Transocean Ltd

NYSE:RIG

Earnings Call Transcript 2018-Q1

[Operator]

Good day, and welcome to the First Quarter 2018 Transocean Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Bradley Alexander, Vice President of Investor Relations. Please go ahead, sir.

[Bradley Alexander, Transocean Ltd.]

Thank you, Christina. Good morning, and welcome to Transocean's First Quarter 2018 Earnings Conference Call. A copy of the press release covering our financial results, along with supporting statements and schedules including reconciliations and disclosures regarding non-GAAP financial measures, are posted on the company's website at deepwater.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; and Roddie Mackenzie, Vice President of Marketing and Contracts.

During the course of this call, 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 the current expectations and certain assumptions of management and are therefore subject to certain risks and uncertainties. Many factors could cause actual results to differ materially. Please refer to our SEC filings for more information regarding our forward-looking statements including the 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.

When we get to the question-and-answer session, to give more participants an opportunity to speak on this call, please limit yourself to an initial question and one follow-up.

Thank you. And now, I'll turn the call over to Jeremy.

[005J94-E Jeremy Thigpen]

Thank you, Brad. And a warm welcome to our employees, customers, investors and analysts participating in today's call. As reported in yesterday's earnings release, for the first quarter, the company generated adjusted normalized EBITDA of $170 million on $645 million in adjusted normalized revenue. These results were driven by a combination of strong uptime performance and a continued focus on organizational and operational efficiency.

Operationally, when normalizing for the downtime associated with safely returning the Petrobras 10000 back to work, we delivered first quarter revenue efficiency in excess of 96%. Of note, we achieved this high level of performance despite the fact that we have added six new rigs to our active fleet over the last two quarters. I would like to take this opportunity to thank the entire Transocean team for your continued focus and effort in delivering another solid quarter.

In addition to delivering strong quarterly operating results, on January 30, we officially closed the acquisition of Songa Offshore. We are extremely pleased to welcome the former Songa team into the Transocean family. In addition to the expertise, skill and experience our new colleagues will contribute to the combined company, this transaction is important for a number of reasons.

First and foremost, the Cat-D rigs represent four of the highest-specification harsh environment assets in the world and support our fleet strategy of owning and operating the largest and most technically capable floater fleet in the industry.

Secondly, as of April, these four rigs carried a total backlog of approximately $3.6 billion, bringing Transocean's total backlog to $12.5 billion, more than three times the level of our nearest competitor.

Importantly, we believe there will be opportunity to add to this backlog as the Cat-D rigs were designed in close collaboration with Statoil, and each of the four rigs has 12-year options. And given the performance of the Cat-D rigs to-date with the Equinox recently being ranked as the top-performing floater in Statoil's Norwegian fleet, we are encouraged by the prospect of Statoil ultimately exercising these options.

Finally, we are pleased to be realizing the synergies that are only made possible by a consolidation. Administratively, because we designed a robust plan prior to closing, we have already made significant progress in integrating and consolidating local offices, yards, warehouses and IT systems. Operationally, we're in the process of introducing legacy Songa personnel to Transocean's HSE and overall management systems.

We are also identifying and aligning around best practices from both organizations for managing maintenance and the supply chain. Additionally, we have migrated Songa Offshore to our insurance program, and we're in the process of extending the coverage of our OEM agreements to the four Cat-D rigs. The combination of these two actions alone will result in millions of dollars in annualized savings.

It's important to note that these statements could not have been realized by Songa as a standalone entity as their scale is not sufficient to warrant the favorable terms that we have negotiated with our key supply partners and service providers.

Based on what we've seen and accomplished to-date, we have full confidence that by the end of 2018 we will achieve, at a minimum, the $40 million of annualized cost and operational synergies initially expected, clearly demonstrating the incremental value that we can deliver through consolidation.

As we progress through 2018, we will continue to evaluate acquisition targets with characteristics similar to what we found in Songa including high-specification assets that will strengthen our fleet and some balance of backlog and maturity that will not significantly impact our near-term liquidity.

Speaking of strengthening our fleet, in February, the fourth of our high specification ultra-deepwater drillships contracted to Shell for 10 years, the Deepwater Poseidon, commenced operations in the Gulf of Mexico. And I'm pleased to report that during her first two and a half months of operations, she has delivered an impressive 99% uptime. We are obviously extremely proud of the Poseidon as well as the performance of the other newbuild drillships as they demonstrate that we truly have applied best practices to ensure these rigs are reliable from day one.

With the addition of the Poseidon, the rigs from Songa, and including our two state-of-the-art 3-million-pound hook load drillships under construction at Jurong, we will have 49 floaters in our fleet, of which over 80% are categorized as either ultra-deepwater or harsh environment.

As we move through 2018, we will continue to evaluate our fleet, potentially acquiring high-specification assets, recycling some of our existing assets we think are no longer competitive or economically viable, and upgrading assets to meet customer demand where the economics of the investment justify the enhancement.

Transitioning from our fleet to some of our first quarter wins, in addition to the approximately $3.6 billion in backlog associated with Songa Offshore, in the first quarter we added eight fixtures including a six-month extension with Husky on Henry Goodrich with an additional $50 million in backlog.

In addition to a solid base day rate, the extension provides for additional upside via performance bonus, again demonstrating the strengthening of the global harsh environment market.

As you may recall, we reactivated the Goodrich in 2016 after receiving a contract from Husky. Since commencing operations, the rig has delivered uptime of 98% working in the harsh environment conditions in eastern Canada and has generated cash flow of more than $100 million which significantly exceeds her reactivation and mobilization costs.

The Goodrich was the first of what's now five reactivations we have completed and represents from a performance standpoint what our customers can and do expect when they contract any of our rigs.

In addition to securing the extension on the Goodrich, we were also pleased to secure the additional work for the Deepwater Asgard in the Gulf of Mexico. As you well know, the Asgard is one of the most technically capable ultra-deepwater rigs in the world. Therefore, capitalizing on short term opportunities to keep her working is important as we await better priced fixtures.

Across the Atlantic off the Ivory Coast, we are returning the recently upgraded Discoverer India to work for CNR to commence a five-well project. As we routinely evaluate our assets, we consider the impacts of upgrade to provide sort of long-term competitiveness of our fleet.

In the case of the India, we invested approximately $15 million into enhancements, which elevated her technical ranking into the top 50 ultra-deepwater assets in the world. We believe this is an efficient use of capital and strengthens our position for the eventual ultra-deepwater market recovery.

During the quarter, we also secured another extension with Statoil for the Transocean Spitsbergen, a true testament to the outstanding performance of the assets, the crew and the shore base support team.

Moving farther to the East in Malaysia, we were also pleased to see Shell pick up two additional options on the Deepwater Nautilus. And we are optimistic about future prospects for her in the region.

And finally, in April, the DD-1 returned to operations, commencing work for Quadrant offshore Australia. As we previously discussed, we have long believed that the DD-1 is best suited for the Australian market, which she would instantly become the most technically capable asset in the region. Given the Quadrant work and the visibility to numerous potential follow-on opportunities in the Australian market, we made the decision last year to reactivate the previously cold-stacked rig.

So far, we are pleased with the decision as we recently signed an additional one-well contract for the DD-1 with PTTEP and are currently bidding the rig into other projects commencing in 2019. On a go-forward basis, we will continue to thoughtfully and prudently evaluate our reactivation opportunities, considering both near-term demand and follow-on opportunities that provide sufficient cash flow to justify each rig reactivation.

Looking at the macro environment, oil prices have remained solidly in the 60s since the fourth quarter of last year, with Brent exceeding $70 per barrel since the beginning of April. Needless to say, these higher and more stable prices enable our customers to generate sufficient operating cash flow to fund near-term dividend and debt requirements while also pursuing longer-cycle investments.

Despite the longer-dated oil price curve remaining below current spot prices, multiple factors provide optimism that longer-term oil prices will remain at or above the $60 level. For one, OPEC has maintained its compliance with the supply set they first announced in the fall of 2016. Additionally, reserve replacement ratios are 20-year lows, and delays in final investment decisions by operators over the past four years are expected to remove approximately 6 million barrels per day from the 2025 supply, with the initial decline starting no later than 2020.

With this supply dynamic playing out, combined with current offshore breakeven economics for most projects at levels ranging from the 40s to as low as the low 20s, it's not surprising to see increasing customer interest in the offshore developments. In fact, if oil prices can remain constructive for the next few months, we believe that operator budgets for 2019 could reflect a return to offshore projects sanctioning for 2019 and beyond as the deepwater space has become a more compelling investment proposition for our customers.

In a harsh environment market, opportunities in Norway, the UK, and Canada remain strong. We continue to see day rates strengthening for high-specification assets with customers more frequently seeking to sign multi-year fixtures with base day rates now approaching, if not exceeding, $300,000 per day. And many of these fixtures, like the Henry Goodrich, include additional upside linked to performance incentives.

In ultra-deepwater, the increasing level of interest throughout the Golden Triangle is encouraging. In Mexico, there are a handful of opportunities which could materialize into deepwater drillship contracts before year-end. In fact, we would not be surprised to see some deepwater activity commencing in Mexico later this year and steadily increasing through 2019 and into 2020. In Brazil, the recent lease sales are reflective of the significant interest integrated oil companies have in this basin.

If IOC's contract rigs to drill their respective prospects and Petrobras goes through the tendering process to replace the rigs rolling off contracts in the coming quarters, we expect to see a reversal in the declining rig counts in this area that have occurred over the last four years. In fact, we believe in the next couple of years, we could see deepwater rig activity in Brazil, again exceeding 40 floaters. We also believe that the presence of IOCs in the region could ultimately drive a push towards higher-specification assets and establish drilling contractors, which would certainly go well for Transocean.

In West Africa, we have visibility in several new opportunities in a handful of countries. As confidence in the oil price continues to increase, we expect longer duration of opportunities in the region to become more numerous and ultimately drive additional demand for our assets and services. We are further encouraged by the recent customer interest in projects considered to be Frontier drilling, with multiple customers exploring projects in deeper-water depths beyond 12,000 feet and high-pressure fields requiring 20,000 BOPs. This points to an industry that is focusing on the future and to new sources of hydrocarbons beyond what is accessible today.

As the harsh environment market continues its recovery and optimism for an ultra-deepwater market recovery grows, we recognize that our operational performance is essential to our continued success. As such, we will continue with our unwavering focus on safety, equipment reliability, drilling efficiency and cost control. We have made considerable progress on all four areas over the past three years and we've been repeatedly recognized by our customers for our market leadership.

From a safety perspective, while we are continuing to refine our policies, procedures and training programs, we recognize that we need engineered solutions to prevent injuries. As such, we are reassessing all potential hazards on our rigs and actively exploring opportunities for their physical removal. We are also evaluating technologies from other industries that we can leverage to move closer to our goal of an incident-free workplace.

Regarding equipment reliability, in addition to our OEM healthcare agreements which have dramatically improved the alignment between Transocean and our primary equipment providers, we have recently designed a BOP health monitoring tool which enables to forecast the future operating state of the BOP based on predictive analytics which compares current operating conditions versus an ideal model.

From a drilling efficiency perspective, our performance dashboard has successfully raised visibility and awareness across our organization, which has driven material performance improvements. The dashboards have also highlighted inconsistent performance from rig to rig and even from crew to crew. As such, we are now introducing a machine analytics tool across our fleet to monitor the movement of equipment to better understand the specific reasons for the inconsistencies and to quickly share best practices across the fleet.

And finally, from a cost perspective, we continue to evaluate opportunities for streamlining our organization and our operations to make offshore drilling more economically viable.

Before turning the call over to Mark, I would just like to reemphasize our continued priorities. We will continue to proactively manage our balance sheet to provide us the necessary liquidity to invest in our business while simultaneously providing us the optionality to be opportunistic. We will continue to explore and pursue opportunities to further enhance the capability and overall quality of our fleet. We will continue to acutely focus on operational and organizational efficiency to reduce the time and cost required for our customers to construct wells while also enhancing our earnings. And most importantly, we will never lose sight of our objective of maintaining a safe, incident-free workplace all the time everywhere. Mark?

[Mey Lovell Mark-Anthony, Transocean Ltd.]

Thank you, Jeremy, and good day to all. During today's call, I will recap our first quarter results, provide updated second quarter and full-year 2018 guidance and update our liquidity forecast through 2019.

For the first quarter of 2018, we reported a net loss attributable to controlling interest of $210 million or $0.48 per diluted share. Highlights for the quarter include two months of operations on the four CAT-D harsh environment semisubmersibles required as part of the Songa acquisition, 48 days of operations from a newbuild Deepwater Poseidon which commenced operations in the U.S. Gulf of Mexico on February 12, and a full quarter of activity for the newbuild Deepwater Pontus which commenced operations in the fourth quarter of 2017.

Let me now address two revenue-related items in more detail. Firstly and related to the Songa acquisition, pursuant to purchase price accounting rules, we calculate the fair value of the four Cat-D drilling contracts by comparing them to current market day rates and expectation of future market day rates during the term of these contracts. The difference being reported as contract intangible assets. The contract intangible assets associated with the Songa totaled $232 million at closing and will be amortized over the remaining term of the drilling contracts on a straight-line basis.

Accordingly, in the first quarter of 2018, we recorded a non-cash reduction in contract drilling revenues of $19 million. This amount is included in contract drilling revenues on a consolidated statement of operations and presented on a separate line on the statement of cash flows. A schedule detailing the expected quarterly contract intangible amortization is now available on our website.

Secondly, we adopted ASC 606, the new revenue accounting standard effective January 1, 2018. As a result of this adoption, we have determined that the drilling and related services we perform represent a single performance obligation, and as all revenues, including reimbursable revenues, are reported as a single line on the consolidated statement of operations.

Further to this adoption, reimbursables will now be recognized when accrued as opposed to when billed. Please see our first quarter Form 10-Q for additional information.

For the first quarter, reimbursable revenues were $26 million, compared with $15 million in the previous quarter. The increase was mainly related to the adoption of the aforementioned revenue standard. Likewise, reimbursable costs associated with the aforementioned reimbursable revenue will be included in operating and maintenance expense. Please note that these additional costs were not included in our prior guidance.

Moving on, cash flow from operations totaled $103 million, compared with $244 million in the prior quarter. The decrease was mostly due to the receipt in the prior quarter of the early termination payment related to the Discoverer Clear Leader.

Capital expenditures in the first quarter were $53 million and were mostly attributable to the final costs associated with the delivery of the Deepwater Poseidon with 10-year contract with Shell. Including the effect of $57 million of net cash required to settle our Songa acquisition obligations, cash and short-term investments were $2.9 billion at the end of the quarter with total liquidity at $5.9 billion, including our $3 billion undrawn revolving credit facility. Renewing or extending our revolving credit facility remains a priority, and we expect to complete this 2018. We also anticipate refinancing the secured debt associated with all four of the Songa Cat-D rigs with the completion occurring this summer.

Let me now provide an update to our 2018 financial expectations. For the second quarter of 2018, we expect our contract drilling revenues to increase approximately 14% sequentially. This forecast includes both early termination revenue related to the Discoverer Clear Leader of $38 million and the amortization of the Songa contract intangibles of $29 million and with revenue efficiency forecasted to average 95% during the quarter. This forecast also includes an estimated $30 million in customer reimbursables.

We expect second quarter O&M expense of approximately $445 million. This include a full quarter of the Cat-D rigs and the costs associated with reimbursable revenues. The second quarter will also include a full quarter of the Deepwater Poseidon operations. We expect G&A expense for second quarter to be approximately $42 million. Net interest expense for second quarter is expected to be approximately $150 million. This includes capitalized interest of approximately $9 million and interest income of $10 million. Capital expenditures including capitalized interest for the second quarter are anticipated to be approximately $55 million.

Turning now to our full-year 2018 expectations. Contract drilling revenues for the year are expected to include customer reimbursables and revenue associated with the early termination of the Discoverer Clear Leader. Our full-year operating and maintenance expense expectation has increased to the top end of my previous range of $1.55 billion to $1.65 billion, primarily due to now including reimbursable costs related to the adoption of ASC 606 in a O&M forecast. This excludes any costs for respective activations.

We expect our G&A expense 2018 to be approximately $117 million. Full-year 2018 depreciation expense is expected to be approximately $840 million. Net interest expense is expected to be approximately $575 million. The estimate includes capitalized interest of approximately $40 million and interest income of $40 million.

Our 2018 cash taxes are expected to be approximately $90 million. This estimate includes the impact of BEAT taxes associated with the 2017 U.S. Tax Reform and Jobs Act. However, we continue to assess and analyze the portion of the act related to transition taxes.

Capital expenditures in 2018 are anticipated to be approximately $175 million. This includes $77 million in newbuild CapEx with the remainder targeted for maintenance CapEx.

Turning now to an update of our projected liquidity as of December 31, 2019. And exclusive of a new extended revolving credit facility or any additional secured debt issuances, our end-of-year 2019 liquidity is estimated to range between $2.2 billion and $2.4 billion. In 2019, we expect total CapEx to be approximately $200 million. This includes $97 million on the remaining two newbuild drillships at Jurong and $103 million for maintenance CapEx. I would note that both 2018 and 2019 CapEx guidance exclude any speculative rig reactivations.

In conclusion, we continue to generate robust cash flow as a result of our fleet's strong revenue efficiency and prudent management of our cost structure. We also remain very pleased with our balance sheet, especially our debt-to-maturity profile, with no significant debt due until 2023. And liquidity position which provides the optionality to continue to selectively high grade the quality of our fleet. With our industry-leading contract backdrop of $12.5 billion, we expect to continue generating strong cash flow as market utilization and day rates recover.

Now, I'll turn the call back over to Brad.

[Bradley Alexander, Transocean Ltd.]

Thanks, Mark. Christina, we're now ready to take questions. And as a reminder to all participants, please limit yourself to one question and one follow-up question.

[Operator]

Thank you. And we'll take our first question from James West with Evercore ISI.

[James West, Evercore ISI]

Good morning, guys.

[Jeremy D. Thigpen, Transocean Ltd.]

Good morning, James.

[James West, Evercore ISI]

Jeremy, clearly the harsh environment market has picked up nicely and tightened nicely. Do you have any thoughts on the true seventh gen market? I mean, those really high-spec, high-end rigs. The 36 or so that are out there – or really 26, I guess, with 10 in the shipyard, on when that market may see a tightening. It seems to me there's a number of large oil companies looking for that specific rig right now with very few uncontracted that are available for work today.

[Jeremy D. Thigpen, Transocean Ltd.]

Yeah. No. That's exactly right. I'll let Roddie handle that one.

[Roddie Mackenzie, Transocean Ltd.]

Hey, James. Okay. So, to kind of give you a picture that you're spot on that the high-spec rigs are in high demand there in the ultra-deepwater side. So, we're seeing several programs. In fact, we were just going through our numbers here. But there has been a doubling of project sanctioning from last year to this year. And there's a projected doubling again into 2019.

[James West, Evercore ISI]

Okay.

[Roddie Mackenzie, Transocean Ltd.]

So, what we're beginning to see now is a lot of them – a lot of push to bring those better rigs back to the market. And actually, the other thing I was going to mention in this realm is looking at utilization, we look at effective utilization. So, the actual supply of good floaters is really only somewhere in the region of kind of 160 or so rigs. And with 120 of them working today, our utilization is already in the mid 70s, and just with a little bit of uptick that we're all projecting. In fact, we were at Clarksons yesterday, they're showing a nice uptick plan for 2019. Utilization should be in 2019 well into the 80s and approaching the 90 mark. So, your answer is yes, those big rigs with a nice specifications are going to go pretty soon.

[James West, Evercore ISI]

Okay. That's great.

[Jeremy D. Thigpen, Transocean Ltd.]

Well, and we hope that day rates follow as they did with the harsh environment space.

[James West, Evercore ISI]

Got you. Okay. That's great to hear. And then, as you assess your fleet further, Roddie or Jeremy or Mark, do you still have rigs that are candidates for retirement at this point or is that primarily done?

[Jeremy D. Thigpen, Transocean Ltd.]

No. We still have a few rigs that are candidates for retirement. Some of them may currently be on contracts, and so certainly not going to recycle them while they're generating revenue and cash there for us.

[James West, Evercore ISI]

Right.

[Jeremy D. Thigpen, Transocean Ltd.]

But yeah, we are continuing to assess the fleet. And as we learn more about the direction of the industry and the eventual market recovery and continue to update our reactivation models, what that cost looks like, we'll continue to take action as needed.

[James West, Evercore ISI]

Okay. Great. All right. Thanks, guys.

[Jeremy D. Thigpen, Transocean Ltd.]

Thanks, James.

[Operator]

We'll take our next question from Angie Sedita with UBS.

[Angie Sedita, UBS Securities LLC]

Thanks. Good morning, guys.

[Jeremy D. Thigpen, Transocean Ltd.]

Good morning, Angie.

[Roddie Mackenzie, Transocean Ltd.]

Good morning.

[Angie Sedita, UBS Securities LLC]

So, Jeremy, maybe you could talk a little bit about your commentary on M&A and individual assets that you had in your prepared remarks. Maybe on the M&A side, you mentioned, right, a focus on high-spec assets with backlog. Are there companies out there that meet those specs that offer both high-spec assets and the backlog? And then, two, on the individual assets, maybe a little bit of criteria there as far as specs timing? And would you need to have a contract in hand before acting on a transaction?

[Jeremy D. Thigpen, Transocean Ltd.]

Yeah. Good question, Angie. And the pickings are slim. And that's why you haven't seen more transactions in this space. There are certainly candidates out there that we feel have the right mix of asset quality and then some kind of combination of backlog to offset near-dated maturities, but they're few and far between. So, we are certainly looking and trying to progress those discussions, but it is a challenge.

With respect to individual assets, given what we've seen in the harsh environment space with not only utilization picking up for the high-spec rigs but followed by day rates which have more than doubled over the last two months, if we were going to go out and acquire individual assets, you'd probably see us more inclined to look at the harsh environment space than the ultra-deepwater space at this point. But we're certainly encouraged by what we're seeing in the ultra-deepwater as well.

[Angie Sedita, UBS Securities LLC]

Okay. All right. That's helpful. And then, on the comments on Mexico, potentially some opportunities later this year. Any thoughts there on how many rigs we could see moving into Mexico, either late this year or 2009 (sic) [2019] and the specs they're looking for in short-term or longer-term work?

[Roddie Mackenzie, Transocean Ltd.]

Yeah, Angie. I'll take that one. Certainly, the excitement around Mexico was just palpable amongst the customers where our sales, just Transocean's fleet, looking at our opportunities are right in front of us. By mid-2019, we could have up to four rigs, maybe even more in Mexico. The overall industry as a whole, you've got to extrapolate that out and see if they're going to be perhaps in the teens in terms of number of rigs. But as we said in the previous call, moving into Mexico with a couple of our existing customers that have rigs under contract is a great segue to get in there. But now, we're seeing that it's a very real possibility that we're going to move in on several new contracts as well.

[Jeremy D. Thigpen, Transocean Ltd.]

Yeah.

[Roddie Mackenzie, Transocean Ltd.]

So, we're very encouraged by that.

[Jeremy D. Thigpen, Transocean Ltd.]

And regarding your question around the spec, it would be the exact same spec that you see in the U.S. side of the Gulf of Mexico. So, you're looking for dual activity, high hook load, two BOPs, got highly-efficient rigs.

[Angie Sedita, UBS Securities LLC]

Okay. Okay. Great. And then, those are shorter-term contracts, or longer, or mixed?

[Roddie Mackenzie, Transocean Ltd.]

It's a mix. It's kind of all over the place. It's primarily exploration work, right? But there's a mix of just one or two wells, but then there's also programs that will be a year or longer.

[Angie Sedita, UBS Securities LLC]

Okay. Great. Thank you. I'll turn it over.

[Jeremy D. Thigpen, Transocean Ltd.]

Thanks, Angie.

[Operator]

We'll take our next question from Blake Hancock with Howard Weil.

[K. Blake Hancock, Scotia Howard Weil]

Thanks. Good morning, guys.

[Jeremy D. Thigpen, Transocean Ltd.]

Hey. Good morning, Blake.

[K. Blake Hancock, Scotia Howard Weil]

Hey, Jeremy. Maybe first, as we think about the cold-stacked assets and you talked about the Goodrich and the ability to generate cash flow exceeding the reactivation costs. You've kind of laid out what you think reactivation would be on some of these other rigs. Can you maybe talk about the criteria, what you would expect? Would you expect a payback on kind of your reactivation on the first contract? Peers out there are doing the same thing, but not getting paid back on that first deal. So, maybe you could talk about the strategy there as you think about the improvement in environment.

[Jeremy D. Thigpen, Transocean Ltd.]

Yeah. I mean, candidly, in the current market, it's tough to get paid back on that first contract. So, as we assess whether or not we want to reactivate a rig, we want to see not only the first contract. And of course, get as much as we possibly can as part of that contract. But then, what are the follow-on opportunities. And so far, as we've looked at that, we've seen several follow-on opportunities that any one of, say, three could materialize. And that's what gave us the confidence to go forward with the reactivation.

So, there's not an exact science to it. I can assure you that Mark pushes back pretty hard on it as he should whenever Roddie comes up with new opportunities to reactivate rigs. But so far, I think the process has worked well for us. We've been rewarded with every rig that we have reactivated to get some follow-on work, and so we're going to continue to follow that process.

[Roddie Mackenzie, Transocean Ltd.]

Yeah, Blake. I'd also add in there that those strategic assets that we think are going to be very strong players in the future helps in the decision making, but we also look at some of the older rigs as well that are fit for purpose for the right markets. And as we saw with the Goodrich, that worked extremely well, so that's certainly an older vintage asset pulling down some really nice numbers. And we're currently engaged in a couple of other things that we'll let you know about it once they're committed. But that would reactivate rigs again that are a little bit older but with very solid financials to not only pay for the reactivations, but move those rigs into a good profitable space in the first contract.

[K. Blake Hancock, Scotia Howard Weil]

That's great. Thanks, guys. And then, part Jeremy, part Roddie here. Jeremy, on the Asgard, can you give us an update? You kind of talked about holding out here for pricing. What do you think is acceptable if we were to term out that rig? And Roddie, update on the contracting potentials for the Asgard and maybe the DD-3?

[Jeremy D. Thigpen, Transocean Ltd.]

Yeah. I mean, I'll just start and then turn over to Roddie. If you'd asked this question a year, 18 months ago, we probably would've been inclined to lock up a rig like the Asgard for 12, even 24 months. But then anything beyond that, we'd want to have some kind of market-driven fluctuation increase in day rate to give us some optionality in the outer years and some upside.

Today, I think given what we're seeing, we'd be less inclined to go that kind of duration, probably more inclined to look at something no longer than 12 months before we would start to get some day rate appreciation. And so, I think that's kind of how we're thinking about rigs like the Asgard right now, and then I'll let Roddie elaborate.

[Roddie Mackenzie, Transocean Ltd.]

Yeah, no, that's spot on. So, the Asgard is arguably one of the very best available rigs in the market today, and we are pursuing short-term activity for her until we see that window where we can really push the rate on her because she is extremely capable. And you also asked about the DD-3. So, when you think about the DD-3 in a similar fashion, very interested in putting her in the right spot where she has that unique DP by moored capability, and she's a dual-activity rig. So, finding the right job for that, we're cautiously optimistic we'll have something to tell you about pretty soon on her.

[K. Blake Hancock, Scotia Howard Weil]

That's great. Thank you, guys.

[Jeremy D. Thigpen, Transocean Ltd.]

Thanks, Blake.

[Operator]

We will take our next question from Haithum Nokta with Clarksons Platou Securities.

[Haithum Nokta, Clarksons Platou Securities, Inc.]

Hi, good morning. Roddie, I wanted to follow up on the comments about the high-spec ultra-deepwater market tightening. And do you see that as, I guess, sustainable even if rates start to rise in that segment? Do operators just say, all right, I can work with, call it, single activity or I can go without dual BOP? Is that something that you see that could actually be a risk to that outlook?

[Roddie Mackenzie, Transocean Ltd.]

I'll tell you what we see is that the operators, how would you say, are not opposed to paying more money for the rigs. But what they're really opposed to is paying more money for the wells. So, with the efficiency that we're delivering on these high-spec assets, even with the higher day rate, they're still getting a tremendously low cost of ownership for the wells, better than it's ever been actually. So, we just think that that will be sustainable environment. And I think we will be able to see some, how would you say it, appropriate day rates coming out in 2019.

[Haithum Nokta, Clarksons Platou Securities, Inc.]

That's good to hear. And then, I wanted to ask about the Spitsbergen extension that you had announced in the recent fleet status report, but you also had basically a shorter firm duration on the contract, and I assume that's basically performance driven. And I guess are you guys able to positively benefit from that shorter duration in the contract structure? Or kind of how should we think about improved sufficiency from a financial perspective?

[Roddie Mackenzie, Transocean Ltd.]

Yes, so you're spot on. The rig is just drilling like crazy. She's doing a fantastic job in organizing these wells for Statoil. So, in that contract, we have a series of options before the next big firm term period. So, Statoil was picking up those options as we go. They've got several partners that are interested in it. And of course, the performance of the rig speaks for itself. In terms of upside for us, that rig is on a performance bonus contract. So, the better we drill, the more upside there is for us. So, our compensation is linked to our performance.

[Haithum Nokta, Clarksons Platou Securities, Inc.]

And that's something that you're trying to add to more areas of the fleet at this time, performance driven?

[Roddie Mackenzie, Transocean Ltd.]

Yeah, we believe that's a very positive business model for our entire industry actually. We view ourselves as competing against other places where operators can spend their capital. So, making ultra-deepwater as competitive as you possibly can and making harsh environment competitive is what we're all about. So, we do welcome that because our operations teams around the world are the very best in the world, and they're delivering fantastic performance.

So, it kind of gives the operators the opportunity to pick up a rig on a pretty reasonable headline rate, but also be able to pay for a significant performance that gives us a per day higher-margin on those rigs. So, it's kind of a win-win situation. And the answer is yes, the customers are very interested in that performance alignment.

[Haithum Nokta, Clarksons Platou Securities, Inc.]

Thank you, I will turn it back.

[Operator]

We will take our next question from Ian Macpherson with Simmons.

[Ian Macpherson, Simmons & Company]

Hi, good morning, everyone.

[Jeremy D. Thigpen, Transocean Ltd.]

Good morning, Ian.

[Ian Macpherson, Simmons & Company]

I guess my first question will be back to the M&A strategy. If things are really so close to tightening, as it sounds like they could be, not only do you want to be careful with your contract length, but you also want to be careful with your use of equity. And it's terrific that Songa has been in every way, it was a very equity intensive transaction for you. So, Jeremy, what would be your attitude towards the use of equity in future M&A given how close it feels that we may be to recovery and a $12 stock price for Transocean today?

[Mey Lovell Mark-Anthony, Transocean Ltd.]

Yeah. That's a great question because you're right, we look at this pretty carefully. And when the Songa transaction was negotiated last August when honestly it was negotiated over the previous several months, if you recall, at that time the harsh environment had barely moved and clearly the industry was not experiencing the level of optimism we're seeing today. So, shoring up our balance sheet by overequitizing a transaction was certainly the right way to go.

I think we are in a different place now. And I do think that we expect ultra-deepwater to follow harsh environment over the next few quarters. So, as we look at opportunities, we get a little more comfortable with our balance sheet and especially our level of liquidity. We would be more inclined to use cash or a bigger mix of cash in a corporate transaction. Obviously, in an asset transaction, there would be cash only. So, we certainly do reflect your views on this.

[Ian Macpherson, Simmons & Company]

Okay. Thanks, Mark. I have another question also for you. And I'd want to clarify the revenue guidance for Q2. If we go up 14% sequentially, that's $757 million, and you said that includes terminations, intangibles, and reimbursables. So, if we added back the intangibles, would it therefore be cash revenue of, what is it, I guess $786 million. Is that what we should be thinking about?

[Mey Lovell Mark-Anthony, Transocean Ltd.]

If that's the calculation, Ian, then that's correct. Yes. The fact that we have not been disclosing day rates on our fleet status reports, we thought that by starting to give you some guidance on the revenue on the call would make it a little easier for you to get closer to the revenue for the quarter. So, that's what we had finally achieved with that.

[Ian Macpherson, Simmons & Company]

Okay. Thank you very much. Good quarter.

[Operator]

We'll take our last question from Colin Davies with Bernstein.

[Colin Davies, Sanford C. Bernstein & Co. LLC]

Good morning. I wonder if you would give us a little bit more color on the nature of the performance bonuses that you talked about. I mean, it sounds like that could become the precursor to gaining some pricing traction in the market, but how significant are we talking about in terms of sort of an uplift from the headline rates you were mentioning? I mean, are we talking tenths of percents or just sort of single digits?

[Roddie Mackenzie, Transocean Ltd.]

So, I'll take that one. So, we have various different models and there are a few that are relatively small numbers. But the increasing trend at the moment is that we're seeing bonus potentials of 10%, 15%, 20%, and in some cases 30% and beyond possibility, which is really significant.

Now, obviously you have to deliver really top-tier performance for that, but we have done that in several instances. So, we really think that is a way forwards. And you're right, it's a way of getting our effective day rates up nicely compared to where we used to be, at the same time, allowing the operators to get an AFE over the line, so to speak.

[Jeremy D. Thigpen, Transocean Ltd.]

Yeah.

[Roddie Mackenzie, Transocean Ltd.]

And giving us all that potential to perform and add a lot more money. But in short, the bonuses are significant. And in fact, it seems to be the higher the day rate, the higher the bonus percentage as well, so – in harsh environment, that seems to be leading the way where you're seeing routinely potentials of 15% to 20%.

[Colin Davies, Sanford C. Bernstein & Co. LLC]

Okay. That's really helpful. And then, just a follow-up question. I mean, if I look at just – take a step back and look at the contract expiry portfolio, I mean there's a lot of rigs coming off sort of back end of the second half of 2018 just as you're sort of describing the market to be tightening in certain of those categories. But you've also got a large option portfolio as well, if I look at the Fleet Status Report. What happens next? If the market is tightening, do you see customers really starting to lock in those options?

[Roddie Mackenzie, Transocean Ltd.]

Yes, certainly. So, so far, we have actually seen them locking up options. So, most of the options are picked up. I think the pickup rate is over 80% of a number of options that get picked up, so – but in terms of where that goes going forward, so options being offered, we're being a bit more stringent on that now, right. Especially in the tighter market, we're tending not to offer as many options or we're pushing back on strike dates, so that they're picked up into firm work a lot earlier.

[Colin Davies, Sanford C. Bernstein & Co. LLC]

Yeah. That makes sense. That makes sense. And you managed to getting some – on the longer options, you managed to get some pricing on those as well?

[Roddie Mackenzie, Transocean Ltd.]

Yeah. So, as Jeremy said, we've been very balanced in how many rigs we commit to long-term prospects in the down market. And all the ones that we do have on longer periods in every case, the option rates go up. So, we can point to the Norway ones because they're the easiest. But the option rates go up quite significantly. And they're still picking up the options, so that's a good sign. But fairly even on the ultra-deepwater ones, a couple of long-term ones that we signed during a downturn, all of them have higher option periods, higher option rates. So, some of them are hardwired that will go up by a certain percentage. And some of them are actually linked to things like oil price commodity or average day rate of floaters.

So, when we saw options being requested in later years like 2019 and 2020 and 2021, that's kind of the way we played it to make sure that we didn't lock ourselves into lower rates into the early 20s, but – so we should see some good upside on some of those longer ones.

[Colin Davies, Sanford C. Bernstein & Co. LLC]

Very interesting. Thank you. I'll hand it back.

[Operator]

And that concludes today's question-and-answer session. Mr. Alexander, at this time, I will turn the conference back to you for any additional or closing remarks.

[Bradley Alexander, Transocean Ltd.]

Thank you, Christina, and thank you, everyone, for your participation on today's call. If you have any further questions, please feel free to contact me. We look forward to talking with you again when we report our second quarter 2018 results. Have a good day.

[Operator]

And this concludes today's call. Thank you for your participation. You may now disconnect.