Transocean Ltd. CEO Steven Newman said the company's management is confident that BP plc will honor the indemnification clause of its contract for the doomed Deepwater Horizon rig, whose sinking following an April 20 well blowout led to what is now considered the world's largest unintentional oil spill.
"We have a broad indemnity in our drilling contract from BP with respect to, among other matters, claims related to the cleanup of pollution from the well or claims resulting from such pollution [see Daily GPI, May 7]," Newman said during an earnings conference call Thursday. "...In light of the facts, the law and the long history of contract sanctity in our industry, we remain confident that BP will ultimately honor its indemnity obligations."
Asked whether BP might try to challenge the indemnity clause, Newman said it was not appropriate for him to speculate on BP's intentions or motives. On Thursday BP said it had finished cementing its damaged Macondo well in the Gulf of Mexico (GOM) after having stopped the flow of oil with a static kill operation (see Daily GPI, Aug. 5a).
After preliminary discussions with the U.S. Department of Justice (DOJ), Transocean said it has voluntarily agreed to provide DOJ with 30 days notice prior to share repurchases and before making "substantial cash payments out of our U.S. entities..."
Transocean, a leading offshore drilling company based in Switzerland, expects to see some softening in the deepwater rig market and continues to work with customers in the GOM as they deal with the government-imposed drilling moratorium there (see Daily GPI, Aug. 5b), Newman said.
Force majeure declarations by customers are being dealt with on a case-by-case basis and some agreements have been reached, he said.
"In general, our approach with these customers recognizes the unique circumstances of each situation and strives to preserve the overall contract backlog," Newman said. "These discussions are productive and generally reflect the strength of our relationships and the customer community's long-term commitment to activity and investment in the Gulf of Mexico."
Terry Bonno, Transocean vice president of marketing, said the company is in discussions with several customers "on trying to look for opportunities or farmout opportunities or other contracts that they can mobilize the rig to international locations." She said two customers are interested in moving contracted rigs from the GOM to international waters.
Projected increases in contract drilling revenue during the second half of the year will be more than offset by five significant items, CFO Ricardo Rosa said.
"First, the impact of the drilling moratorium in the U.S. Gulf of Mexico, which we currently estimate to be approximately $165 million," Rosa said. "Second, the effect of the loss of the Deepwater Horizon of approximately $130 million. Third, the impact of additional rigs stacked during the year. Fourth, higher planned out-of-service and mobilization time for high-specification floaters. And fifth, declining rates on some jackups and midwater floaters as they commence new contracts at lower dayrates."
The date of the company's next shareholder distribution is on hold while regulators in Switzerland review it in light of Macondo-related lawsuits served on the company in Switzerland.
Transocean reported second quarter net income of $715 million ($2.22/share) on revenues of $2.505 billion, compared to net income of $806 million ($2.49/share) on revenues of $2.882 billion, for the year-ago period.
Second quarter results included increased expenses associated with the Macondo well blowout of $82 million, or $69 million after tax. These include insurance deductibles, legal costs, increased insurance premiums, internal investigation costs and professional fees. Second quarter results benefited from $249 million after tax from a $267 million gain resulting from insurance recoveries associated with the loss of the Deepwater Horizon rig, offset by $18 million of expenses primarily relating to litigation matters not associated with the Macondo blowout.
Revenue in the second quarter declined $97 million from the year-ago period primarily due to contract drilling revenue reductions, including $80 million resulting from the stacking of rigs, $69 million from rigs operating on contracts at lower dayrates, $61 million from increased rig time in shipyards and mobilizations and $37 million associated with the loss of Deepwater Horizon. The decrease was partially offset by an $80 million increase in drilling management services revenues, a $54 million increase in contract drilling revenue from newly constructed ultra-deepwater rigs commencing or continuing operations in the second quarter and $16 million of other minor variances.
As of June 30 the company had cash and cash equivalents of $2.888 billion, compared to $1.586 billion at March 31, 2010. The increase is principally due to operating cash flow and the receipt of $560 million in insurance proceeds for the loss of Deepwater Horizon.
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