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No. of Recommendations: 5
OK, here's the transcript from the conference call:

I think the reason for the price swing (from 1% up to 1% down during the call), which I noted yesterday, was from comments about flattening dayrates. Late in the call, Kurt Hallead of RBC Capital Markets asked an interesting question about this. At least, the setup was interesting in giving insight to what is "expected" with dayrates (and flat isn't good).

I think most people on this call and most investors are probably uncomfortable with the prospect of a flat day-rate environment. At least that is the feedback that I get back in the context of either rates are going up or they're going down, and if they are not going up or down, then they are about to go up or down. So in the context of what you've already indicated, vis-a-vis the market dynamics, it seemed like a little bit more of a situation of maybe -- I don't want to -- not putting words in your mouth, is it -- in your mind, is it excess, or is it just that finally balance that we could see a flat Ultra-Deepwater day-rate environment extend out into -- well into 2014? What is your best guess on that right now?

Terry Bonno, the company's SVP on Marketing, and the man with the most insight into the demand level going on right now (remember, Transocean is the world's largest offshore driller) responded this way:

I like the word that you use, Kurt. You said balance, and I think that that's where we find ourselves today is there's a balance. And the recent tendering activity was certainly up over the first quarter, and it was very encouraging to see these rigs obtain contracts, so that was a positive. But what it shows you is that they were all about in the range. So I think we are balanced, and I think if we were able to continue to be able to continue on that same mode, then it's where it's headed. I don't see it modulating until we hit a place in time where our customers can't simply move forward and contract the rigs. So that's about -- but I think balance is the right answer.

Another comment that probably spooked some people was a mention that demand is actually weakening a little. Actually, it was more in the way of supply of UDW (ultradeep water) rigs was high and that was reducing demand for DW and Midwater rigs. Angie Sedita of UBS and Terry Bonno had an interesting exchange on this:

Angie Sedita -- UBS:
And then, Terry, you mentioned on the last call some potential concern about short-term over capacity and Ultra-Deepwater market. Can -- in the context of what you said today, has that view changed for the better or to the worse or stable, and then also, in conjunction with that, with the Ultra-Deepwater rigs coming into the market in 2013, 2014, do you think there is near-term risks for the standard Midwater and Deepwater rigs as you see with the Amirante still being idle?

Terry Bonno -- Transocean:
Hi, Angie. Those are really good questions. The last two quarters, we have stated some concern about the sheer numbers. Now, if you look at 2014 in particular, you end up with a number that we haven't seen in the industry ever, so there's 42 rigs. I think there's about 12 new builds that need to be placed, and the rest is a rollover fleet. As we go back to 2008, I think we've of average about 20 to 25 that have been absorbed by our customers. So I think the number is just a little bit concerning. However, with all the successes, we feel comfortable that there is plenty of opportunity for these rigs to go to work. As we look forward, it could be a timing issue, and I think that's the concern. And that's why we say, near term, can our customers absorb just the sheer numbers? There's plenty of capacity to drill, plenty of opportunities out there, and we see an increasing pool of that as these discoveries continue to mound up for 2013, but I think we have to be cautious about it, and be prepared for it, and get our rigs to work as quickly as we can.

Angie Sedita -- UBS:
So do you think that with the Ultra-Deepwater new builds coming in, that there actually could be -- obviously, they're good rigs. People are going to want the rigs. Maybe there's a little bit of a timing issue in putting those in contracts, but do you think the greater risk could be for the standard Midwater and Deepwater rigs in other places in the world outside of the North Sea?
Terry Bonno -- Transocean:
This has happened in the other type of loose markets that we have experienced. The more capable assets are always going to compete down to the less capable assets, so we've seen it before with the standard Midwaters actually take a pause, and then when the market tightens up again, every rig goes back to its natural water-depth capacity to execute in, and things -- repair itself over time. So there is a possibility of it. Again, we've said that we believe we will see some idle capacity in the near term. You've already seen some. We've seen some. Our competitors have also experienced a bit of it. But again, as soon as we can work this capacity in '14 and see how it plays out, we're just going to have to, again, work very hard to place our rigs.

This is, of course, the risk with any investment in an offshore driller. As demand heats up and dayrates move upward, drillers start ordering new rigs and bringing them into the market. At some point -- and it's happened in the past -- there's too much supply for the available demand and dayrates drop and the industry goes into a slump.

So how is this going to play out? Are we beginning to see the early stages of this part of the cycle or will it hold off some more? I don't know. There have been a fair number of new discoveries recently and demand for oil is still believed to be high (though U.S. imports have been coming down recently and the country has turned into a net exporter, actually). Talk is that China and other emerging economies will take up the slack, but China has a huge pollution problem that its finally beginning to address and that means fewer auto sales (a worry for the likes of Ford, but possibly not for Tesla) as well as fewer oil-based energy plants (China's big on growing solar and wind energy, something that was supposed to help Power One, a former MUE holding).

Oil is a major input stock to the chemical industry, but energy and transportation account for 75% of the use of petroleum according the EIA ( And we still love to drive our cars (gasoline is 47% of total use). So demand is still there for petroleum, though the inland production is reducing demand for offshore oil, at least a bit here in the U.S.

Affecting the supply is continued building of new rigs by Transocean, Atwood, SeaDrill, and others. Transocean is trying to stay to building only when there's a contract ready for a newbuild, but not all companies are doing so. Atwood and SeaDrill, for instance, build on "spec" -- short for speculation -- which means they build and then try to get a contract lined up (usually within the last year before delivery). If demand slips sharply enough, then those spec newbuilds are delivered (and have to be paid for) and then are idled. And if demand slips enough, then the portions of the current fleet become idled, as well. That's the bust part of the cycle.

On the other hand, the price of Brent oil is still fairly high and has been high for the past several years since recovering from the drop during the second half of 2008. It's been above $90 since the end of 2010. ( High petroleum prices mean it is economical to go after those new finds and keep exploring. As long as that holds, I believe, demand will remain pretty strong and disruptions to the supply/demand balance such as talked about in the call, above, will be relatively temporary in nature.

However, we need to keep an eye on utilization rates (how many days the rig fleet is in use versus total possible days) and revenue efficiency rates (how much actual revenue earned versus total possible revenue that could be earned in a time period). We want both of these to be as high as possible. A declining trend is a major warning sign.

Now Transocean hasn't had the best of utilization rates in the past and I've been alright with that because the demand was still high and growing and Transocean was a bit of a special situation with the Macondo well incident overhang. The thesis involves coming out from under that as well as improved operating metrics. That's happening (though the MUE port is still down 14.15% in its overall RIG position), though not as quickly as I had wanted. And there was a setback earlier this year as it had to work through some maintenance issues.

However, as it finally seems to be taking hold, we now get this talk about flattening dayrates and some concern about too much rig supply. :-P So now, I'm going to be keeping an eagle eye on utilization rates and if it starts slipping again, I'll have to rethink the position.

Anyway, that's all for now. This post turned out to be quite a bit longer than I intended and I haven't even touched on the possibility of the company launching a MLP (which they're still looking at -- it's not necessary, but the benefits might outweigh the costs; analysts wanted a definitive answer and management was saying still under consideration).

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