May 9, 2013
Executives
Thad Vayda - Investor Relations Steven Newman - Chief Executive Officer Esa Ikaheimonen - Executive Vice President and Chief Financial Officer Terry Bonno - Senior Vice President, Marketing
Analysts
Robin Shoemaker - Citi Angeline Sedita - UBS Greg Lewis - Credit Suisse Scott Gruber - Bernstein Ian MacPherson – Simmons Waqar Syed - Goldman Sachs Anders Bergland - Platou Markets Bernd Pomrehn - Main First
Operator
Good day, and welcome to the Transocean First Quarter 2013 Earnings Conference Call. Today’s conference is being recorded.
And at this time, I would like to turn the conference over to Mr. Thad Vayda.
Please go ahead sir.
Thad Vayda
Thank you, Anthony. Welcome to Transocean’s first quarter 2013 earnings conference call.
A copy of the press release covering our financial results along with supporting statements and schedules are posted on the company’s website at deepwater.com. We have also posted supplemental materials as you may find helpful as you update your financial models.
These materials can be found on the company’s website by selecting Quarterly Toolkit under the Investor Relations tab. Joining me on this morning’s call are Steven Newman, Chief Executive Officer; Esa Ikaheimonen, Executive Vice President and Chief Financial Officer; and Terry Bonno, Senior Vice President of Marketing.
Before I turn the call over to Steven, I would like to point out that during the course of this call, participants may make certain forward-looking statements regarding various matters related to our business and company that are not historical facts, including future financial performance, operating results, estimated contingencies associated with the Macondo well incident, the board’s recommendation for the return of capital to shareholders including the timing and amounts of the proposed dividend, projected outcomes of shareholder voting on any matters to be presented at our Annual General Meeting, anticipated results of our store-based cost savings initiatives, and the prospects for the contract drilling business in general. Such statements are based on the current expectations and certain assumptions of management and are therefore subject to certain risks and uncertainties.
As you know, it’s inherently difficult to make projections or other forward-looking statements in a cyclical industry since the risks, assumptions, and uncertainties involved in these forward-looking statements, include the level of crude oil and natural gas prices, rig demand, the effects and results of litigation, assessments and contingencies, and operational and other risks, which are described in the company’s most recent most Form 10-K and other filings with the U.S. Securities and Exchange Commission.
Should one or more of these risks and uncertainties materialize or underlying assumptions prove incorrect, actual results may vary materially from those indicated. Transocean neither intends to nor assumes any obligation to update or revise these forward-looking statements in light of developments which differ from those anticipated.
Please also note that we may use various numerical measures on the call today that are or may be considered non-GAAP financial measures under Regulation G. You will find the required supplemental financial disclosures for these measures, including the most recently comparable GAAP measure and an associated reconciliation on our website at deepwater.com under Investor Relations, Quarterly Toolkit, and Non-GAAP Financial Measures and Reconciliations.
Finally, to give more folks an opportunity to participate in this call, please limit your questions to one initial question and one follow-up. Thanks for your attention.
I’ll now turn the call over to Steven Newman. Steven?
Steven Newman
Thanks, Thad and welcome to all of our employees, customers, investors, and analysts. Thank you for joining us on the call today.
As you saw from the press release, we reported adjusted earnings from continuing operations of $337 million or $0.93 per diluted share, including $16 million in net unfavorable items; we reported net income attributable to controlling interest of $321 million or $0.88 per diluted share. Our first quarter results were negatively impacted by disappointing revenue efficiency caused in part by the industry wide need to replace effective OEM goals in our subsea well control equipment.
As you recall when we reported our fourth quarter 2012 results we indicated that this would impact our first quarter performance. This is unfortunate and a reminder of the potential for variability in our revenue efficiency.
The lower revenue efficiency was most prominent in our ultra-deep water fleet which was affected by both the need to replace the defective bolts and also by unrelated well control equipment problems and other down-time issues. As I have said consistently our progress with revenue efficiency will not be liner and it is susceptible to temporary setbacks.
However I remain fully confident in the initiatives we have undertaken to improve our operating results. Our challenge now is to demonstrate the sustainability of the improvements we have delivered in 2012 and we are meeting this challenge.
Esa will take you through the numbers in some detail in a moment. I will focus the balance of my comments on our strategic objectives as well as our progress and efforts to continuously improve our operating and financial results.
Specifically I will briefly touch on our shore based realignment and cost cutting initiative, developments in our assets strategy and fleet competitiveness, updates in our new build program, our plan to distribution of excess cash to shareholders and the Macondo litigation and other uncertainty. With respect to our cost cutting measures, while we continue to drive sustainable improvement in our revenue efficiency and out of service time.
Our operational focus has expanded to include a critical evaluation of our cost structure as well. As we have noted in recent calls and discussions with analyst and investors and in our recent press release the initial phase involves a review of our global shore based organization.
This initiative is intended to better align the companies shore based support infrastructure is the composition and geographic distribution of our fleet and is a key component of the company’s plans to improve operating margins. We expect this restructuring to result in a more efficient and focused shore based organization that provides the highest level of support for the company’s rig operation delivering best in class safety and operational excellence.
As we communicated in our recent press release we expect to reduce our shore based cost around the world by about $300 million annually. This is an initial step in our efforts to improve the company’s competitiveness and create value for our shareholders and it is a meaningful first step.
Together with improvements in revenue efficiency a reduction in our overhead cost structure and combined with our offshore and project operations initiatives we expect additional improvement in operating margins and we will keep you updated on our progress. As we have discussed our emphasis on improving our operating and financial results is complemented by our focus on executing our asset strategy and improving the competitiveness of our fleet and we continue to make progress in this area as well.
We have sold three standard jackups during the quarter leaving on four standard jackups built for sale. There is continued interest from buyers in this asset class and we expect to exit the standard jackup class by year end.
We are also in conversations with prospective buyers interested in certain low spec commodity (inaudible). This progress and the execution of our asset strategy is all part of our effort to reposition the company as a focused high specification role enhancing our leadership position in ultra-deep water and harsh environment floaters.
Transocean’s competitiveness and importantly our ability to create value for shareholders are directly related to a prudent and balanced approached to the deployment of capital, the cyclicality of the industry demands financial flexibility as characterized by a strong investment grade quality balance sheet. The markets evolving demands which are driven by customers’ needs and asset intensity required discipline, high return investment in our fleet.
We remain committed to maintain our focus and continuous improvement on both of these strategic comparatives. Regarding our current new build program, as you know we have recently put delivery at Transocean Siam Driller which commenced to a long term contract with Chevron in Thailand in the fourth quarter and we recently announced the three year contract on the deep water Asgard.
With this award all of our new build rigs under construction are now under contract, discussions regarding the potential for additional contracting opportunities continue and Terry will comment more specifically on these shortly. Along with strengthening our balance sheet and continuing to make disciplined high return investments in our fleet, Transocean has a history of returning excess cash to shareholders.
The company has distributed approximately $20 billion to shareholders since 2006. Consistent with this history, Transocean has proposed a $2.24 per share dividend or approval by our shareholders at next week’s AGM.
We believe that the market places a premium on dividend sustainability and growth and we firmly believe that the $2.24 per share dividend we have proposed is the right starting point to ensure that we deliver both sustainability and growth in the context of remaining uncertainties which I will discuss in a moment. Our focus on improving our revenues and reducing our cost will allow for growth of the dividend in the near-term and high return reinvestment in our fleet will provide for long-term sustainability and growth going forward.
Regarding Macondo, it is important to note that no new facts related to Transocean emerge during Phase 1 of the trial. We remain focused on defending the company against any allegations that we are finding at gross levels.
We have paid the first installment of $400 million of the $1.4 billion settlement with the DOJ which we announced in January. In Brazil, we are encouraged by the court’s dismissal of the criminal claims against the company regarding the project field incident and the regulators’ approval to Chevron to restart operations on the project field.
Both of these steps represent progress in all attempts to achieve a comprehensive resolution regarding this incident. In Norway, the Civil Court’s finding in Transocean favor regarding the tax residency of one of our key subsidiaries further supports our position that our Norway tax filings are materially correct as filed.
We will continue to vigorously depend ourselves in the ongoing criminal litigation. Before I turn it over to Esa, I will offer just a few comments about our Annual General Meeting to be held next week.
As you are likely well aware, there are two competing dividend proposals up for shareholder vote, the Board’s proposal of $2.24 per share and (indiscernible) proposal of $4 per share. We are pleased that nearly all those in the analyst community, the leading proxy advisors and many of our shareholders have voice support for the company’s $2.24 per share dividend, which represents one of the highest inside payout ratios and dividend yields in the industry.
We believe Mr. (indiscernible) is shortsighted, irresponsible, and ignores the uncertainties the company currently faces.
We encourage all shareholders to vote for the company’s $2.24 per share dividend. On the matter of directors, we urge all shareholders to conduct appropriate due diligence and exercise prudent judgment when casting our votes for Board nominees.
We believe the Transocean board nominees are the most qualified to serve the best long-term interest of the company and its shareholders. Our nominees have deep relevant industry expertise and we are confident they will remain focused on generating value for all shareholders.
We recommend that shareholders vote for the companies by experience and highly qualified director nominee. We believe that board’s function best when regular renewal is balanced with appropriate continuity.
We have added six new directors in the last two years to serve alongside seasoned directors who provide continuity and historical insight given their exceptional institutional knowledge of Transocean, our customers and the industry as a whole. This Transocean board has played a critical role in managing Macondo in the development and the implementation of the operational improvement plan in the cost reduction program and in the proposed $2.24 per share dividend.
And we believe their continued involvement is essential to our ability to continue the progress we have achieved over the past several quarters. These are important issues, but please feel free to call Thad, Esa, or myself if you would like to discuss it.
With that, Esa, let’s go through the numbers.
Esa Ikaheimonen
Thank you, Steven, and good morning and good afternoon everyone. As Steven mentioned, we reported net income attributable to controlling interest of $321 million or $0.88 per diluted share for the first quarter of 2013.
Our results included $16 million in net unfavorable items as follows: $49 million due to a non-cash after-tax adjustment in contingencies associated with Macondo crew claims partly offset by $33 million associated with favorable discrete tax items in certain jurisdictions. Excluding these items, our adjusted earnings from continuing operations were $337 million or $0.93 per diluted share.
This compares with similarly adjusted earnings of $0.91 per diluted share in the fourth quarter of 2012. For the first quarter of 2013, our consolidated revenues decreased by $129 million to $2.2 billion compared with $2.33 billion in the prior quarter.
The decrease was due to lower revenue efficiency offset partly by fewer out-of-service days. Total fleet revenue efficiency was an unsatisfactory 88% in the first quarter compared with 94.7% in the fourth quarter of 2012.
Also deep-water revenue efficiency declined to 83.8% from 95.5% in the prior quarter. As we mentioned in our fourth quarter 2012 earnings call the lower revenue efficiency in the first quarter reflects the impact of replacement of OEM defective bolts in subsea well controlled equipment.
We estimate that the revenue impact of the bolts in the first quarter was approximately $63 million. Also contributing to the decrease and was unrelated well control and other equipment down time on certain ultra-deep water rigs.
Overall fleet utilization for the first quarter was 80% compared with 79% achieved in the fourth quarter of 2012. Other revenues remained at the same level as the previous quarter this reflects the continuation of low activity levels in our international drilling management services business.
As a remainder this operating segment will continue to create some volatility in other revenues. Even though relatively low margin nature of this business the volatility has limited impact on our earnings that has the effect of reducing our overall margins when measured and compared in percentage terms.
Our first quarter operating and maintenance expenses were $1.38 billion reflecting a decrease of 63 million compared with $1.44 billion in the fourth quarter of 2012. The decrease was primarily due to the sequential decline in maintenance and shipyard cost of about a $130 million.
This decrease was partly offset by the non-cash $74 million charge associated with the adjustment of contingencies related to crew claims on the Macondo well incident. Interest expense, net of amount capitalized and interest income was $140 million compared with 167 million in the fourth quarter of 2012 reflecting the repurchase of the Series C convertible senior notes late in the fourth quarter of last year.
Depreciation expense for the quarter was $275 million compared with 278 million in the prior quarter. General and admin expenses were $67 million for the first quarter compared with 65 million in the previous quarter.
The effective tax rate from continuing operations after adjusting for unusual items was 5.7% for the quarter and the annual effective tax rate was 19.2%. Net cash flow generated from operations decreased to $106 million in the first quarter compared with $923 million in the fourth quarter of 2012.
This decrease was primarily due to the payment of the first installment of $400 million plus interest on the Macondo settlement agreed with the U.S. Department of Justice in January 2013 and other changes in working capital.
Capital expenditures from continuing operations were $488 million in the quarter down from 657 million in the prior quarter. Fourth quarter CapEx was impacted by initial shipyard payments associated with the new build drill ships.
The divesture of three standard jackups generated $63 million cash proceeds during the first quarter. Finally during the quarter we repaid a total of $1.19 billion of debt including scheduled maturities and accelerated debt payments.
This resulted in net cash on hand of 3.6 billion to 7 billion at the end of the quarter. Our full year 2013 P&L guidance is unchanged, the first quarter revenue efficiency as Steven said well below our expectations and the need to replace defective bolts and subsea well controlled equipment and other down time issues on certain ultra-deep water rigs.
Our guidance on revenue efficiency is unchanged at 93%. Our operating and maintenance expense guidance is also unchanged at between $5.7 billion and $5.9 billion.
We expect second quarter operating and maintenance cost to be higher than the first quarter, adjusted for the pre-tax $74 million Macondo charge previously discussed due to many factors including seasonality in maintenance, shipyard schedules and increased activity related to our new build rigs. As we communicated in our recent press release, we expect annualized savings associated with the shore based organizational initiative of approximately $300 million.
We do not anticipate realization of a material benefit from the initiative in 2013 as any reduction in cost in 2013 is expected to be offset by restructuring expenses. We expect that about 70% of the annualized savings will be realized already during 2014 with the full effect of this program achieved in 2015.
We continued to review our entire cost structure with the objective of achieving additional improvement in our operating margins. Our 2013 capital expenditures guidance is reduced to approximately $2.4 billion from earlier guidance of $3 billion due to changes in the timing of progress payments on our new build construction project.
The $2.4 billion comprises new build CapEx of approximately $1.3 billion, sustaining CapEx of about $450 million, major upgrades and refurbishments of approximately $400 million, and CapEx associated with Subsea spare parts for our ongoing efforts to improve operational performance of about $250 million. The schedule of expected annual payments for our entire new build program is included on our website.
Finally, a few points about the balance sheet, our short-term liquidity target remains between $3.5 billion and $4.5 billion. The liquidity target includes consolidated cash, the un-drawn $2 billion revolver and the secured credit facility of $900 million issued in October 2012.
Our liquidity target excludes the $690 million cash collateral included in other current assets and other assets that is on deposit to pay the Aker export finance loans. We strongly believe that this is a prudent and responsible target level of liquidity until the uncertainties the company currently faces are reduced.
We are confident that the proposed $2.24 per share dividend that the board is recommending to our shareholders is the right level in the context of our liquidity target and the remaining uncertainties the company faces. The dividend also reflects the need for financial flexibility provided by a strong investment grade balance sheet enabling us to continue to execute a strategy of fleet renewal through disciplined, well-timed, and high return investments in our fleet.
The $2.24 per share dividend produces a yield payout that is very competitive with our peers and represents an initial yield of about 4.1% based on Wednesday’s closing share price. Steven has already discussed steps we are taking to improve our operating margins.
They include the continuous focus on improvement and stabilization of our revenue efficiency, a systematic and urgent focus on our cost structure, an additional improvement in our project execution and in out-of-service time. Given these measures and our roadmap, we are confident that our recommended $2.24 per share dividend is sustainable and provides a basis for future increases.
The board is committed to continue to evaluate the business and consider the distribution of increased level of cash to shareholders going forward. As a further reminder, we remain committed to a strong balance sheet and an investment grade credit rating, and as such our debt target is unchanged.
We intend to reduce gross long-term debt to between $7 billion and $9 billion, reflecting a solid investment grade financial profile. The gross long-term debt target, excludes the export finance loans of some $690 million.
Our goal of retiring approximately $1 billion in excess of existing repayment obligations by the end of 2014 remains on track. During the first quarter, we paid approximately $270 million towards the $1 billion goal by calling our senior unsecured callable bonds due February 2016.
The accelerated debt payments are not expected to incur any material pre-payment penalties or any other costs. Scheduled maturities for the remainder of 2013 and 2014 are expected to be modest at about $170 million and $270 million respectively.
These figures exclude the payment obligations associated with the partial DOJ settlement on Macondo. Even with the debt retirements, capital expenditures and the proposed $2.24 per share dividend distribution, we expect to maintain our liquidity within the target range throughout 2013.
With that I will hand it over to Terry to update you on the markets.
Terry Bonno
Thanks Esa and hello to everyone. Before we cover specific markets I would like to make a few general comments, while tendering in the first quarter was relatively slow compared to the second half of 2012, April has reversed its trend with a number of announced fixtures equaling that at the entire first quarter of 2013.
In the ultra-deep water market seven fixtures have been announced in April leaving a toll of 25 ultra-deep water (inaudible) floaters uncommitted through 2015. The (inaudible) operators are very active having seven rigs available in April and they continue to pursue more capacity in the near term.
Year-to-date we have added 2 billion of contract backlog and we expect to report more positive news shortly. While the tendering pace has improved in April contract awards continue to take an extended period of time to execute mainly because of regulatory requirement.
Additionally we are seeing certain customers delaying decisions on development programs due to overall project cost coupled with near term uncertainty in Brazil causing unexpected capacity in the near term. While the near term maybe a little challenge we are confident in the long term fundamentals and our customer’s willingness to continue to increase their activity level.
Now to specific market, day rates for ultra-deep-water rigs are leveling off around 550,000 to 600,000 per day depending upon area of operation in terms contract. The lower specification ultra-deep-water units offering are around $500,000 to $550,000.
Ultra-deep-water demand continues to be driven by exploration programs in the U.S. Gulf of Mexico, West Africa, East Africa and in other emerging markets.
We are very pleased to contract the Cajun express, the first ultra-deep-water unit to depart Brazil the one year at $600,000 per day offshore Morocco. In our last earnings call we stated we were in advance discussion with the major integrated international oil companies for the construction of one dual activity ultra-deep-water drill ship and today we continue to make progress with these direct negotiations.
Our confidence in the long term future of ultra-deep-water market continues to be confirmed by the customer interest in the remaining fleet available in 2013. Although the pace of tendering of the deep-water market has been relatively quiet year-to-date we recently signed a contract for the jack based in Australia for 90 days at 525,000 per day.
We expect to see an increase in opportunities in the second half of 2013; we are currently in discussions with several customers for the remaining available fleet. Mid-water and harsh environment activity especially in the UK and Norwegian North Sea remains very high with lead times now pushing out to two years.
In the UK long term exploration and development programs are providing opportunity to extend the contract on existing fleet and bring additional harsh environment capacity into the market. We have recently extended the John Shaw for one year at $415,000 per day and we are in discussions to return the article into act of duty in the UK.
Outside of the UK and Norwegian markets the market for mid-water rigs has been less certain, however we are seeing a slight uptick in activity in the (inaudible) and Asia. We’re actively pursuing opportunities for our rigs becoming available in 2013.
Utilization in day rates for premium jackups remains strong due to improving demand in almost all jackup provinces. This is reflected in the extension of the GSF Magellan in Nigeria for one year at a $168,000 per day and the opportunities and discussions we are currently having with our customers for available fleet in 2013.
The increased utilization has resulted in rate of high specification jackups increasing to over a $170,000 per day in West Africa and well over $200,000 in UK. In summary the ultra-deep-water market is strong but we could experience a near term softness due to delays in award and excess capacity.
The deep-water market utilization remains over 90% but currently experiencing slow activity. Mid-water in UK and Norway and the jackup market remains robust.
Longer term we believe that continued success in exploration increased development programs in emerging plays support our view of ample opportunity for the existing fleet and for future growth. This concludes my overview of the market.
So, I will turn it back to you Steven.
Steven Newman
Thank you, Terry. With that, Anthony, we are ready to open it up for Q&A.
Operator
Absolutely. (Operator Instructions) And we will take our first question from Robin Shoemaker at Citi.
Please go ahead.
Robin Shoemaker - Citi
Good morning.
Steven Newman
Good morning Robin.
Robin Shoemaker - Citi
Steven, one of the things you mentioned in your comments was that you saw some interest form buyers in low spec commodity floaters and so I wonder if you could just share with us what your view is on the potential for selling some of the – I guess, this would be in the midwater fleet, I am assuming. And what that could – how that could possibly impact your cost reduction programs?
Steven Newman
Well, I think as it relates to the potential, Robin, I think we see pretty good opportunities out there. As Terry described, the North Sea and Norwegian markets are really strong right now.
Outside those two particular areas, we haven’t seen quite the pace of day rate progression but there still is a fairly active market out there. And so the buyer community is roughly similar to the same folks who are interested in low spec commodity class jackets.
They see an opportunity to deploy capital in what is an interesting business. I think the impact on our cost structure would play out the same way the continued transformation of the broad fleet has played out as we sell rigs and reduce our market presence, where our footprint in particular areas, it gives us an opportunity to reevaluate the shore-based infrastructure in those areas.
And then it does help us continue to drive the focus on direct spending on the rigs as well.
Robin Shoemaker - Citi
Okay. My other question was for Esa, on the last call you spoke at some length about the looking that Transocean is looking at different financing solutions including an MLP and that you kind of had an ongoing internal analysis as to the applicability of that to Transocean.
So, wondered if you could update us if you have had any further thoughts about the MLP structure?
Esa Ikaheimonen
Thanks Robin. Very good question.
I knew somebody was going to ask that question, by making good progress I have got a very high quality team working on the topic bringing different expertise to its financial, legal tax, but also operations, marketing. We are not ready to conclude yet, but we have spent a fair amount of time since the last call reviewing the fleet and looking at the best candidates for a potential MLP analyzed multiple structural alternatives, because this is if implemented going to be very complicated and we need to be absolutely certain that from a tax perspective, this kind of thing would work.
We have analyzed the economics. We have analyzed the capital structure implications, reviewed and assessed the legal boundaries and issues and identified remaining key issues and also tried to model how an MLP would look like throughout that complete drilling cycle.
So, as you can hear we are not ready to conclude that we are making very good progress and in not too distant future we should be able to further engaging it with our board and inside our management to conclude and then communicate as to whether or not we see this as an appropriate tool for Transocean.
Robin Shoemaker - Citi
Okay, alright, thank you.
Operator
And we will go next to Angeline Sedita, UBS.
Angeline Sedita - UBS
Alright, good morning.
Steven Newman
Good morning Angie.
Angeline Sedita - UBS
Terry, you mentioned that the rate of absorption or the contracting of the ultra-deep-water new builds obviously has been slower than anticipated and you cited the regulatory issues, but this is also indicated at least in the near-term that the market is becoming somewhat balanced or saturated at least over the near-term?
Terry Bonno
Angie, what we have seen is in some of – in certainly West Africa, it’s taken so many months to grow even contract awards that the industry knows is out there and then I think we are just little surprised that the recent announcement and goal (ph) of that the tender for blots already to be delayed several months. So the effect of that has in releasing several units back to the market in that time frame causes little bit of near term capacity.
So you know it doesn’t mean that there is not enough demand out there to observe the available fleet, it just means that the timing issue and the customers are certainly out there and we see more demand coming on in the near term too. There has been a couple of fixtures that have come out and most recently but it just creates the perception that there is more capacity there in the near term and then if you look into ’14 with the share number of rigs that are coming on, I think the customers have a little more time to make decision.
So I think it's more of a perception and we just going to have to stay out how it plays out.
Angeline Sedita - UBS
Okay and then have you seen, have any of these (inaudible) that are building these rigs or any of them more European or smaller companies where you think that there could be a little bit of panic as the rigs are delivered that they start to take a rate that’s lower than what has been taken so far in the market?
Terry Bonno
If you look out over the next 12 to 16 months what you’re going to see is with the fragmentation of the market as you decide you’re going to see 15 contract drillers competing for the same opportunities and so while I think that there has been a tremendous amount of discipline in the market thus far you put on some near term capacity and we are just going to see how this plays out certainly but I think it's going to be very interesting.
Angeline Sedita - UBS
And as a related follow-up I guess for Steven or Esa on the operating efficiency initiative clearly in your margins and based on your comments here during this conference call is that beyond the 300 million that you still see additional cost cutting opportunities going into 2015 is that fair?
Esa Ikaheimonen
It's very fair. We have identified several other areas that we are focusing on now in order to further improve well beyond the $300 million target and that includes offshore manning, the way we do projects, maintenance philosophy, even issues such as remuneration policies and so on and so but there is obviously a lot left to optimize and that’s what we are focusing on next, whilst obviously also focusing on implementing the on-shore initiative and delivering the results that we are committed to deliver.
So the answer is clearly there is more opportunity and more space for optimization and improvement.
Operator
And we will go next to Greg Lewis at Credit Suisse.
Greg Lewis - Credit Suisse
Not to dwell on the cost initiative because clearly it's been sort of rig over the calls (ph), is there a way to estimate how much of the 300 million initially is associated directly with the sale of Shelf Drilling.
Esa Ikaheimonen
It's a forced evaluation. I think we could do that, reality is that 300 million is well over and above the Shelf Drilling contribution to overheads, as a matter of fact I think it is, if not in excess of three times is probably something like that in comparison with the overhead coverage that we got from that part of the portfolio.
So clearly this is much larger than that so I don’t have an exact number to use but the $300 million per annum represents something like three times to the contribution to overhead as part of the portfolio had.
Greg Lewis - Credit Suisse
And then just shifting over to the market. I guess congratulations on the extension of the jack based that sounds like a pretty attractive rate in Australia.
As we think about two other rigs that are in sort of that area of the world, I mean I guess you have the one high spec floater the Yumin (ph) in India and it looks like it's rolling off this summer, and then we have in just if you can provide just an update on how that’s working I guess that rigs with ONGC, and then maybe what’s the outlook for the explorer at this point, I believe, that rig has been idled for a little while now?
Terry Bonno
Hi, Greg. Starting with the Hilm, we are still on contract with ONGC.
ONGC actually has some upcoming tenders that we actually could participate in where we could keep the rig right there. Also we are participating in other tendering right now in Asia.
So, we do see there is opportunities for the Hilm to certainly continue her campaign through 2013. At the GSF Explorer, we have been actively marketing the rig.
We have had a few – excuse me, we had a few opportunities, where we just didn’t get to the finish line, where there was partly some interest in Africa, but today, we are still in discussions in India, and we are very hopeful that we will be able to come to some conclusion there.
Greg Lewis - Credit Suisse
Okay, great. And then just if you can just provide on the Hilm mill, it almost sounds like just given the opportunities in India and potentially elsewhere that we probably see that rig get re-upped at a higher rate, is that a fair assumption?
Terry Bonno
Well, I mean I think that you got to look at the capabilities of the rig in the market that it’s in. This is actually a third generation rig.
So, I wouldn’t say that it’s a high-spec rig. She is a third generation standard floater that we had actually done some upgrades too, but she is going to be competing in a market probably with the midwater floater.
So, I wouldn’t have the expectation that it would be a high rollover rate.
Greg Lewis - Credit Suisse
Okay, perfect. Thank you very much.
Steven Newman
Thanks Greg.
Operator
We will go next to Scott Gruber at Bernstein.
Scott Gruber - Bernstein
Yes, hello.
Steven Newman
Hi Scott.
Scott Gruber - Bernstein
You’ve reiterated the goal of reducing debt down to below $9 billion. Now, let’s assume that Macondo is resolved and you face no additional liability above and beyond what you have already booked and assuming you had $800 million dividend is approved, can you discuss how would weight debt reduction versus further enhancement of the dividend?
I guess my question is would reduction be still be prioritized?
Esa Ikaheimonen
Very good questions, Scott, Esa Ikaheimonen here. I wouldn’t say prioritized, because we try and follow that balanced philosophy regarding capital allocation.
So, all elements of our capital allocations are equally important. Clearly, the fact that we are proposing a dividend or reinstating a dividend increases the priority on that side of things particularly, because the intention is to sustain and grow.
So, the balanced capital allocation philosophy continues and based on our financial forecast, we will be able to do all three things. Obviously, not exceedingly aggressively, but managed on a way over a period of time.
We have got $11.5 billion of debt at this moment in time, which is around three times our EBITDA, which is clearly not a financial profile for investment grade. And we know that and the rating agencies know that and therefore we do have somewhat of a necessity to actually manage that debt level down.
And the $9 billion have been established as the level, because that kind of represents the top end of the investment grade leverage level. As our earnings improve, that obviously gives us more flexibility in terms of maybe consider adding that at an appropriate time and that’s why it’s important to maintain the strong balance sheet, because it does give us that financial flexibility and we can take advantage of opportunities as and when they come along.
Scott Gruber - Bernstein Research
Got it. And then if we come back to the cost streamlining initiatives, Esa you outlined potential areas of additional savings beyond this first phase, can those additional areas be as large or potentially larger than this first $300 million, we look at them collectively?
Esa Ikaheimonen
I think, I must be diplomatic here now, Scott. And actually make sure that we don’t start sharing our guesses as to how much the potential it could be before we have done a proper analysis, and we are ready to commit to deliver on those numbers, we are not there quite yet, we have got good estimates as to where we might be able to head and they are all very material but in terms of giving your lot more accurate figures or even indications we are not ready to do that yet but it shouldn’t say too long if OBR (ph) and that’s when we feel that we have evaluated the situation, we have basically done sufficed demand of kind of bottoms up work rather than just jump to a conclusion and that bottoms up work is actually really important so that what we do is done in a structured way that gives us the confidence that the improvements are sustainable rather than it's something that you know come and go and what is important is that we can do what we did with the shore base piece which was that we analyze, we felt comfortable and we are committed to deliver and that’s exactly what we’re planning to do with the other parts as well.
Operator
(Operator Instructions). We will go next to Ian MacPherson with Simmons.
Ian MacPherson – Simmons
I had just a couple of curiosities about the first quarter results on the revenue efficiency, it seems like something deviated from the outlook that you imparted in early March in the fourth quarter call when the 90% quarter-to-date revenue efficiency was expected to improve slightly in March. So can you walk us through what change there and how that impacts your thoughts on you have reaffirmed revenue efficiency and cost guidance for this year both of those seem to be tracking below trend for Q1 if you could comment on that first.
Thanks.
Steven Newman
Ian as it relates to the downtime we experienced in the first quarter we had some significant downtime on a couple of pretty key systems on the rigs, well controlled equipment being one of them and dynamic positioning being the other, it affected a number of rigs but as I said during my prepared comments I remain extremely confident in the ability of the management team, the operations folks around the company to continue to execute against the program we have put in place.
Ian MacPherson – Simmons
The other sort of accounting curiosity I had was around your 8 million negative expense for non-controlling interest and if I understand correctly that’s mainly dominated by the discovery of Discoverer Luanda and maybe secondarily the Transocean on which earned those consolidated DIEs, where there operational issues of those rigs that explain that number in Q1?
Steven Newman
I think we had an operational issue on the Honor, I can’t recall off the top of my head whether we had anything happen on the Luanda or not.
Ian MacPherson – Simmons
I can follow-up offline on that and then just secondary among the 7 or 8 so ultra-deep water rigs that you in your marketing window for now with roll overs in the next year or year plus, I feel those rigs that are rolling off with BP the deep-water discovery of the enterprise and the DD2 and it's been a couple of years we have assigned a renewal with BP. So can you just comment on the view there with those rigs that are better rolling off with that customer?
Terry Bonno
Yes I can comment, we are actively marketing all of the rigs that are rolling over in this window as you described so BP has taken on some new builds portfolio that we believe is going to come in and move forward where these rigs are going to be moved to other markets. We’re actually in discussion serious discussions on all of the units but that doesn’t mean that we won't be extending some of our other plays that we have with BP.
So I just wanted to make that distinction that I believe we are about to have some frequent discussions on at least one rig. So again yes we are looking to move those to follow-on work with some other customers, so that’s where we are today.
Operator
(Operator Instructions). We will go next to Waqar Syed with Goldman Sachs.
Waqar Syed - Goldman Sachs
Thank you very much. Terry could you comment on the dual BOP stacks we’re hitting that the customers are now focusing a lot more on dual BOP stacks and if you don’t have that you get a discount to what is now like a $600,000 day rate in the Gulf of Mexico?
Terry Bonno
Hi, Waqar. Yes, I think that the dual BOP stacks in the Gulf of Mexico certainly they are making quite a bit of difference with the customers and the drilling contractors.
There is certainly some efficiency due to the regulatory requirements of what we have to do now when we pull of BOP or having one ready to go is certainly beneficial. I wouldn’t say that universally the rates that are being executed $600,000 a day discounted I mean look at the Cajun Express doesn’t have two BOPs and we are able to get $600,000 a day.
Also the Asgard that we have recently contracted, that is a tender that was requesting only one BOP, so we got $600,000 a day for one BOP. So, I am not sure that we can universally say that, but again because of the requirements in Gulf of Mexico and the environment that we are in it is a beneficial addition to our fleet.
Waqar Syed - Goldman Sachs
And just as a follow-up, I hear that there could be new BOP regulations this summer and do you know what those could be?
Steven Newman
I had the opportunity to sit down yesterday here in Houston with the recently appointed Secretary of the Interior and the Director of BSEE and BOEM. And I took advantage of that opportunity to chat with them about BOP regulations and the importance of clarity and timeliness in issuing those regulations, so that we can understand exactly what we need to do respond.
What I got back from Director Watson was complementary feedback on the industry’s responsiveness and the willingness to continue to engage regarding the discussion going forward. So, I have reached out to Director Watson to continue that dialogue and I am not sure exactly when we will see him or what form they will take, but I can promise we’ll be a part of the dialogue.
And hopefully as a result of being part of the dialogue, we’ll be in a position to respond as well as we have done up until now.
Waqar Syed - Goldman Sachs
Okay. Thank you.
Steven Newman
Thanks Waqar.
Operator
And we will go next to (indiscernible).
Unidentified Analyst
Thank you. Terry, you mentioned Cajun Express leaving Brazil at the first ultra-deep-water, do you expect more of your ultra-deep-water units coming off contracts to leave Brazil?
Terry Bonno
Well, I think that they are in an interesting place and time with their current place that they have and what they are doing. And I don’t think that it’s been the secret that they are going to focus on their Campos basin and keep the rigs that are certainly instrumental for that work.
At the ultra-deep-water fleet, they said that they are going to basically follow status quo and then wait for their new builds to come in. So, I think we will certainly see our DWD departing that she was actually contracted right now with BP even though she farmed out with Petrobras, but anyway she will be leaving and again we are marketing her actively in other markets.
Unidentified Analyst
Okay, great. Switching over to the UK where your very profit into the markets, you have 9 units in the UK now, floaters and possibly one coming in a total of 10 units, and there are 20 units in that market, is that the maximum you can have in terms of government regulation when you have to sell two rigs after the global transaction?
Steven Newman
I think Andreas, the UK regulator looked at the combination of the two companies at the time of the merger and made a ruling on the acquisition of the incremental market share. I think around the world, I think the regulators understand that these are mobile assets and it is the – it’s up to the customers to drive demand in one markets relative to another.
And consequently, the contractors respond accordingly. I have never seen a situation where simply as the result of the customer asking us to bring a rig into a particular market that we have had a negative reaction on the part of the regulator.
Unidentified Analyst
Okay, great. Thanks.
I could go on, that was my two questions.
Steven Newman
Thanks.
Operator
And we will go next to Anders Bergland at Platou Markets.
Anders Bergland - Platou Markets
I have some question on the cost cutting side, I guess you touch upon that. Just to switch over to the mid-water market, do you expect any kind of a fleet renew in this market and are there any charters of getting contract against new build from this market going forward?
Terry Bonno
I’m sorry I didn’t hear the last part of it, were you talking about getting contracts for new builds?
Anders Bergland - Platou Markets
Yes contracts for new builds and the mid-water market, do you get fleet competition of (inaudible) distribution extending 30 years pretty soon and I guess we will need some kind of fleet renewal in the segment as well as some (inaudible).
Terry Bonno
Well I think that in the current environment where we have such an influx of the ultra-deep-water units and then if we had any capacity we are going to see certain of the rigs that we are doing compete down into other market but I think at some point that people are going to start looking at what does it take and is it economical and can you cross the economic hurdles that you need to convince yourself that you need to start replacing the mid-water fleet outside the UK and Norway and I wouldn’t be surprised if we do see some speculative building. I mean we already have seen a little bit of it in the harsh environment space.
But I think at some point we will have to take a look at that but until then we are going to continue to work these rigs and work in our fleet and certainly the North Sea has been very profitable and the fact that you know we are able to maintain a 50% market share and that environment is certainly a very good for Transocean. We will continue to look at the opportunities to upgrade the fleet as necessary with our customers but we will just have to again, we will have to wait to see how this turns out.
Operator
And we will take our next question from Bernd Pomrehn at Main First.
Bernd Pomrehn - Main First
Just a question on this nasty bolt issue please, obviously we underestimate that at least the short term impact of this issue, how successful have you been to fix this problem, which share of your fleet still has this issue and consequently which impact should we expect from the inspection and replacement of potentially defective bolt in the second quarter. Thank you.
Steven Newman
I think with respect to the need to replace the defective bolts we are largely through the program. The remaining couple of rigs that are exposed to the possibility of having to replace bolts are going to undertake the inspection of bolts and consequently the potential replacement of those bolts as part of normal between loss maintenance (ph).
Steven Newman
Thank you all very much for your participation in today’s conference call. We’re certainly available, if you have any additional questions and we look forward to speaking with you again on our second quarter call.
Thanks again and have a good day.
Operator
And this does conclude today’s presentation. We thank everyone for their participation.