $175,000,000 of restricted cash for debt service and $774,000,000 I will now provide an update on expectations for our Q2 and for full year financial performance. As always, our guidance would reflect only contract related rig reactivations and or upgrades.

Speaker 3

For the Q2 of 2023, we expect adjusted contract drilling revenue of approximately $735,000,000 based upon an average fleet Wide revenue efficiency of 96.5 percent. This quarter over quarter increase is primarily attributable to a full quarter utilization Of the Transocean Barrons and DD3, we started contracts in the prior quarter and the contract commencement of the Deepwater Titan and Transocean Norge During the Q2, partially offset by in between contract idle time with Transocean Endurance in Norway. For the full year 2023, I'm reiterating prior guidance of adjusted contract drilling revenue of between $2,900,000,000 $3,000,000,000 We expect Q2 O and M expense to be approximately $490,000,000 This quarter over quarter increase is primarily due to higher Utilization, increased out of service maintenance incurred on the KG2 and Deepwater Orion in preparation for their contracts with Petrobras And the timing of in service maintenance activities. Our expected full year 2023 operating and maintenance expense remains unchanged from our 4th quarter call at Approximately $1,900,000,000 We continue to see some upward pressure on salaries and wages and vendor pricing. Observed inflation appears to have moderated to around 6%, which is reflected in our guidance.

Speaker 3

As a reminder, The influence of inflation on our maintenance costs is largely tempered by our long term care agreements with our largest suppliers. We also have protection on the revenue side as our legacy long term contracts with our customers contain cost adjustment mechanisms. For ongoing and future contract negotiations, we will continue to insist on provisions to protect our margins against cost increases in day rate and terms as appropriate. We expect G and A expense for the Q2 to be approximately $49,000,000 and around $200,000,000 for the full year. Net interest for the 2nd quarter is forecasted to be approximately $118,000,000 including capitalized interest of approximately $12,000,000 And excluding any non cash fair value adjustment of the bifurcated exchange feature embedded in our exchangeable bonds issued in September of 2023.

Speaker 3

For the full year, we estimate net interest expense of approximately $479,000,000 including capitalized interest of approximately $31,000,000 And excluding the non cash loss of $133,000,000 mentioned above. Capital expenditures including capitalized interest for the 2nd quarter Our forecast will be approximately $100,000,000 which includes approximately $70,000,000 for newbuild CapEx and approximately $30,000,000 of Sustaining and contract preparation related CapEx. Cash taxes are expected to be $15,000,000 for the 2nd quarter $35,000,000 For the year, as expected, our expected liquidity in December 2023 is projected to be $1,200,000,000 $1,300,000,000 reflecting our revenue and cost guidance and including the $600,000,000 capacity of our revolving credit facility And restricted cash of $215,000,000 which is primarily reserved for debt service. This liquidity forecast includes 2023 CapEx expectations of $285,000,000 of which $167,000,000 related to our newbuilds $118,000,000 for sustaining and contract preparation CapEx. We continue to focus on deleveraging our balance sheet and reducing interest expense Simplifying our capital structure and maintaining financial flexibility.

Speaker 3

As I discussed in the Q4 earnings call, we have addressed Substantially all material maturities until 2025. Consistent with our deleveraging objectives, one of our large holders Of our exchangeable bonds, we recently agreed to convert its exchangeable bond to equity, reducing our debt by $213,000,000 We may look to address a portion of the remaining $618,000,000 of outstanding exchangeable bonds should other economic and prudent opportunities Given our current contracting activity and strong day rate environments, We expect to utilize available free cash flow to continue reducing debt and interest expense. Concurrently, we will look to continue to evaluate opportunistic Financing transactions to address medium term maturities and optimize the balance sheet and reduce the cost of debt. This concludes my prepared comments. I will now turn it over to Alison.

Speaker 1

Thanks, Mark. Gretchen, we're now ready to take questions.

Operator

We'll take our first question from James West from Evercore ISI.

Speaker 2

Hey, good morning,

Speaker 4

guys. Good morning, James.

Speaker 5

So, Jeremy, we're talking about day rates For non harsh environment in the $500,000 a day range by year end, Which I think is probably consistent with where you're negotiating contracts now. Would any of these rigs that would achieve that type of day rate Actually start this year or are we talking about rigs that are going to be coming out of cold stacked that given that we're in May now would probably take until next year to really kick off

Speaker 2

Thanks. I'll hand it over to Radek.

Speaker 4

Yes. No problem. Yes. So, I think that would be the case. Yes, you would See that come in next year.

Speaker 4

And there's been a lot of discussion about this magical $500,000,000 mark. But I wanted to give a couple of Statistics on that just real quickly. We don't know what our competitors bid except when they bid into public tenders. So We use the Petrobras tenders in Brazil as an example. In the pool number one tender that happened last year, There was only 2 rigs were bid above the 500 ks a day.

Speaker 4

And the pool 2 tender that just completed This week, it was 9. So that's like a marked change in that. Of course, you see Lots of folks across the board saying that the expectation is that it will be this year for the 500s and I've seen a couple of projections that say it will be mid-500s By 2025.

Speaker 5

Right. Okay. That's kind of our expectation as well. The I guess the follow-up for me is on consolidation in the space. We obviously have had a good amount During the restructuring phase that we saw, there are still some companies that we're aware of that are kind of up for grabs here and there's some assets up for grabs.

Speaker 5

How are you guys thinking about, I guess, 1, the need for consolidation and 2, Transocean's role in that consolidation?

Speaker 2

Yes. Thanks, James. Good question. We have seen a lot of consolidation in the space. We've dramatically improved industry structure for offshore drillers, far fewer players, far fewer assets Due to retirements, so it's much far more disciplined behavior as a result.

Speaker 2

So we're going in the right direction. I think there's still room for more consolidation, Especially now that most of our competitors have gone through Chapter 11 and have merged with clean balance sheets. I think and all of us have digested our own acquisitions over the course of the last couple of years. So I would expect to see some more consolidation through this year. We certainly look at every opportunity out there and we get pitched every opportunity that's out there.

Speaker 2

Mark smiling

Speaker 5

at me.

Speaker 2

And so we'll continue to look, but again, we're going to kind of follow the same Blueprint we followed so far. It's got to be ultra deepwater and harsh environment, high specification assets, so fleet matters. And we can't do anything to compromise the balance sheet. And We look through those that lens really at every strategic opportunity.

Speaker 5

Okay, got it. Thanks guys.

Speaker 6

Thanks, Dave.

Operator

Our next question comes from Thomas Johnson from Morgan Stanley.

Speaker 7

Hi. Congratulations on the strong quarter. First one would be helpful to kind of go back to the harsh environment outlook. You guys mentioned a handful of rigs have left the European space, which is clearly supportive of utilization there. You mentioned 500 ks per day leading edge by year end on the benign side, but maybe if you could kind of add some color around How people should think about the potential range for leading edge rates in the harsh environment outlook over the next 12 to 18 months?

Speaker 7

Thanks.

Speaker 4

Yes, I think I'll take that one. So, yes, as we think about another kind of 8 to 10 rigs potentially Leaving Norway, that pretty much leaves you a fleet of maybe 12 or 13 rigs. What we see And the expected demand in the 2024 into 2025 timeframe is about 15 to 18 rigs. So you're suggesting that there's probably A deficit of 4 to 6 rigs in that timeframe, that's that in my view is going to have a step change in day rates, right? I mean, we've seen that We're consistently now in the upper 300s.

Speaker 4

I would expect that the next fixtures are going to be solidly in the 4s And who knows where that may lead to, but certainly, we're at this kind of 13 AOC compliant florists in Norway just now that is Historically, the lowest number ever. And I think just in the context of an improving global market that has Consistently delivered quarter over quarter, you're now seeing this kind of mass exodus to rigs moving to places that they can Not only be active and have work, but also get pretty high EBITDA margins comparatively speaking to staying in Norway. So I think that's going to be the key hurdle. It will be the rigs that have to come back to Norway that will command a super premium.

Speaker 2

And Thomas, the other thing I would mention in addition to having day rates Firmly in the 400s, if not higher, customers are paying mobilization fees as well upfront. So you layer that in as well and it looks pretty lucrative for

Speaker 7

Great. Thanks. And then just last comment, still related to supply. Thanks for the range of 75 to 125 on reactivation. But can you maybe update us on the timeline to reactivate a cold stacked Drill ship in the market, obviously aware that there's going to be a range depending on the assets.

Speaker 7

But just kind of broad strokes reactivation timeline ranges And then maybe an update on how you see supply chain, whether there are major hurdles to reactivating rigs potentially based on

Speaker 4

Yes, Keelan, can you take that one?

Speaker 8

Yes, Thomas. I think our guidance on that Still hasn't changed since the last time. We're still looking at 12 anywhere between 12 18 months to get a cold stack Reactivation effective door to door into operation, largely probably around the 15 month side. The supply chain side It's improving as capacity is getting better across the supply chain, but We're still facing some long lead issues, particularly on heavy steel forgings and obviously on electronic components that There's a reliability probably issue in terms of delivery in the supply chain from Europe in that regard. But I think we're still seeing 12 to 18 month range on our cold stacked reactivations at this time.

Speaker 7

Great. Thank you very much. I'll turn it back now.

Operator

And our next question comes from Eddie Kim from Barclays.

Speaker 9

Hi, good morning. So you announced a handful of

Speaker 3

nice contracts Good

Speaker 9

morning. Good morning. That's a handful of nice contracts for Harsh Environment Semi this past quarter, but notably absent were

Speaker 3

contracts for the Invictus and the

Speaker 9

Inspiration, especially given their For the Invictus and the Inspiration, especially given their near term expiration of their current contracts, both of those rigs are also in the U. S. Gulf of Mexico, which is effectively a which is effectively a sold out market. So could you just talk about the future prospects for those 2 rigs Specifically and when we should expect them to get back to work?

Speaker 4

Yes, sure. Yes, so obviously, I can't tip my hand to this Precise opportunities we're exploring, but yes, we're in active dialogue on both the rigs for different things. And we expect that Fairly shortly, we'll be able to add some more backlog to those. And kind of as a reminder on that Contracting philosophy, we are purposefully keeping a couple of rigs available in the near term to take advantage of this improving market for us. So You did see and thank you for noting the prolific contracting that we did on many of the assets over the last couple of quarters.

Speaker 4

So We maintain that balance of, yes, it's nice to have the majority of the fleet on long term contracts, but We certainly also want to be able to capture the upside in this improving market.

Speaker 9

Got it. Understood. So bit of a kind of strategic negotiation going on there. Understood. My follow-up is just on kind of the pace Reactivations we've been seeing, there's been one major contractor who's been reactivating a number of cold stacked floaters, as I know you're well aware.

Speaker 9

Does the pace of reactivations concern you at all in terms of the day rate progression? Your expectation to see a contract announced with the 5 handle By end of year, I would suggest you're not very concerned at all, but any thoughts here would be appreciated.

Speaker 3

Good. Yes. So if you look at the results from the Petrobras contracts was announced last Friday, the 2 rigs that won the first one were both in the mid-4s And they are stranded new builds. So very similar to a reactivation of a cold stack rig. These are rigs that are coming out.

Speaker 3

And as Jeremy mentioned in his prepared comments, You're paying about $200,000,000 for these rigs and you're spending another $150 ish to bring those rigs to market. So to see that Those investors are bidding in the mid-4s. I don't see them dragging rates down at all. I think it was a very good Heim Watermark for Brazil. So I don't think that's a challenge for us at this stage.

Speaker 9

Got it. Understood. Thank you. I'll turn it back.

Speaker 4

Yes. Actually, I may add on top of that. The interesting thing against pool 1 versus pool 2, which is kind of 7 months apart is, we saw a 17% increase in the average bid Great. So you kind of went from 3.50 ks a day average to 4.08 ks. So I mean that's pretty substantial increase in just a few months, 58 ks A day on average.

Operator

And our next question comes from David Smith from Pink Green Energy Partners.

Speaker 6

Hey, good morning and thank you for taking my questions. Good morning, Deb. So, 2 interesting agreements you all announced in the past 3 months. The first, dedicating the Olympia For subsea mineral exploration. And then the second, converting up to 2 floating vessels for floating wind turbine installation.

Speaker 6

Am I just wanted to make sure I'm right to understand those two vessels would be coming from your stacked fleet?

Speaker 3

That's correct, yes.

Speaker 6

So I was just hoping to get your thoughts on removing up to 3 stacked rigs for alternative uses and kind of How you think about the trade off for increasing exposure to the energy transition versus the auction value of Eventually happened the last incremental capacity before new builds would be needed and maybe if you're considering dedicating any more stacked rigs for I'll turn it to

Speaker 4

Youssef. Yes, I'll take that one. So look, I mean, if we do consider using some of our stacked fleet for these opportunities, The logic is pretty simple. We basically have a good crop of available cold stacked units For writing the upside of this increased activity as we expect floaters to go from kind of like the 140 level committed rigs Up to 150, we've got plenty of room to grow on the drilling side of the business. But the assets that we might consider for something like this Would happen to be the lowest specification of our stacked assets.

Speaker 4

So it's really a very interesting way To get into the energy expansion, to be not just one dimensional in our outlook, but also to take assets that Otherwise might be stacked for many, many more years and making good use of them in the near term. So I think it's an extremely interesting opportunity And a smart use of our fleet.

Speaker 3

And let me just add to that. We've been talking about the pace of reactivations for the industry and for Transocean specifically. We believe given the current constraints, especially on the supply chain side, it's about 2 a year. So, if we have 11 and you take those 2 out, now it's 9, That's 4.5 years of reactivations. Do we believe the cycle is going to last 4.5 years, 5 years, 6 years?

Speaker 3

Not so sure, but do believe it's going to last 3 years. So we certainly can get through the majority of our stacked fleet by reactivating them. And if day rates support direct operating the rest of it, we'll clearly do that. But we're targeting these rigs into markets that we believe will generate returns for our shareholders over time, As well as what he said, helping us as a company to move into the energy expansion a little more forcefully.

Speaker 6

That's great color. Thank you. And that's all I had.

Operator

Our next question comes from Kurt Hallead from Benchmark.

Speaker 10

Hey, good morning.

Speaker 6

Good morning, Kurt.

Speaker 10

So, Jeremy, I think as you referenced here earlier, There's something along the lines of 13, Gold Stack rigs. I think on prior call, you indicated that Brazil Mike, the incremental rig demand of order of magnitude 20 rigs over the next, I don't know, 2 to 3 year period, I think is what the timeframe was. And just wondering if you could give us an update on overall demand dynamics as you see it, maybe update it relative to You saw it versus the prior call. And I guess the context is it seems to me that Brazil could absorb The vast majority of the available idle capacity in the market leaving West Africa and other areas scrambling to compete For what's left? So just want to get your perspective on that.

Speaker 4

Yes, sure. Yes. Sure, sure. So yes, with regards to Brazil, yes, If you think about just a larger context before you go into the details of that, the drillship market is effectively 100% utilized at the moment Yes, certainly Brazil has more to add. There's no doubt.

Speaker 4

So I think you're going to see, as Mark pointed out, there's 2 stranded assets I'm going to come to satisfy the Cool II tender. We think there's still plenty more cold stacked potential For satisfying Buzios and other tenders that may also come out. So, yes, Brazil really is putting a draw on pretty much everything that's available. But as we go around the world and we think about the different markets, I mean, every market is up. If you view it on a 12 month basis, every market is up.

Speaker 4

So that simply means that we're going to continue to book the rigs that are coming available and have to reactivate other ones. So again, as I said, the kind of numbers are supposed to be heading to 150 active floaters as we get into 2024. That would suggest that we've got 10 to add. So that's a tall order, but certainly in good shape for that. And I think as the guys had articulated many times, we've got 12 cold stacked assets at the moment.

Speaker 4

We could dedicate a couple of those to alternate But we'd also be optimistic about reactivating a couple of those over the next year or so into new opportunities.

Speaker 10

That's great. Appreciate that color. So follow-up here would be again on the harsh environment side where you're moving these assets from Norway to Australia. Just wondering if you can just give us an update on what's the cash margin differential, if any, Between what you could have earned in Norway versus what you're getting in Australia?

Speaker 4

Yes, I'm not sure I'd comment exactly on the margins, but it's a there is a better margin to be got in Australia. This is substantially better margin to be got in West Africa. So you've seen the excess of the rigs that's currently standing at 6 of them. So, if you think about just where we are in Norway in terms of like the rules and regulations for not only the equipment, but Crews and a number of people on the rigs, it's going to be a pretty substantial hurdle to pull those rigs back, particularly if you're already making More EBITDA where you are and the demand for the rigs in the new countries appears set to continue for several years.

Speaker 10

Okay, great. Appreciate the color. Thank you.

Speaker 6

Thanks, Craig.

Operator

And our last question comes from Frederic Singh from Clarksons Securities.

Speaker 11

Hey, guys. Thank you for taking my question. Hopefully, you can hear me okay. So I have Two questions for you. I would like to kind of add a bit to the coal stacked Asset discussion here.

Speaker 11

As you mentioned in your prepared remarks, you have the majority really of the coal stacked assets here. And one thing is talking about where these assets can go and who can absorb them. But I think another part or dimension of that discussion is The strategy in a way of how to employ them because

Speaker 10

you seem to know your peers

Speaker 11

Taking out their spec capacity at lower rates or being more aggressive in taking out their spec capacity. At some point, I think that could leave you as the only price setter really of incremental capacity into the floater market, but that also gives you a bit more risk on your side. So do you have any color or thinking about how you're approaching that right now? Or if the way you're approaching it has Change as we've seen rate levels move higher?

Speaker 2

Yes, I don't think our approach has changed. I think we've been pretty clear that the customer has to pay for the reactivation. And so we're going to continue to follow that strategy, I think, going forward. I know going forward. So we're happy to wrap Continue to push rates on our existing fleet as they become available and then when the customers are willing to pay for reactivation, we'll certainly do it.

Speaker 4

Yeah. No. And I think as we think about what it costs us for those rigs to remain stacked, it's really de minimis. So Choosing the right time and choosing the right contract is really what the strategy is about and showing some patients not We certainly do not value utilization over EBITDA generation. So, I think most of our competitors see it that way, maybe 1 or 2 don't, but We'll certainly continue to push that mantra.

Speaker 4

We will not reactivate on spec.

Speaker 11

Perfect. And the last one. Turning to the harsh environment markets again. I think You said that you'd like to or you would prefer to keep your assets in Norway or at least Norway compliant But obviously, you and some of your competitors have now started to take those assets out. Have there been any change in that preference for your side that you're seeing that the economics are just too Good to kind of give up the optionality of keeping the assets in Norway?

Speaker 11

Or do you think that you have a balanced approach to that, Some optionality in Norway and then some hard cash in other parts of the world right now.

Speaker 4

Yes. I was just going to say, no, I mean, it's pretty simple. I think we've showed an Exceptional amount of patients over the last few years of keeping rigs in Norway. We've had rigs idle in Norway for some time. We've Talk to kind of all the major customers about this and been, I would say, very competitive in our Attempts to keep the rigs busy in Norway, especially during 2019, 2020 and so on.

Speaker 4

But now we're really at the point that the demand elsewhere is so substantial. It's always our preference to keep the rigs where they are. There's no questions about that. But the economic challenge is now overwhelming when you compare how accretive the contracts are elsewhere.

Speaker 10

All right. Thank you so much.

Speaker 11

That's all for me. Have a good day.

Speaker 6

Thanks, Patrick. You too.

Operator

It appears you have no further questions at this time. I will now turn the program back over to Allison Johnson for any additional or closing remarks.

Speaker 1

Thank you, Gretchen, and thank you, everyone, for your participation on today's call. We look forward to talking with you again when we report our Q2 2020

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Transocean Q1 2023
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