Transforming Transocean

OIL & GAS FINANCIAL JOURNAL: Steven, to help our readers get to know you, could you tell us a little about your background?

STEVEN NEWMAN: I was born in Salt Lake City and raised by a copper miner. My father spent his career in copper mining, and he is probably the biggest reason I am what I am today. He spent his life searching for copper, and I've spent mine looking for oil. It was a result of his poking and prodding that I went into petroleum engineering at the Colorado School of Mines. He introduced me to a colleague of his who was a Mines alum, and that's how I got interested in that school. He had gone through an executive program at Harvard and encouraged me to think about ways I could broaden myself and be more than just a technically oriented engineer. I took the GMAT in anticipation of attending business school, and I was fortunate enough to get into Harvard. So I paired a degree in petroleum engineering with an MBA from Harvard.

That combination of a technical knowledge of our business coupled with a strategic, financial, and organizational understanding put me on the right path. Over the course of my career, I was fortunate enough to be mentored by some really talented people who made sure I had the right opportunities, the right exposure, the right development, and the right challenges. I've been with Transocean and its predecessors for 20 years now. I've worked in almost every part of the world and on every type of equipment we operate. I've worked in highly regulated environments and in less regulated emerging markets. I've worked with national oil companies, IOCs, and independents. I've worked in a variety of functions, including stints in human resources, treasury, and marketing – and I did a lot of field operations. I've been CEO for four years now. I should also mention that I have a wonderful wife of 27 years and four amazing kids.

OGFJ: You should write a book about your experiences.

NEWMAN: I may do that one day, if for no other reason than to capture my own thoughts and perspectives about a lot that has happened, especially some of the more recent experiences that have been life-changing.

OGFJ: Transocean is the largest deepwater drilling company in the world with 79 total rigs, including 46 listed as deepwater, ultra-deepwater, or for harsh environments. How did the company grow to this size?

NEWMAN: It's an interesting story. One of the things that attracted me to this company 20 years ago was the leadership position the company had in deepwater equipment at the time. In 1994, the most modern equipment was referred to as "fourth generation." There were 13 fourth-generation rigs in the world, and Sonat Offshore [Sonat acquired Norway's Transocean ASA in 1996 and eventually changed its name to Transocean] controlled five of them. Deepwater and, later, ultra-deepwater represented a major growth opportunity for the company and a way for it to differentiate itself. Over the course of my career, the list of firsts that this company has created is unmatched in our industry. We built the first rig capable of operating outside the sight of land, the first dynamically-positioned semi-submersible, the first rig capable of operating year round west of the Shetland Islands, the first rig capable of operating year round north of the Arctic Circle, the first rig capable of operating in excess of 10,000 feet of water, and we were the first company to actually operate in excess of 10,000 feet of water.

I credit my predecessors, Bob Long and Mike Talbert, for leading the company into deepwater, and more recently, ultra-deepwater. They recognized that was the one area where the company could really stand out. The choice of deepwater.com as a domain name wasn't an accident. It was by design. Those guys had a vision and they recognized and took advantage of opportunities. Initially, the merger between Sonat Offshore and Transocean. Then the merger between Transocean and Sedco Forex (1999). Then the acquisition of R&B Falcon (2001). And more recently the merger with Global Santa Fe (2007) and the acquisition of Aker Drilling (2011). All of these moves were designed to strengthen the company's leadership position in deepwater, ultra deepwater, and harsh environments. That's why you see today in Transocean the leading name in ultra deepwater and harsh environments.

OGFJ: Where are the company's main areas of operation?

NEWMAN: The Gulf of Mexico is really where the company developed and honed its reputation for deepwater drilling. That's where the first pre-salt wells were drilled. There have been more deepwater wells drilled there, more salt footage, and a lot of that was done by Transocean and its predecessors. We currently have 16 rigs in the Gulf of Mexico and offshore Canada and the potential for six more on the way.

We operate about 19 rigs in the UK and Norwegian sectors of the North Sea, and that's where the company has developed its reputation for harsh-environment drilling. Transocean has pioneered in these areas where it is really inhospitable to humans. We also operate about 14 rigs in Africa. That's where the company has developed a reputation for remote operations with challenging logistics and complex project management – the ability to get people into and out of some of those countries and operate in areas where the supply chain and the oilfield infrastructure isn't well developed.

We operate about 17 rigs in the Far East, and that's a very far-flung and widespread geography. The company has developed a reputation for the ability to move rigs over long distances and keep operational integrity intact, including the integrity of our operations teams. We have been developing Vietnamese, Thai, and Indonesian nationals into the workforce of the future.

If you look at these markets around the world, they have all offered something to us in terms of helping us develop and enhance our reputation, and I think we've contributed significantly to the exploration and development of hydrocarbons in those areas.

A lot of people don't know this but Transocean, working for Petrobras, drilled the first pre-salt well in Brazil. We helped Petrobras discover the pre-salt resource down there. All these areas around the world remain really important to the company in terms of continuing to build and enhance our position in the industry.

OGFJ: The deepwater sector is known for being cyclical and is currently in a bit of a slump. Would you care to speculate about how long this will continue, and how is Transocean coping with the down cycle?

NEWMAN: One of the challenges of operating in a cyclical industry is being able to predict the cycles. It's difficult to know how long this is going to last. But I do think we've gotten some credit from the analyst and investor community because we were talking about this early on in 2013. We started to see indications that we could be entering a period of softness. As we continue to evaluate things and look at the signposts and signals that we pay attention to, we expect to be in a position to react well when the industry starts to recover. Our focus is on the things we can control, so we're bidding competitively to keep the rigs working. We're focused primarily on utilization. And we're focused on ensuring that our cost structure is appropriate for the fleet we're operating today. That we're as efficient as we can be. By doing this, we'll be in a position to compete very effectively when the industry does rebound.

OGFJ: The Motley Fool says that of the 38 floater rigs coming off contract in 2014, Transocean has 12 of them. Will you be able to deploy these rigs elsewhere? What is your strategy?

NEWMAN: Under the circumstances we're seeing today in the marketplace, we can expect a little inter-contract idle time as we look for opportunities to re-contract the rigs. We certainly could see a situation where we would relocate equipment from one market to another. We've done that with a handful of rigs in Brazil. We used to operate 10 rigs in Brazil, and today we only operate five. We've been successful in re-contracting several of those rigs elsewhere. So as we think about a rig like the Development Driller I in the Gulf of Mexico, there are certainly possibilities and opportunities we're looking at outside the Gulf of Mexico to find follow-on work for that rig. But to see the Development Driller I idle in a period like this is not wholly unexpected. With that many rigs rolling off contract and a little bit of softness in terms of demand, I would expect to see some inter-contract idle time.

OGFJ: Transocean has ordered two newbuild dynamically positioned ultra-deepwater drillships that are expected to be delivered in the second quarter of 2017 and the first quarter of 2018. The combined cost of the drillships is about $1.24 billion. The company has also entered into an option agreement for three additional drillships of the same design and specs. This sounds as if the company is optimistic about the market going forward. Is that a fair statement?

NEWMAN: I'm very optimistic about the long-term fundamentals of our business. Energy will continue to be important. The growing population of the world and the improving standard of living will drive demand for energy. Hydrocarbons will continue to supply the vast majority of that energy, and offshore hydrocarbons will constitute a significant supply of the hydrocarbon mix. Our customers are looking farther and farther offshore in deeper and deeper water in remote and harsh environments. We believe that long term, ultra-deep water is a growth market, so we think this is exactly the right time to be investing in ultra-deep water. We have slots at the shipyards, and we have very attractive capital costs. This is all about the long-term transformation of our fleet. We are continuing to invest in ultra-deep water equipment, harsh environment equipment, and high-spec jackups. It's all part of our plan to position our company as the leading operator of high-spec equipment.

OGFJ: Transocean has been divesting some non-core assets. Can you elaborate on this?

NEWMAN: As our assets age and become more commoditized, we divest those assets. Over the past couple of years, we've tried to reduce the company's exposure to low-spec, commodity-class assets. Those are the assets that are most vulnerable in a downturn in the market, and they're the assets that are most volatile in a cyclical industry. We've sold around 60 drilling rigs over the last couple of years for in excess of $2 billion. We've made good progress in transforming the fleet, but we have more work we need to do.

OGFJ: In your Feb. 27 conference call with analysts, Transocean's fourth-quarter revenues and earnings were down slightly, while operating and maintenance expenditures were up over the previous quarter. Total fleet utilization was also down a bit – 75% in the fourth quarter versus 83% in the prior quarter. Is this attributable to the current lull in the market?

NEWMAN: We provide the market with a fair amount of data about our company, and we readily share our insight with analysts and investors. Then people are free to do their own analysis. In this case, we had guided the market to expect an increase in shipyard time for our fleet during the fourth quarter, so the lower utilization and the higher operating and maintenance expenses were a direct result of that expected increase in shipyard time, or out-of-service time. The decline in revenue was also a reflection of that though we did have a bit of a setback in our operating results in the fourth quarter relative to the third quarter. We are very open about this. If the analyst community is diligent, they can put together a pretty good model of how the company is going to perform.

OGFJ: How does Transocean pay the enormous costs of constructing a state-of-the-art fleet of offshore rigs? Surely you don't do this out of cash flow. Do you have a credit facility you utilize, and if so with whom?

NEWMAN: We regularly talk about a capital allocation that is balanced. Our focus is on ensuring financial flexibility because we believe financial flexibility in a cyclical industry is a competitive advantage. We also believe in regularly investing in our fleet. That's the only way a drilling contractor can drive long-term shareholder returns. And we believe in distributing excess cash to our shareholders, ensuring an appropriate level of shareholder returns. When it comes to incremental investment like the cost of building a new drilling rig, we view it in the context of that balanced approach to capital allocation. This assures we have a prudent level of leverage with an appropriate level of liquidity provided by the facility that supports the investment in our fleet. We believe in a disciplined approach to evaluating all investments.

OGFJ: How has the so-called "Shale Revolution" affected the offshore oil and gas industry?

NEWMAN: For starters, it has highlighted the benefit of technology. We are now able to produce gas and oil economically from shale deposits, which are essentially source rock. No one anticipated this would happen 10 years ago. Fifteen years ago, we were not able to image below the salt layer in the Gulf of Mexico. We weren't able to drill effectively through salt or produce hydrocarbons beneath salt at that time. Technological breakthroughs have made all this possible. As for how it affects offshore players, our customers will continue to take a balanced approach to deploying their capital. Given its favorable economics, offshore will continue to be an important component of their business.

OGFJ: But doesn't shale development take much of the exploratory risk out of drilling? It's almost like a manufacturing process. Does taking the risk out of the equation make shale an attractive option for many companies?

NEWMAN: I agree with you. There is little exploration risk in pursuing an onshore shale play. But the corollary to that is exploration reward. If you look at exploration results over the last couple of years, onshore volumes are relatively small compared to offshore where the absolute number of discoveries is not as large as onshore, but the volumes are significant. So when you think about our customers, particularly our IOC customers, big companies need big accumulations. The offshore environment may have greater risk than onshore shale, but it also offers the prospect of greater accumulations and greater rewards.

OGFJ: I have to ask you about the Macondo incident. The April 2010 blowout on the Deepwater Horizon rig was tragic due to the lives lost, and it was a financial blow as well. Can you describe the impact on the company and what lessons were learned from Macondo?

NEWMAN: It's a little bit easier to talk about the lessons that we learned from Macondo, so I'll take that question first, Don. Our understanding of what happened at Macondo, much as it is with other incidents we've experienced, is that we learned a lot about risk management, risk identification, risk assessment, and communication of the outcome of those assessments. Since April 20, 2010, we have continued to improve the approach we take to risk management, and I think the industry has as well.

In terms of the impact of Macondo, we used to include an estimate of the cost in our annual filing.s As good a job as we tried to do in calculating that number, I'm not sure that number accurately captured the impact on our company. April 20, 2010, was a tragedy. It was extremely traumatic for our people, and it was devastating for those who were directly involved.

OGFJ: You had just been named CEO a short time before Macondo, right?

NEWMAN: Yes. I became CEO on March 1st, and the accident happened 50 days later.

Since Macondo, the company has been undergoing a significant transformation. Really, Don, at every level of the company we have undergone significant change. Our board of directors, for instance. The board I work with today is very different from the board I was working with when I became CEO. There are 14 directors, and more than half of them have four years or less as members of our board. Our senior management team is almost entirely new.

Earlier you mentioned the 79 rigs we operate today. Just a couple of years ago, we were operating 140 rigs, so the fleet is about half the size it was two years ago. It is significantly more competitive today than it was then. The transformation that is underway with our fleet is continuing to reposition the company as a leading competitor in high-sec equipment. Our operating results and our financial performance are continuing to improve from what was a very disappointing performance in 2010 and 2011. I believe that our customer relationships are much stronger today than they were a few years ago. If you put the last four years in context, Macondo was the low point. Since that time, we've really been on an intense journey to transform this company.

OGFJ: Are you actively involved with your primary insurer in the risk management process? One insurance company recently told me that they often partner with their oil and gas customers in the risk management effort.

NEWMAN: They're very interested in what we do. I meet with our lead underwriter a couple of times a year. One of the benefits with me being in Western Europe is that the London market is not that far away. We talk about the results, and we talk about the continuing efforts that the company is undertaking to regularly improve those results. We talk about what we're doing with respect to training and competency development. We talk to them about how our management systems continue to evolve.

OGFJ: Earlier in our conversation, you mentioned some of the mergers and acquisitions that made Transocean what it is today. Are you still looking at prospective companies with respect to additional M&As?

NEWMAN: Certainly. As I talked earlier about the transformation underway with our fleet, we continue to look for opportunities to invest in equipment that will allow us to differentiate ourselves. Whether we build that equipment ourselves or we buy the equipment from somebody else who might have built it, I'm agnostic about the build versus buy decision. What I look for are assets that are supportive of our asset strategy – equipment that allows us to differentiate ourself; economics that are compelling – I want a value-creating business case that I can put in front of our shareholders to justify any M&A activity; and the third element to any M&A opportunity is feasibility – can you get the deal done. Those are the three criteria we apply to any opportunity. We continue to look for opportunities in the marketplace. In a cyclical downturn, opportunities for industry consolidation can emerge.

OGFJ: What are you doing to compete for the best employees in the current environment in which the workforce has gotten older and older over the past decade or so, and many of the baby-boomers are starting to retire?

NEWMAN: Developing the next generation of leaders in our business isn't something that is new to us. I remember when I managed our business in the Far East 15 years ago. We had a focus on hiring really talented local folks – Indonesians, Malaysians, Thais, and Vietnamese. That was the only way we were going to be successful in that area of the world. We needed local people to manage our business. If you look at our employee demographics today, I think we have about 80 nationalities represented, and we have about six nationalities among our executives. This is something we've been focused on for well over a decade.

It's interesting that in the Western World, mainly Western Europe and the US, the oil and gas industry is not seen as an attractive opportunity for young people especially. But if you get out of Europe and the US, the rest of the world sees the petroleum industry as offering exciting career opportunities with strong development and growth potential. So that's one of the benefits we have of being a global company. We've taken a global approach to identifying and developing talent. We partner with the IADC in the drilling industry and API in the petroleum industry on training and development. We participate in career fairs, and we're a strong supporter of the Offshore Energy Center in Galveston, Texas, and their deployment of what they call the mobile oilfield learning unit (MOLU), which they ship around the US in an effort to encourage young people to think about a career in the oilfield. Offshore technology is extremely advanced , and the opportunities we provide are very, very challenging. You can join the offshore energy industry and see the world. All of these things can be very enticing to young people.

OGFJ: Final question: What will Transocean look like in 10 years?

NEWMAN: I've talked about this transformation that we're undergoing. So I look forward to a time when we are much further along in this transformation. There are a few things that I think will characterize this company. We will be the leader in high-spec rigs – high-spec floaters, harsh environment rigs, and high-spec jackups. I could rattle off 10 or 12 or 15 things, but the bottom line is that we will have a much longer list of firsts than we have now. We will have further enhanced our reputation for technological innovation. We will be characterized as a best-in-class operator. We will be the company that everybody else points to as being the leader in operating drilling rigs. And we will have done some of these things that you and I talked about in terms of unlocking the world's offshore resources. There is more in the world's oceans than just hydrocarbons. There are huge mineral deposits offshore, and there are gas hydrates in abundance. As our customers tackle some of these opportunities, I wouldn't be surprised to see them come to Transocean to partner with them because we have the offshore expertise they need. We are willing and able to help expand the industry's frontiers.

OGFJ: Thanks very much for your time.