Internet Address


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


FORM 10-K
(Mark One)
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2005
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to ______.

Commission file number 333-75899
 

 TRANSOCEAN INC.
(Exact name of registrant as specified in its charter)

 

Cayman Islands
66-0582307
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
   
4 Greenway Plaza
77046
Houston, Texas
(Zip Code)
 (Address of principal executive offices)
 

Registrant's telephone number, including area code: (713) 232-7500

Securities registered pursuant to Section 12(b) of the Act:

Title of class
Exchange on which registered
Ordinary Shares, par value $0.01 per share
New York Stock Exchange, Inc.

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer x
Accelerated filer o
Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes o No x

As of June 30, 2005, 328,508,472 ordinary shares were outstanding and the aggregate market value of such shares held by non-affiliates was approximately $17.7 billion (based on the reported closing market price of the ordinary shares on such date of $53.97 and assuming that all directors and executive officers of the Company are “affiliates,” although the Company does not acknowledge that any such person is actually an “affiliate” within the meaning of the federal securities laws). As of February 28, 2006, 325,966,986 ordinary shares were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's definitive Proxy Statement to be filed with the Securities and Exchange Commission within 120 days of December 31, 2005, for its 2006 annual general meeting of shareholders, are incorporated by reference into Part III of this Form 10-K.
 



 
TRANSOCEAN INC. AND SUBSIDIARIES
INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2005

Item
 
Page
       
     
       
4
 
 
4
 
 
5
 
 
11
 
 
13
 
 
13
 
 
13
 
 
14
 
 
14
 
 
15
 
 
15
 
16
 
20
 
20
 
20
 
22
 
 
22
 
       
     
24
 
25
 
27
 
59
 
60
 
110
 
110
 
110
 
       
     
110
 
110
 
110
 
110
 
110
 
       
     
111
 
 

Forward-Looking Information

The statements included in this annual report regarding future financial performance and results of operations and other statements that are not historical facts are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Statements to the effect that we or management “anticipates,” “believes,” “budgets,” “estimates,” “expects,” “forecasts,” “intends,” “plans,” “predicts,” or “projects” a particular result or course of events, or that such result or course of events “could,” “might,” “may,” “scheduled” or “should” occur, and similar expressions, are also intended to identify forward-looking statements. Forward-looking statements in this annual report include, but are not limited to, statements involving contract commencements, contract option exercises, revenues, expenses, results of operations, commodity prices, customer drilling programs, supply and demand, utilization rates, dayrates, contract backlog, planned shipyard projects and rig mobilizations and their effects, newbuild projects and opportunities, the upgrade projects for the Sedco 700-series semisubmersible rigs, other major upgrades, rig reactivations, expected downtime (including downtime with respect to the Deepwater Nautilus and Transocean Marianas), the impact of the hurricane damage to the Deepwater Nautilus and Transocean Marianas on operating income, capital expenditures and insurance proceeds, PetroJack ASA options, future activity in the deepwater, mid-water and the shallow and inland water market sectors, market outlook for our various geographical operating sectors, capacity constraints for fifth-generation rigs, rig classes and business segments, effects of new rigs on the market, income related to the TODCO tax sharing agreement, the TODCO tax sharing agreement dispute, intended reduction of debt and other uses of excess cash, including ordinary share repurchases, the timing and funding of share repurchases, planned asset sales, timing of asset sales, proceeds from asset sales, our effective tax rate, changes in tax laws, treaties and regulations, our other expectations with regard to market outlook, operations in international markets, expected capital expenditures, results and effects of legal proceedings and governmental audits and assessments, adequacy of insurance, liabilities for tax issues, liquidity, cash flow from operations, adequacy of cash flow for our obligations, effects of accounting changes, adoption of accounting policies, pension plan and other postretirement benefit plan contributions and benefit payments and the timing and cost of completion of capital projects. Such statements are subject to numerous risks, uncertainties and assumptions, including, but not limited to, those described under “Item 1A. Risk Factors,” the adequacy of sources of liquidity, the effect and results of litigation, audits and contingencies and other factors discussed in this annual report and in the Company's other filings with the SEC, which are available free of charge on the SEC's website at www.sec.gov. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those indicated. All subsequent written and oral forward-looking statements attributable to the Company or to persons acting on our behalf are expressly qualified in their entirety by reference to these risks and uncertainties. You should not place undue reliance on forward-looking statements. Each forward-looking statement speaks only as of the date of the particular statement, and we undertake no obligation to publicly update or revise any forward-looking statements.

- 3 -


PART I
 
Business 

Transocean Inc. (together with its subsidiaries and predecessors, unless the context requires otherwise, “Transocean,” the “Company,” “we,” “us” or “our”) is a leading international provider of offshore contract drilling services for oil and gas wells. As of March 2, 2006, we owned, had partial ownership interests in or operated 89 mobile offshore and barge drilling units. As of this date, our fleet included 32 High-Specification semisubmersibles and drillships (“floaters”), 23 Other Floaters, 25 Jackup Rigs and 9 Other Rigs.

Our mobile offshore drilling fleet is considered one of the most modern and versatile fleets in the world. Our primary business is to contract these drilling rigs, related equipment and work crews primarily on a dayrate basis to drill oil and gas wells. We specialize in technically demanding sectors of the offshore drilling business with a particular focus on deepwater and harsh environment drilling services. We also provide additional services, including integrated services. Our ordinary shares are listed on the New York Stock Exchange under the symbol “RIG.”

Transocean Inc. is a Cayman Islands exempted company with principal executive offices in the U.S. located at 4 Greenway Plaza, Houston, Texas 77046. Our telephone number at that address is (713) 232-7500.

Background of Transocean

In June 1993, the Company, then known as “Sonat Offshore Drilling Inc.,” completed an initial public offering of approximately 60 percent of the outstanding shares of its common stock as part of its separation from Sonat Inc., and in July 1995 Sonat Inc. sold its remaining 40 percent interest in the Company through a secondary public offering. In September 1996, the Company acquired Transocean ASA, a Norwegian offshore drilling company, and changed its name to “Transocean Offshore Inc.” On May 14, 1999, we completed a corporate reorganization by which we changed our place of incorporation from Delaware to the Cayman Islands.

In December 1999, we completed our merger with Sedco Forex Holdings Limited (“Sedco Forex”), the former offshore contract drilling business of Schlumberger Limited (“Schlumberger”). Effective upon the merger, we changed our name to “Transocean Sedco Forex Inc.” On January 31, 2001, we completed our merger transaction (the “R&B Falcon merger”) with R&B Falcon Corporation (“R&B Falcon”). At the time of the merger, R&B Falcon operated a diverse global drilling rig fleet, consisting of drillships, semisubmersibles, jackup rigs and other units in addition to the Gulf of Mexico Shallow and Inland Water segment fleet. R&B Falcon and the Gulf of Mexico Shallow and Inland Water segment later became known as TODCO (together with its subsidiaries and predecessors, unless the context requires otherwise, “TODCO”), a publicly traded company and a former wholly-owned subsidiary. In preparation for the initial public offering discussed below, we transferred all assets and subsidiaries out of R&B Falcon that were unrelated to the Gulf of Mexico Shallow and Inland Water business. In May 2002, we changed our name to “Transocean Inc.”

In February 2004, we completed an initial public offering (the “TODCO IPO”) of common stock of TODCO in which we sold 13.8 million shares of TODCO class A common stock, representing 23 percent of TODCO’s total outstanding shares. In September 2004 and December 2004, respectively, we completed additional public offerings of TODCO common stock (respectively referred to as the “September 2004 Offering” and “December 2004 Offering” and, together with the TODCO IPO, the “2004 Offerings”). We sold 17.9 million shares of TODCO’s class A common stock (30 percent of TODCO’s total outstanding shares) in the September 2004 Offering and 15.0 million shares of TODCO’s class A common stock (25 percent of TODCO’s total outstanding shares) in the December 2004 Offering. Prior to the December 2004 Offering, we held TODCO class B common stock, which was entitled to five votes per share (compared to one vote per share of TODCO class A common stock) and converted automatically into class A common stock upon any sale by us to a third party. In conjunction with the December 2004 Offering, we converted all of our remaining TODCO class B common stock not sold in the 2004 Offerings into shares of class A common stock. After the 2004 Offerings, we held a 22 percent ownership and voting interest in TODCO, represented by 13.3 million shares of class A common stock.

We consolidated TODCO in our financial statements through December 16, 2004 and that portion of TODCO that we did not own was reported as minority interest in our consolidated statements of operations and balance sheets. As a result of the conversion of the TODCO class B common stock into class A common stock, we no longer had a majority voting interest in TODCO and no longer consolidated TODCO in our financial statements but accounted for our remaining investment using the equity method of accounting.

In May 2005 and June 2005, respectively, we completed a public offering of TODCO common stock and a sale of TODCO common stock pursuant to Rule 144 under the Securities Act of 1933, as amended (respectively referred to as the “May Offering” and the “June Sale,” collectively referred to as the “2005 Offering and Sale,” and, collectively with the 2004 Offerings, the “TODCO Stock Sales”). We sold 12.0 million shares of TODCO’s class A common stock (20 percent of TODCO’s total outstanding shares) in the May Offering and our remaining 1.3 million shares of TODCO’s class A common stock (two percent of TODCO’s total outstanding shares) in the June Sale. After the May Offering, we accounted for our remaining investment using the cost method of accounting. As a result of the June Sale, we no longer own any shares of TODCO’s common stock.

- 4 -


For information about the revenues, operating income, assets and other information relating to our business segments and the geographic areas in which we operate, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 22 to our consolidated financial statements included in Item 8 of this report.

Drilling Fleet

We principally operate three types of drilling rigs:
 
 
·
drillships;
 
 
·
semisubmersibles; and
 
 
·
jackups.

Also included in our fleet are barge drilling rigs, tenders, a mobile offshore production unit and a platform drilling rig.

Most of our drilling equipment is suitable for both exploration and development drilling, and we normally engage in both types of drilling activity. Likewise, most of our drilling rigs are mobile and can be moved to new locations in response to client demand. All of our mobile offshore drilling units are designed for operations away from port for extended periods of time and most have living quarters for the crews, a helicopter landing deck and storage space for pipe and drilling supplies.

As of March 2, 2006, our fleet of 89 rigs, which excludes assets held for sale, included:
 
 
·
32 High-Specification Floaters, which are comprised of:
 
 
-
13 Fifth-Generation Deepwater Floaters;
 
 
-
15 Other Deepwater Floaters; and
 
 
-
four Other High-Specification Floaters;
 
 
·
23 Other Floaters;
 
 
·
25 Jackups; and
 
 
·
9 Other Rigs, which are comprised of:
 
 
-
three barge drilling rigs;
 
 
-
four tenders;
 
 
-
one mobile offshore production unit; and
 
 
-
one coring drillship.

As of March 2, 2006, our fleet was located in the U.S. Gulf of Mexico (12 units), Trinidad (one unit), Canada (one unit), Brazil (eight units), North Europe (17 units), the Mediterranean and Middle East (five units), the Caspian Sea (one unit), West Africa (16 units), India (10 units) and Asia and Australia (18 units).

We periodically review the use of the term “deepwater” in connection with our fleet. The term as used in the drilling industry to denote a particular sector of the market varies somewhat and continues to evolve with technological improvements. We generally view the deepwater market sector as that which begins in water depths of approximately 4,500 feet.

We categorize our fleet as follows: (i) “High-Specification Floaters,” consisting of our “Fifth-Generation Deepwater Floaters,” “Other Deepwater Floaters” and “Other High-Specification Floaters,” (ii) “Other Floaters,” (iii) “Jackups” and (iv) “Other Rigs.” Within our High-Specification Floaters category, we consider our Fifth-Generation Deepwater Floaters to be the semisubmersibles Deepwater Horizon, Cajun Express, Deepwater Nautilus, Sedco Energy and Sedco Express and the drillships Deepwater Discovery, Deepwater Expedition, Deepwater Frontier, Deepwater Millennium, Deepwater Pathfinder, Discoverer Deep Seas, Discoverer Enterprise and Discoverer Spirit. These rigs were built in the construction cycle that occurred from approximately 1996 to 2001 and have high-pressure mud pumps and a water depth capability of 7,500 feet or greater. The Other Deepwater Floaters are generally those other semisubmersible rigs and drillships that have a water depth capacity of at least 4,500 feet. The Other High-Specification Floaters, built as fourth-generation rigs in the mid to late 1980’s, are capable of drilling in harsh environments and have greater displacement than previously constructed rigs resulting in larger variable load capacity, more useable deck space and better motion characteristics. The Other Floaters category is generally comprised of those non-high-specification floaters with a water depth capacity of less than 4,500 feet. The Jackups category consists of our jackup fleet, and the Other Rigs category consists of other rigs that are of a different type or use. These categories reflect how we view, and how we believe our investors and the industry generally view, our fleet, and reflect our strategic focus on the ownership and operation of premium high-specification floating rigs and jackups.

- 5 -


Drillships are generally self-propelled, shaped like conventional ships and are the most mobile of the major rig types. All of our drillships are dynamically positioned, which allows them to maintain position without anchors through the use of their onboard propulsion and station-keeping systems. Some of our drillships can also be operated in a moored configuration. Drillships typically have greater load capacity than early generation semisubmersible rigs. This enables them to carry more supplies on board, which often makes them better suited for drilling in remote locations where resupply is more difficult. However, drillships are typically limited to calmer water conditions than those in which semisubmersibles can operate. Our three Enterprise-class drillships include our patented dual-activity technology. Dual-activity technology includes structures and techniques for using two drilling stations within a single derrick to perform drilling tasks. Dual-activity technology allows our rigs to perform simultaneous drilling tasks in a parallel rather than sequential manner. Dual-activity technology reduces critical path activity and improves efficiency in both exploration and development drilling.
 
Semisubmersibles are floating vessels that can be submerged by means of a water ballast system such that the lower hulls are below the water surface during drilling operations. These rigs are capable of maintaining their position over the well through the use of an anchoring system or a computer controlled dynamic positioning thruster system. Some semisubmersible rigs are self-propelled and move between locations under their own power when afloat on pontoons although most are relocated with the assistance of tugs. Typically, semisubmersibles are better suited for operations in rougher water conditions than drillships. Our three Express-class semisubmersibles are designed for mild environments and are equipped with the unique tri-act derrick, which was designed to reduce overall well construction costs and effectively integrate new technology.

Jackup rigs are mobile self-elevating drilling platforms equipped with legs that can be lowered to the ocean floor until a foundation is established to support the drilling platform. Once a foundation is established, the drilling platform is then jacked further up the legs so that the platform is above the highest expected waves. These rigs are generally suited for water depths of 300 feet or less.

Rigs described in the following tables with a customer name are under contract, including rigs being mobilized under contract. Rigs described as “warm stacked” are not under contract and may require the hiring of additional crew, but are generally ready for service with little or no capital expenditures and are being actively marketed. Rigs described as “upgrade” are undergoing a shipyard project to enhance the operational capabilities of the rig, and rigs described as “reactivation” are in the process of being reactivated to return to service. Rigs described as “cold stacked” are not being actively marketed on short or near term contracts, generally cannot be reactivated upon short notice and normally require the hiring of most of the crew, a maintenance review and possibly significant refurbishment before they can be reactivated. Our cold stacked rigs and some of our warm stacked rigs would require additional costs to return to service. The actual cost, which could fluctuate over time, is dependent upon various factors, including the availability and cost of shipyard facilities, cost of equipment and materials and the extent of repairs and maintenance that may ultimately be required. For some of these rigs, the cost could be significant. We would take these factors into consideration together with market conditions, length of contract and dayrate and other contract terms in deciding whether to return a particular idle rig to service. When market conditions are depressed, we may consider marketing some of our cold stacked rigs for alternative uses, including as accommodation units, from time to time until drilling activity increases and we obtain drilling contracts for these units.
 
- 6 -


High-Specification Floaters (32)

The following tables provide certain information regarding our High-Specification Floaters as of March 2, 2006:
 
Name
 
Type
 
Year
Entered
Service/
Upgraded(a)
 
Water
Depth
Capacity
(in feet)
 
Drilling
Depth
Capacity
(in feet)
 
Location
 
Customer
 
Estimated
Expiration (b)
Fifth-Generation Deepwater Floaters (13)
                           
Deepwater Discovery (c)
 
HSD
 
2000
 
10,000
 
30,000
 
Nigeria
 
ExxonMobil
 
April 2006
                   
Nigeria
 
Chevron
 
June 2006
                   
Nigeria
 
Petrobras
 
August 2006
                   
Nigeria
 
Shipyard
 
September 2006
                   
Nigeria
 
Total
 
September 2008
                   
Brazil
 
Devon
 
December 2011
Deepwater Expedition (c)
 
HSD
 
1999
 
10,000
 
30,000
 
Brazil
 
Petrobras
 
May 2006
                   
-
 
Mob/Contract Prep
 
July 2006
                   
Egypt
 
Shell
 
November 2006
                   
-
 
Mob/Contract Prep
 
December 2006
                   
Morocco
 
Petronas
 
March 2007
                   
-
 
Mob/Contract Prep
 
May 2007
                   
India
 
Reliance
 
June 2009
Deepwater Frontier (c)
 
HSD
 
1999
 
10,000
 
30,000
 
Brazil
 
Petrobras
 
June 2006
                   
-
 
Mob/Contract Prep
 
September 2006
                   
India
 
Reliance
 
October 2008
                   
India
 
Shipyard
 
November 2008
                   
India
 
Reliance
 
December 2011
Deepwater Millennium (c)
 
HSD
 
1999
 
10,000
 
30,000
 
U.S. Gulf
 
Anadarko
 
June 2010
Deepwater Pathfinder (c)
 
HSD
 
1998
 
10,000
 
30,000
 
Nigeria
 
Devon/Shell/Conoco
 
August 2006
                   
Nigeria
 
Shell/Agip/Petrobras
 
June 2007
                   
Nigeria
 
Shipyard
 
June 2007
                   
Nigeria
 
Devon
 
September 2007
                   
Nigeria
 
Shell/Agip/Petrobras
 
December 2008
Discoverer Deep Seas (c) (e)
 
HSD
 
2001
 
10,000
 
35,000
 
U.S. Gulf
 
Chevron
 
March 2007
                   
U.S. Gulf
 
Shipyard
 
March 2007
                   
U.S. Gulf
 
Chevron
 
January 2011
Discoverer Enterprise (c) (e)
 
HSD
 
1999
 
10,000
 
35,000
 
U.S. Gulf
 
BP
 
December 2010
Discoverer Spirit (c) (e)
 
HSD
 
2000
 
10,000
 
35,000
 
U.S. Gulf
 
Chevron
 
March 2006
                   
U.S. Gulf
 
Shell
 
August 2007
                   
U.S. Gulf
 
Anadarko
 
August 2010
Deepwater Horizon (c)
 
HSS
 
2001
 
10,000
 
30,000
 
U.S. Gulf
 
BP
 
September 2010
Cajun Express (c) (f)
 
HSS
 
2001
 
8,500
 
35,000
 
U.S. Gulf
 
Chevron
 
May 2006
                   
U.S. Gulf
 
Shipyard
 
June 2006
                   
U.S. Gulf
 
Chevron
 
January 2010
Deepwater Nautilus (d)
 
HSS
 
2000
 
8,000
 
30,000
 
U.S. Gulf
 
Shell
 
May 2006
                   
U.S. Gulf
 
Shipyard
 
July 2006
                   
U.S. Gulf
 
Shell
 
December 2008
Sedco Energy (c) (f)
 
HSS
 
2001
 
7,500
 
25,000
 
Nigeria
 
Chevron
 
December 2007
Sedco Express (c) (f)
 
HSS
 
2001
 
7,500
 
25,000
 
Angola
 
BP
 
April 2007
                   
Angola
 
Shipyard
 
May 2007
                   
Angola
 
BP
 
June 2008
                             
Other Deepwater Floaters (15)
                           
Deepwater Navigator (c)
 
HSD
 
2000
 
7,200
 
25,000
 
Brazil
 
KMG/Devon
 
May 2006
                   
Brazil
 
Shell
 
December 2006
                   
Brazil
 
Petrobras
 
January 2011
 
- 7 -

 
Name
 
Type
 
Year
Entered
Service/
Upgraded(a)
 
Water
Depth
Capacity
(in feet)
 
Drilling
Depth
Capacity
(in feet)
 
Location
 
Customer
 
Estimated
Expiration (b)
Discoverer 534 (c)
 
HSD
 
1975/1991
 
7,000
 
25,000
 
Singapore
 
Mob/Contract Prep
 
April 2006
                   
China
 
Husky
 
June 2006
                   
-
 
Shipyard
 
March 2007
                   
India
 
Reliance
 
October 2009
Discoverer Seven Seas (c)
 
HSD
 
1976/1997
 
7,000
 
25,000
 
India
 
ONGC
 
March 2006
                   
India
 
Shipyard
 
May 2006
                   
India
 
ONGC
 
April 2007
                   
India
 
Shipyard
 
July 2007
                   
India
 
ONGC
 
August 2010
Transocean Marianas
 
HSS
 
1979/1998
 
7,000
 
25,000
 
U.S. Gulf
 
Shipyard
 
March 2006
                   
U.S. Gulf
 
BP
 
April 2006
                   
U.S. Gulf
 
Shipyard
 
May 2006
                   
U.S. Gulf
 
BP
 
December 2006
                   
U.S. Gulf
 
BP
 
January 2010
Sedco 707 (c)
 
HSS
 
1976/1997
 
6,500
 
25,000
 
Brazil
 
Petrobras
 
April 2006
                   
Brazil
 
Shipyard
 
June 2006
                   
Brazil
 
Petrobras
 
April 2010
Jack Bates
 
HSS
 
1986/1997
 
5,400
 
30,000
 
Australia
 
Woodside
 
April 2006
                   
Australia
 
Chevron
 
July 2006
                   
-
 
Mob/Contract Prep
 
October 2006
                   
U.S. Gulf
 
Woodside
 
November 2008
Peregrine I (c)
 
HSD
 
1982/1996
 
5,200
 
25,000
 
Brazil
 
Petrobras
 
January 2009
Sedco 709 (c)
 
HSS
 
1977/1999
 
5,000
 
25,000
 
Angola
 
ExxonMobil
 
April 2006
                   
S. Africa
 
Mob/Contract Prep
 
September 2006
                   
Nigeria
 
Shell
 
September 2008
M. G. Hulme, Jr.
 
HSS
 
1983/1996
 
5,000
 
25,000
 
Nigeria
 
Total
 
August 2006
Transocean Richardson
 
HSS
 
1988
 
5,000
 
25,000
 
Ivory Coast
 
CNR
 
April 2006
                   
Ivory Coast
 
Shipyard
 
May 2006
                   
Angola
 
Total
 
June 2007
Jim Cunningham
 
HSS
 
1982/1995
 
4,600
 
25,000
 
Nigeria
 
Agip
 
February 2007
                   
-
 
Shipyard
 
March 2007
                   
Angola
 
ExxonMobil
 
March 2009
Transocean Leader
 
HSS
 
1987/1997
 
4,500
 
25,000
 
Norwegian N. Sea
 
Statoil
 
July 2007
                   
Norwegian N. Sea
 
Shipyard
 
August 2007
                   
Norwegian N. Sea
 
Statoil
 
June 2008
Transocean Rather
 
HSS
 
1988
 
4,500
 
25,000
 
U.K. North Sea
 
BP
 
April 2006
                   
U.K. North Sea
 
Shell
 
July 2006
                   
U.K. North Sea
 
Chevron
 
December 2006
                   
U.K. North Sea
 
BP
 
September 2007
                   
U.K. North Sea
 
Shipyard
 
October 2007
                   
U.K. North Sea
 
BP
 
December 2007
Sovereign Explorer
 
HSS
 
1984
 
4,500
 
25,000
 
Trinidad
 
BG
 
April 2006
                   
-
 
Shipyard
 
May 2006
                   
Venezuela
 
Statoil
 
November 2006
                   
-
 
Shipyard
 
June 2007
Sedco 710 (c)
 
HSS
 
1983/2001
 
4,500
 
25,000
 
Brazil
 
Petrobras
 
February 2006
                   
Brazil
 
Shipyard
 
March 2006
                   
Brazil
 
Petrobras
 
February 2007
                   
Brazil
 
Shipyard
 
April 2007
                   
Brazil
 
Petrobras
 
December 2010
 
- 8 -

 
Name
 
Type
 
Year
Entered
Service/
Upgraded(a)
 
Water
Depth
Capacity
(in feet)
 
Drilling
Depth
Capacity
(in feet)
 
Location
 
Customer
 
Estimated
Expiration (b)
Other High-Specification Floaters (4)
                           
Henry Goodrich
 
HSS
 
1985
 
2,000
 
30,000
 
Canada
 
Terra Nova
 
August 2006
Paul B. Loyd, Jr.
 
HSS
 
1990
 
2,000
 
25,000
 
U.K. North Sea
 
BP
 
June 2006
                   
U.K. North Sea
 
Shipyard
 
July 2006
                   
U.K. North Sea
 
BP
 
April 2009
Transocean Arctic
 
HSS
 
1986
 
1,650
 
25,000
 
Norwegian N. Sea
 
Statoil
 
September 2007
                   
Norwegian N. Sea
 
Shipyard
 
October 2007
                   
Norwegian N. Sea
 
Statoil
 
November 2010
Polar Pioneer
 
HSS
 
1985
 
1,500
 
25,000
 
Norwegian N. Sea
 
Statoil
 
July 2009
 

“HSD” means high-specification drillship.
“HSS” means high-specification semisubmersible.

(a)
Dates shown are the original service date and the date of the most recent upgrade, if any.
(b)
Expiration dates represent our current estimate of the earliest date that the contract for each rig is likely to expire or the shipyard, mobilization/contract preparation, reactivation or upgrade is likely to be complete. Some rigs have two or more contracts in continuation, so the last line shows the last expected termination date. Some contracts may permit the client to extend the contract.
(c)
Dynamically positioned.
(d)
The Deepwater Nautilus is leased from its owner, an unrelated third party, pursuant to a fully defeased lease arrangement.
(e)
Enterprise-class rig.
(f)
Express-class rig.

Other Floaters (23)

The following table provides certain information regarding our Other Floaters as of March 2, 2006:

Name
 
Type
 
Year
Entered
Service/
Upgraded(a)
 
Water
Depth
Capacity
(in feet)
 
Drilling
Depth
Capacity
(in feet)
 
Location
 
Customer
 
Estimated
Expiration (b)
Sedco 700
 
OS
 
1973/1997
 
3,600
 
25,000
 
E. Guinea
 
A. Hess
 
January 2007
Transocean Amirante
 
OS
 
1978/1997
 
3,500
 
25,000
 
U.S. Gulf
 
ENI
 
March 2006
                   
U.S. Gulf
 
ENI/Nexen
 
July 2006
                   
U.S. Gulf
 
Remington
 
December 2006
                   
U.S. Gulf
 
Shipyard
 
January 2007
Transocean Legend
 
OS
 
1983
 
3,500
 
25,000
 
Korea
 
KNOC
 
March 2006
                   
-
 
Mob/Contract Prep
 
April 2006
 
                 
Sakhalin Is.
 
BP
 
November 2007
C. Kirk Rhein, Jr.
 
OS
 
1976/1997
 
3,300
 
25,000
 
U.S. Gulf
 
Cold stacked
 
-
Transocean Driller
 
OS
 
1991
 
3,000
 
25,000
 
Brazil
 
Petrobras
 
February 2006
 
                 
Brazil
 
Shipyard
 
March 2006
 
                 
Brazil
 
Petrobras
 
August 2010
Falcon 100
 
OS
 
1974/1999
 
2,400
 
25,000
 
U.S. Gulf
 
DeepGulf Energy
 
April 2006
 
                 
U.S. Gulf
 
Petrobras
 
March 2007
Sedco 703
 
OS
 
1973/1995
 
2,000
 
25,000
 
Australia
 
Woodside
 
January 2007
Sedco 711
 
OS
 
1982
 
1,800
 
25,000
 
U.K. North Sea
 
Shell
 
June 2007
 
                 
U.K. North Sea
 
Shipyard
 
July 2007
 
                 
U.K. North Sea
 
Shell
 
October 2008
Transocean John Shaw
 
OS
 
1982
 
1,800
 
25,000
 
U.K. North Sea
 
Nexen
 
June 2007
 
                 
-
 
Shipyard
 
July 2007
Sedco 714
 
OS
 
1983/1997
 
1,600
 
25,000
 
U.K. North Sea
 
Total
 
May 2007
Sedco 712
 
OS
 
1983
 
1,600
 
25,000
 
U.K. North Sea
 
Oilexco
 
March 2008
 
- 9 -

 
Name
 
Type
 
Year
Entered
Service/
Upgraded(a)
 
Water
Depth
Capacity
(in feet)
 
Drilling
Depth
Capacity
(in feet)
 
Location
 
Customer
 
Estimated
Expiration (b)
Actinia
 
OS
 
1982
 
1,500
 
25,000
 
India
 
Reliance
 
July 2006
                   
India
 
Shipyard
 
August 2006
                   
India
 
Reliance
 
September 2006
Sedco 601
 
OS
 
1983
 
1,500
 
25,000
 
Indonesia
 
Santos
 
November 2006
Sedco 702 (d)
 
OS
 
1973/1992
 
1,500
 
25,000
 
Singapore
 
Upgrade
 
April 2008
 
                 
TBD
 
Shell
 
July 2010
Sedneth 701
 
OS
 
1972/1993
 
1,500
 
25,000
 
Angola
 
Chevron
 
April 2006
                   
Angola
 
Shipyard
 
June 2006
 
                 
Angola
 
Chevron
 
June 2007
Transocean Prospect
 
OS
 
1983/1992
 
1,500
 
25,000
 
U.K. North Sea
 
Reactivation
 
May 2006
 
                 
U.K. North Sea
 
CNR
 
June 2008
Transocean Searcher
 
OS
 
1983/1988
 
1,500
 
25,000
 
Norwegian N. Sea
 
Statoil
 
October 2006
Transocean Winner
 
OS
 
1983
 
1,500
 
25,000
 
Norwegian N. Sea
 
Reactivation
 
September 2006
 
                 
Norwegian N. Sea
 
TBD
 
October 2009
Transocean Wildcat
 
OS
 
1977/1985
 
1,300
 
25,000
 
U.K. North Sea
 
Cold stacked
 
-
Transocean Explorer
 
OS
 
1976
 
1,250
 
25,000
 
U.K. North Sea
 
Cold stacked
 
-
J. W. McLean
 
OS
 
1974/1996
 
1,250
 
25,000
 
U.K. North Sea
 
ConocoPhillips
 
March 2006
 
                 
U.K. North Sea
 
Shipyard
 
April 2006
 
                 
U.K. North Sea
 
Shell
 
May 2008
Sedco 704
 
OS
 
1974/1993
 
1,000
 
25,000
 
U.K. North Sea
 
Venture
 
October 2006
                   
U.K. North Sea
 
BG
 
March 2007
                   
U.K. North Sea
 
Shipyard
 
March 2007
                   
U.K. North Sea
 
BP
 
April 2008
Sedco 706 (d)
 
OS
 
1976/1994
 
1,000
 
25,000
 
U.K. North Sea
 
Total
 
June 2006
                   
TBD
 
Upgrade
 
February 2008
                   
Brazil
 
Chevron
 
March 2011
 

“OD” means other drillship.
“OS” means other semisubmersible.
“TBD” means to be determined.
 
(a)
Dates shown are the original service date and the date of the most recent upgrade, if any.
(b)
Expiration dates represent our current estimate of the earliest date that the contract for each rig is likely to expire or the shipyard, mobilization/contract preparation, reactivation or upgrade is likely to be complete. Some rigs have two or more contracts in continuation, so the last line shows the last expected termination date. Some contracts may permit the client to extend the contract.
(c)
Dynamically positioned.
(d)
In the fourth quarter of 2005, we entered into agreements with clients to upgrade two of our Sedco 700-series semisubmersible rigs in our Other Floaters fleet at a cost expected to be approximately $300 million for each rig. The Sedco 702 and Sedco 706 upgrades are scheduled to commence in early 2006 and in the third quarter of 2007, respectively. Once completed, these units will become part of our High-Specification Floaters fleet.

Jackups (25)

The following table provides certain information regarding our Jackups fleet as of March 2, 2006:

Name
 
Year Entered
Service/
Upgraded(a)
 
Water
Depth
Capacity
(in feet)
 
Drilling
Depth
Capacity
(in feet)
 
Location
 
Customer
 
Estimated
Expiration (b)
Trident IX
 
1982
 
400
 
21,000
 
Vietnam
 
JVPC
 
August 2006
Trident 17
 
1983
 
355
 
25,000
 
Vietnam
 
Petronas Carigali
 
June 2006
Trident 20
 
2000
 
350
 
25,000
 
Caspian Sea
 
Petronas Carigali
 
January 2010
Harvey H. Ward
 
1981
 
300
 
25,000
 
Malaysia
 
Petronas Carigali
 
July 2006
               
Malaysia
 
Talisman
 
July 2008
J. T. Angel
 
1982
 
300
 
25,000
 
Indonesia
 
EMP
 
March 2006
 
- 10 -

 
Name
 
Year Entered
Service/
Upgraded(a)
 
Water
Depth
Capacity
(in feet)
 
Drilling
Depth
Capacity
(in feet)
 
Location
 
Customer
 
Estimated
Expiration (b)
               
Singapore
 
Shipyard
 
June 2006
               
India
 
ONGC
 
January 2010
Roger W. Mowell
 
1982
 
300
 
25,000
 
Malaysia
 
Talisman
 
November 2008
Ron Tappmeyer
 
1978
 
300
 
25,000
 
India
 
ONGC
 
December 2006
               
India
 
Shipyard
 
January 2007
               
India
 
ONGC
 
January 2010
D. R. Stewart
 
1980
 
300
 
25,000
 
Italy
 
ENI
 
March 2007
Randolph Yost
 
1979
 
300
 
25,000
 
India
 
ONGC
 
December 2006
               
India
 
Shipyard
 
February 2007
               
India
 
ONGC
 
February 2010
C. E. Thornton
 
1974
 
300
 
25,000
 
India
 
ONGC
 
October 2007
               
India
 
Shipyard
 
October 2007
F. G. McClintock
 
1975
 
300
 
25,000
 
India
 
ONGC
 
January 2008
Shelf Explorer
 
1982
 
300
 
25,000
 
Indonesia
 
Pearl Oil
 
April 2006
               
Indonesia
 
Chevron
 
September 2006
Transocean III
 
1978/1993
 
300
 
20,000
 
Egypt
 
Zeitco
 
July 2006
               
Egypt
 
Shipyard
 
July 2006
               
Egypt
 
Zeitco
 
August 2007
Transocean Nordic
 
1984
 
300
 
25,000
 
India
 
ONGC
 
March 2007
               
-
 
Shipyard
 
March 2007
Trident II
 
1977/1985
 
300
 
25,000
 
India
 
ONGC
 
November 2006
               
India
 
Shipyard
 
March 2007
               
India
 
ONGC
 
March 2010
Trident IV
 
1980/1999
 
300
 
25,000
 
Nigeria
 
Chevron
 
December 2006
               
Nigeria
 
Shipyard
 
January 2007
               
Nigeria
 
Chevron
 
March 2008
Trident VIII
 
1981
 
300
 
21,000
 
-
 
Mob/Contract Prep
 
March 2006
               
Nigeria
 
Conoil
 
April 2008
Trident XII
 
1982/1992
 
300
 
25,000
 
India
 
ONGC
 
October 2006
               
-
 
Mob/Contract Prep
 
January 2007
               
India
 
ONGC
 
December 2009
Trident XIV
 
1982/1994
 
300
 
20,000
 
Cabinda
 
Chevron
 
April 2006
               
-
 
Shipyard
 
May 2006
Trident 15
 
1982
 
300
 
25,000
 
Thailand
 
Chevron
 
December 2006
               
Thailand
 
Shipyard
 
April 2007
               
Thailand
 
Chevron
 
June 2011
Trident 16
 
1982
 
300
 
25,000
 
Malaysia
 
Chevron
 
September 2007
George H. Galloway
 
1984
 
300
 
25,000
 
Italy
 
ENI
 
July 2008
Transocean Comet
 
1980
 
250
 
20,000
 
Egypt
 
GUPCO
 
November 2006
               
Egypt
 
Shipyard
 
December 2006
               
Egypt
 
GUPCO
 
October 2007
Transocean Mercury
 
1969/1998
 
250
 
20,000
 
Egypt
 
Petrobel
 
February 2008
Trident VI
 
1981
 
220
 
21,000
 
Vietnam
 
PetroVietnam
 
January 2007
 

 
(a)
Dates shown are the original service date and the date of the most recent upgrade, if any.
 
(b)
Expiration dates represent our current estimate of the earliest date that the contract for each rig is likely to expire or the shipyard, mobilization/contract preparation, reactivation or upgrade is likely to be complete. Some rigs have two or more contracts in continuation, so the last line shows the last expected termination date. Some contracts may permit the client to extend the contract.

Other Rigs

In addition to our floaters and jackups, we also own or operate several other types of rigs. These rigs include three drilling barges, four tenders, a mobile offshore production unit and a coring drillship.

Markets

Our operations are geographically dispersed in oil and gas exploration and development areas throughout the world. Rigs can be moved from one region to another, but the cost of moving a rig and the availability of rig-moving vessels may cause the supply and demand balance to vary somewhat between regions. However, significant variations between regions do not tend to exist long-term because of rig mobility. Consequently, we operate in a single, global offshore drilling market. Because our drilling rigs are mobile assets and are able to be moved according to prevailing market conditions, we cannot predict the percentage of our revenues that will be derived from particular geographic or political areas in future periods.

- 11 -


In recent years, there has been increased emphasis by oil companies on exploring for hydrocarbons in deeper waters. This is, in part, because of technological developments that have made such exploration more feasible and cost-effective. For this reason, water-depth capability is a key component in determining rig suitability for a particular drilling project. Another distinguishing feature in some drilling market sectors is a rig’s ability to operate in harsh environments, including extreme marine and climatic conditions and temperatures.

The deepwater and mid-water market sectors are serviced by our semisubmersibles and drillships. While the use of the term “deepwater” as used in the drilling industry to denote a particular sector of the market can vary and continues to evolve with technological improvements, we generally view the deepwater market sector as that which begins in water depths of approximately 4,500 feet and extends to the maximum water depths in which rigs are capable of drilling, which is currently approximately 10,000 feet. We view the mid-water market sector as that which covers water depths of about 300 feet to approximately 4,500 feet.

The global shallow water market sector begins at the outer limit of the transition zone and extends to water depths of about 300 feet. We service this sector with our jackups and drilling tenders. This sector has been developed to a significantly greater degree than the deepwater market sector because the shallower water depths have made it much more accessible than the deeper water market sectors.

The “transition zone” market sector is characterized by marshes, rivers, lakes, shallow bay and coastal water areas. We operate in this sector using our drilling barges located in Southeast Asia.

- 12 -

 
Operating Revenues and Long-Lived Assets by Country

Operating revenues and long-lived assets by country are as follows (in millions):

   
Years ended December 31,
 
   
2005
 
2004
 
2003
 
Operating Revenues
             
United States
 
$
648
 
$
856
 
$
753
 
Brazil
   
265
   
278
   
317
 
India
   
296
   
271
   
120
 
United Kingdom
   
335
   
209
   
212
 
Other Countries (a)
   
1,348
   
1,000
   
1,032
 
Total Operating Revenues
 
$
2,892
 
$
2,614
 
$
2,434
 

   
As of December 31,
     
   
2005
 
2004
     
Long-Lived Assets
         
 
 
United States
 
$
2,311
 
$
2,397
       
Brazil
   
762
   
865
       
Nigeria
   
980
   
811
       
Other Countries (a)
   
2,695
   
2,932
       
Total Long-Lived Assets
 
$
6,748
 
$
7,005
       
 
 

(a)
Other Countries represents countries in which we operate that individually had operating revenues or long-lived assets representing less than 10 percent of total operating revenues earned or total long-lived assets.

Integrated Services

From time to time, we provide well services in addition to our normal drilling services through third party contractors. We refer to these other services as integrated services. The work generally consists of individual contractual agreements to meet specific client needs and may be provided on either a dayrate or fixed price basis depending on the daily activity. As of March 2, 2006, we were performing such services in the North Sea and India. These integrated service revenues did not represent a material portion of our revenues for any period presented.

Drilling Contracts

Our contracts to provide offshore drilling services are individually negotiated and vary in their terms and provisions. We obtain most of our contracts through competitive bidding against other contractors. Drilling contracts generally provide for payment on a dayrate basis, with higher rates while the drilling unit is operating and lower rates for periods of mobilization or when drilling operations are interrupted or restricted by equipment breakdowns, adverse environmental conditions or other conditions beyond our control.

A dayrate drilling contract generally extends over a period of time covering either the drilling of a single well or group of wells or covering a stated term. These contracts typically can be terminated by the client under various circumstances such as the loss or destruction of the drilling unit or the suspension of drilling operations for a specified period of time as a result of a breakdown of major equipment. Many of these events are beyond our control. The contract term in some instances may be extended by the client exercising options for the drilling of additional wells or for an additional term. Our contracts also typically include a provision that allows the client to extend the contract to finish drilling a well-in-progress. In reaction to depressed market conditions, our clients may seek renegotiation of firm drilling contracts to reduce their obligations or may seek to suspend or terminate their contracts. Some drilling contracts permit the customer to terminate the contract at the customer's option without paying a termination fee. Suspension of drilling contracts results in the reduction in or loss of dayrate for the period of the suspension. If our customers cancel some of our significant contracts and we are unable to secure new contracts on substantially similar terms, or if contracts are suspended for an extended period of time, it could adversely affect our results of operations.

- 13 -

 
Significant Clients

We engage in offshore drilling for most of the leading international oil companies (or their affiliates), as well as for many government-controlled and independent oil companies. Major clients included BP, Shell, Petrobras, Chevron and ONGC. Our largest clients in 2005 were Chevron and BP accounting for 12.1 percent and 11.7 percent, respectively, of our 2005 operating revenues. No other client accounted for 10 percent or more of our 2005 operating revenues. The loss of any of these significant clients could, at least in the short term, have a material adverse effect on our results of operations.

Regulation

Our operations are affected from time to time in varying degrees by governmental laws and regulations. The drilling industry is dependent on demand for services from the oil and gas exploration industry and, accordingly, is affected by changing tax and other laws generally relating to the energy business.

International contract drilling operations are subject to various laws and regulations in countries in which we operate, including laws and regulations relating to the equipping and operation of drilling units, currency conversions and repatriation, oil and gas exploration and development, taxation of offshore earnings and earnings of expatriate personnel and use of local employees and suppliers by foreign contractors. Governments in some foreign countries are active in regulating and controlling the ownership of concessions and companies holding concessions, the exportation of oil and gas and other aspects of the oil and gas industries in their countries. In addition, government action, including initiatives by the Organization of Petroleum Exporting Countries (“OPEC”), may continue to cause oil price volatility. In some areas of the world, this governmental activity has adversely affected the amount of exploration and development work done by major oil companies and may continue to do so.

In the U.S., regulations applicable to our operations include certain regulations controlling the discharge of materials into the environment and requiring the removal and cleanup of materials that may harm the environment or otherwise relating to the protection of the environment.

The U.S. Oil Pollution Act of 1990 (“OPA”) and related regulations impose a variety of requirements on “responsible parties” related to the prevention of oil spills and liability for damages resulting from such spills. Few defenses exist to the liability imposed by OPA, and such liability could be substantial. Failure to comply with ongoing requirements or inadequate cooperation in a spill event could subject a responsible party to civil or criminal enforcement action.

The U.S. Outer Continental Shelf Lands Act authorizes regulations relating to safety and environmental protection applicable to lessees and permittees operating on the outer continental shelf. Included among these are regulations that require the preparation of spill contingency plans and establish air quality standards for certain pollutants, including particulate matter, volatile organic compounds, sulfur dioxide, carbon monoxide and nitrogen oxides. Specific design and operational standards may apply to outer continental shelf vessels, rigs, platforms, vehicles and structures. Violations of environmental related lease conditions or regulations issued pursuant to the U.S. Outer Continental Shelf Lands Act can result in substantial civil and criminal penalties, as well as potential court injunctions curtailing operations and canceling leases. Such enforcement liabilities can result from either governmental or citizen prosecution.

The U.S. Comprehensive Environmental Response Compensation and Liability Act (“CERCLA”), also known as the “Superfund” law, imposes liability without regard to fault or the legality of the original conduct on some classes of persons that are considered to have contributed to the release of a “hazardous substance” into the environment. These persons include the owner or operator of a facility where a release occurred and companies that disposed or arranged for the disposal of the hazardous substances found at a particular site. Persons who are or were responsible for releases of hazardous substances under CERCLA may be subject to joint and several liability for the costs of cleaning up the hazardous substances that have been released into the environment and for damages to natural resources. It is not uncommon for third parties to file claims for personal injury and property damage allegedly caused by the hazardous substances released into the environment.

Many of the other countries in whose waters we are presently operating or may operate in the future have regulations covering the discharge of oil and other contaminants in connection with drilling operations.

Governmental authorities in the U.S. are also reviewing various regulations relating to rig mooring requirements, particularly in the aftermath of the hurricane activity in 2005 in the Gulf of Mexico. We and the drilling industry are working with the pertinent authorities as part of this process.

- 14 -


Although significant capital expenditures may be required to comply with various governmental laws and regulations, such compliance to date has not materially adversely affected our earnings or competitive position.

Employees

We require highly skilled personnel to operate our drilling units. As a result, we conduct extensive personnel recruiting, training and safety programs. At January 31, 2006, we had approximately 9,600 employees and we also utilized approximately 2,000 persons through contract labor providers. As of such date, approximately 14 percent of our employees and contract labor worldwide worked under collective bargaining agreements, most of whom worked in Norway, U.K. and Nigeria. Of these represented individuals, virtually all are working under agreements that are subject to salary negotiation in 2006. These negotiations could result in higher personnel expenses, other increased costs or increased operating restrictions.

Available Information
 
Our website address is www.deepwater.com. We make our website content available for information purposes only. It should not be relied upon for investment purposes, nor is it incorporated by reference in this Form 10-K. We make available on this website under “Investor Relations-Financial Reports,” free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports as soon as reasonably practicable after we electronically file those materials with, or furnish those materials to, the Securities and Exchange Commission (“SEC”). The SEC also maintains a website at www.sec.gov that contains reports, proxy statements and other information regarding SEC registrants, including us.

You may also find information related to our corporate governance, board committees and company code of ethics at our website. Among the information you can find there is the following:

 
·
Corporate Governance Guidelines;
 
·
Audit Committee Charter;
 
·
Corporate Governance Committee Charter;
 
·
Executive Compensation Committee Charter;
 
·
Finance and Benefits Committee Charter; and
 
·
Code of Ethics.
 
We intend to satisfy the requirement under Item 5.05 of Form 8-K to disclose any amendments to our Code of Ethics and any waiver from a provision of our Code of Ethics by posting such information in the Corporate Governance section of our website at www.deepwater.com.
 
- 15 -


Risk Factors

Our business depends on the level of activity in the oil and gas industry, which is significantly affected by volatile oil and gas prices.

Our business depends on the level of activity in oil and gas exploration, development and production in market sectors worldwide, with the U.S. and international offshore areas being our primary market sectors. Oil and gas prices and market expectations of potential changes in these prices significantly affect this level of activity. However, higher commodity prices do not necessarily translate into increased drilling activity since our customers' expectations of future commodity prices typically drive demand for our rigs. Worldwide military, political and economic events have contributed to oil and gas price volatility and are likely to do so in the future. Oil and gas prices are extremely volatile and are affected by numerous factors, including the following:

 
·
worldwide demand for oil and gas,

 
·
the ability of OPEC to set and maintain production levels and pricing,

 
·
the level of production in non-OPEC countries,

 
·
the policies of various governments regarding exploration and development of their oil and gas reserves,

 
·
advances in exploration and development technology, and

 
·
the worldwide military and political environment, including uncertainty or instability resulting from an escalation or additional outbreak of armed hostilities or other crises in the Middle East or other geographic areas or further acts of terrorism in the United States, or elsewhere.

Our industry is highly competitive and cyclical, with intense price competition.

The offshore contract drilling industry is highly competitive with numerous industry participants, none of which has a dominant market share. Drilling contracts are traditionally awarded on a competitive bid basis. Intense price competition is often the primary factor in determining which qualified contractor is awarded a job, although rig availability and the quality and technical capability of service and equipment may also be considered. Mergers among oil and natural gas exploration and production companies have reduced the number of available customers.

Our industry has historically been cyclical and is impacted by oil and gas price levels and volatility. There have been periods of high demand, short rig supply and high dayrates, followed by periods of low demand, excess rig supply and low dayrates. Changes in commodity prices can have a dramatic effect on rig demand, and periods of excess rig supply intensify the competition in the industry and often result in rigs being idle for long periods of time. We may be required to idle rigs or enter into lower rate contracts in response to market conditions in the future.

During prior periods of high utilization and dayrates, industry participants have increased the supply of rigs by ordering the construction of new units. This has typically resulted in an oversupply of drilling units and has caused a subsequent decline in utilization and dayrates, sometimes for extended periods of time. As of March 2, 2006, there are approximately 21 high-specification rigs and 51 jackup rigs under contract for construction with delivery dates ranging from 2006 to approximately 2010. There are also a number of mid-water semisubmersibles that are being upgraded to enhance their operating capability. The entry into service of these new and upgraded units will increase supply and could curtail a further strengthening of dayrates, or reduce them, in the affected markets or result in a softening of the affected markets as rigs are absorbed into the active fleet. Any further increase in construction of new drilling units would likely exacerbate the negative impact on utilization and dayrates. Lower utilization and dayrates in one or more of the regions in which we operate could adversely affect our revenues and profitability. Prolonged periods of low utilization and dayrates could also result in the recognition of impairment charges on certain classes of our drilling rigs or our goodwill balance if future cash flow estimates, based upon information available to management at the time, indicate that the carrying value of these rigs, or the goodwill balance, may not be recoverable.
 
- 16 -


Our drilling contracts may be terminated due to a number of events.

Our customers may terminate or suspend some of our term drilling contracts under various circumstances such as the loss or destruction of the drilling unit, downtime or impaired performance caused by equipment or operational issues, some of which are beyond our control, or sustained periods of downtime due to force majeure events. Some drilling contracts permit the customer to terminate the contract at the customer's option without paying a termination fee. Suspension of drilling contracts results in loss of the dayrate for the period of the suspension. If our customers cancel some of our significant contracts and we are unable to secure new contracts on substantially similar terms, it could adversely affect our results of operations. In reaction to depressed market conditions, our customers may also seek renegotiation of firm drilling contracts to reduce their obligations.

Our business involves numerous operating hazards.

Our operations are subject to the usual hazards inherent in the drilling of oil and gas wells, such as blowouts, reservoir damage, loss of production, loss of well control, punch-throughs, craterings, fires and natural disasters such as hurricanes and tropical storms. The occurrence of these events could result in the suspension of drilling operations, damage to or destruction of the equipment involved and injury or death to rig personnel. We may also be subject to personal injury and other claims of rig personnel as a result of our drilling operations. Operations also may be suspended because of machinery breakdowns, abnormal drilling conditions, and failure of subcontractors to perform or supply goods or services or personnel shortages. In addition, offshore drilling operations are subject to perils peculiar to marine operations, including capsizing, grounding, collision and loss or damage from severe weather. Damage to the environment could also result from our operations, particularly through oil spillage or extensive uncontrolled fires. We may also be subject to property, environmental and other damage claims by oil and gas companies. Our insurance policies and contractual rights to indemnity may not adequately cover losses, and we do not have insurance coverage or rights to indemnity for all risks.

Consistent with standard industry practice, our clients generally assume, and indemnify us against, well control and subsurface risks under dayrate contracts. These risks are those associated with the loss of control of a well, such as blowout or cratering, the cost to regain control or redrill the well and associated pollution. However, there can be no assurance that these clients will necessarily be financially able to indemnify us against all these risks. Also, we may be effectively prevented from enforcing these indemnities because of the nature of our relationship with some of our larger clients.

We have historically maintained broad insurance coverages, including coverages for property damage, occupational injury and illness, and general and marine third-party liabilities. Property damage insurance covers against marine and other perils, including losses due to capsizing, grounding, collision, fire, lightning, hurricanes, wind, storms, action of waves, punch-throughs, cratering, blowouts, explosion and war risks. We currently insure all of our offshore drilling equipment for general and third party liabilities, occupational and illness risks, and property damage. We also generally insure all of our offshore drilling rigs against property damage for amounts that take into account a number of factors including their approximate fair market value, replacement cost and net carrying value for financial reporting purposes.

In accordance with industry practices, we believe we are adequately insured for normal risks in our operations; however, such insurance coverage would not in all situations provide sufficient funds to protect us from all liabilities that could result from our drilling operations. Although our current practice is generally to insure all of our rigs as described above, our insurance would not completely cover the costs that would be required to replace certain of our units, including certain High-Specification Floaters. However, we may in the future take significant self-insured retentions for these coverages, and we may also decide to partially or fully self-insure our drilling rigs with respect to property damage. We do not carry insurance for loss of revenue and certain other claims may not be reimbursed by insurance carriers. Such lack of reimbursement may cause us to incur substantial costs.

Our non-U.S. operations involve additional risks not associated with our U.S. operations.

We operate in various regions throughout the world that may expose us to political and other uncertainties, including risks of:

 
·
terrorist acts, war and civil disturbances;
 
·
expropriation or nationalization of equipment; and
 
·
the inability to repatriate income or capital.

- 17 -

 
We are protected to a substantial extent against loss of capital assets, but generally not loss of revenue, from most of these risks through insurance, indemnity provisions in our drilling contracts, or both. The necessity of insurance coverage for risks associated with political unrest, expropriation and environmental remediation for operating areas not covered under our existing insurance policies is evaluated on an individual contract basis. Although we maintain insurance in the areas in which we operate, pollution and environmental risks generally are not totally insurable. If a significant accident or other event occurs and is not fully covered by insurance or an enforceable or recoverable indemnity from a client, it could adversely affect our consolidated financial position, results of operations or cash flows. Moreover, no assurance can be made that we will be able to maintain adequate insurance in the future at rates we consider reasonable or be able to obtain insurance against certain risks, particularly in light of the instability and developments in the insurance markets following the terrorist attacks of September 11, 2001. As of March 2, 2006, all areas in which we were operating were covered by existing insurance policies.

Many governments favor or effectively require the awarding of drilling contracts to local contractors or require foreign contractors to employ citizens of, or purchase supplies from, a particular jurisdiction. These practices may adversely affect our ability to compete.

Our non-U.S. contract drilling operations are subject to various laws and regulations in countries in which we operate, including laws and regulations relating to the equipment and operation of drilling units, currency conversions and repatriation, oil and gas exploration and development and taxation of offshore earnings and earnings of expatriate personnel. Governments in some foreign countries have become increasingly active in regulating and controlling the ownership of concessions and companies holding concessions, the exploration for oil and gas and other aspects of the oil and gas industries in their countries. In addition, government action, including initiatives by OPEC, may continue to cause oil or gas price volatility. In some areas of the world, this governmental activity has adversely affected the amount of exploration and development work done by major oil companies and may continue to do so.

Another risk inherent in our operations is the possibility of currency exchange losses where revenues are received and expenses are paid in nonconvertible currencies. We may also incur losses as a result of an inability to collect revenues because of a shortage of convertible currency available in the country of operation.

A change in tax laws of any country in which we operate could result in a higher tax rate on our worldwide earnings.

We operate worldwide through our various subsidiaries. Consequently, we are subject to changing tax laws and policies in the jurisdictions in which we operate, which could include laws or policies directed toward companies organized in jurisdictions with low tax rates. A material change in the tax laws or policies of any country in which we have significant operations could result in a higher effective tax rate on our worldwide earnings. In addition, our income tax returns are subject to review and examination in various jurisdictions in which we operate. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Outlook-Tax Matters” and “—Critical Accounting Estimates-Income Taxes.”

Our shipyard projects are subject to delays and cost overruns.

We have scheduled one deepwater newbuild rig project, two Sedco 700-series rig upgrades and two reactivation projects in our Other Floaters fleet, and we are discussing other potential newbuild opportunities with several clients. We also have a variety of other more limited shipyard projects at any given time. Our shipyard projects are subject to the risks of delay or cost overruns inherent in any such construction project resulting from numerous factors, including the following:

 
·
shipyard unavailability;
 
·
shortages of equipment, materials or skilled labor;
 
·
unscheduled delays in the delivery of ordered materials and equipment;
 
·
engineering problems, including those relating to the commissioning of newly designed equipment;
 
·
work stoppages;
 
·
weather interference or storm damage;
 
·
unanticipated cost increases; and
 
·
difficulty in obtaining necessary permits or approvals.

- 18 -

 
These factors may contribute to cost variations and delays in the delivery of our upgraded and newbuild units and other rigs undergoing shipyard projects. Delays in the delivery of these units would result in delay in contract commencement, resulting in a loss of revenue to us, and may also cause our customer to terminate or shorten the term of the drilling contract for the rig pursuant to applicable late delivery clauses. In the event of termination of one of these contracts, we may not be able to secure a replacement contract on as favorable terms.

Failure to retain key personnel could hurt our operations.

We require highly skilled personnel to operate and provide technical services and support for our drilling units. To the extent that demand for drilling services and the size of the worldwide industry fleet increase, shortages of qualified personnel could arise, creating upward pressure on wages. We are continuing our recruitment and training programs as required to meet our anticipated personnel needs.

On January 31, 2006, approximately 14 percent of our employees and contracted labor worldwide worked under collective bargaining agreements, most of whom worked in Norway, U.K. and Nigeria. Of these represented individuals, virtually all are working under agreements that are subject to salary negotiation in 2006. These negotiations could result in higher personnel expenses, other increased costs or increased operating restrictions.

Public health threats could have a material adverse effect on our operations and our financial results.

Public health threats, such as the bird flu, Severe Acute Respiratory Syndrome (SARS), and other highly communicable diseases, outbreaks of which have already occurred in various parts of the world in which we operate, could adversely impact our operations, the operations of our clients and the global economy including the worldwide demand for oil and natural gas and the level of demand for our services. Any quarantine of personnel or inability to access our offices or rigs could adversely affect our operations. Travel restrictions or operational problems in any part of the world in which we operate, or any reduction in the demand for drilling services caused by public health threats in the future, may materially impact operations and adversely affect our financial results.

Compliance with or breach of environmental laws can be costly and could limit our operations.

Our operations are subject to regulations controlling the discharge of materials into the environment, requiring removal and cleanup of materials that may harm the environment or otherwise relating to the protection of the environment. For example, as an operator of mobile offshore drilling units in navigable U.S. waters and some offshore areas, we may be liable for damages and costs incurred in connection with oil spills related to those operations. Laws and regulations protecting the environment have become more stringent in recent years, and may in some cases impose strict liability, rendering a person liable for environmental damage without regard to negligence. These laws and regulations may expose us to liability for the conduct of or conditions caused by others or for acts that were in compliance with all applicable laws at the time they were performed. The application of these requirements or the adoption of new requirements could have a material adverse effect on our consolidated financial position, results of operations or cash flows.

We have generally been able to obtain some degree of contractual indemnification pursuant to which our clients agree to protect and indemnify us against liability for pollution, well and environmental damages; however, there is no assurance that we can obtain such indemnities in all of our contracts or that, in the event of extensive pollution and environmental damages, our clients will have the financial capability to fulfill their contractual obligations to us. Also, these indemnities may not be enforceable in all instances. In addition, we may be effectively prevented from enforcing these indemnities because of the nature of our relationship with some of our larger clients.

World political events could affect the markets for drilling services.

In the past several years, world political events have resulted in military action in Afghanistan and Iraq and terrorist attacks and related unrest. Military action by the U.S. or other nations could escalate and further acts of terrorism may occur in the U.S. or elsewhere. Such acts of terrorism could be directed against companies such as ours. Such developments have caused instability in the world's financial and insurance markets in the past. In addition, these developments could lead to increased volatility in prices for crude oil and natural gas and could affect the markets for drilling services. Insurance premiums have increased and could rise further and coverages may be unavailable in the future.

U.S. government regulations may effectively preclude us from actively engaging in business activities in certain countries. These regulations could be amended to cover countries where we currently operate or where we may wish to operate in the future.

- 19 -


Unresolved Staff Comments

None.

Properties 

The description of our property included under “Item 1. Business” is incorporated by reference herein.

We maintain offices, land bases and other facilities worldwide, including our principal executive offices in Houston, Texas and regional operational offices in the U.S., France and Singapore. Our remaining offices and bases are located in various countries in North America, South America, the Caribbean, Europe, Africa, Russia, the Middle East, India, Asia and Australia. We lease most of these facilities.

Legal Proceedings

Several of our subsidiaries have been named, along with other defendants, in several complaints that have been filed in the Circuit Courts of the State of Mississippi involving over 700 persons that allege personal injury arising out of asbestos exposure in the course of their employment by some of these defendants between 1965 and 1986. The complaints also name as defendants certain of TODCO's subsidiaries to whom we may owe indemnity and other unaffiliated defendant companies, including companies that allegedly manufactured drilling related products containing asbestos that are the subject of the complaints. The number of unaffiliated defendant companies involved in each complaint ranges from approximately 20 to 70. The complaints allege that the defendant drilling contractors used those asbestos-containing products in offshore drilling operations, land based drilling operations and in drilling structures, drilling rigs, vessels and other equipment and assert claims based on, among other things, negligence and strict liability, and claims authorized under the Jones Act. The plaintiffs seek, among other things, awards of unspecified compensatory and punitive damages. The trial court has ordered that the plaintiffs provide additional information regarding their employment histories. We have not yet had an opportunity to conduct extensive discovery nor have we been able to definitively determine the number of plaintiffs that were employed by our subsidiaries or otherwise have any connection with our drilling operations. We intend to defend ourselves vigorously and, based on the limited information available to us at this time, we do not expect the liability, if any, resulting from these matters to have a material adverse effect on our consolidated financial position, results of operations or cash flows.

In 1990 and 1991, two of our subsidiaries were served with various assessments collectively valued at approximately $10 million from the municipality of Rio de Janeiro, Brazil to collect a municipal tax on services. We believe that neither subsidiary is liable for the taxes and have contested the assessments in the Brazilian administrative and court systems. We have received several adverse rulings by various courts with respect to a June 1991 assessment, which is valued at approximately $9 million. We are continuing to challenge the assessment, however, and have an action to stay execution of a related tax foreclosure proceeding. We expect that the government will attempt to enforce the judgment on this assessment and that the amount claimed may exceed the amounts we believe are at issue. We received a favorable ruling in connection with a disputed August 1990 assessment and the government has lost what is expected to be its final appeal with respect to that ruling. We also are awaiting a ruling from the Taxpayer's Council in connection with an October 1990 assessment. If our defenses are ultimately unsuccessful, we believe that the Brazilian government-controlled oil company, Petrobras, has a contractual obligation to reimburse us for these municipal tax payments. We do not expect the liability, if any, resulting from these assessments to have a material adverse effect on our consolidated financial position, results of operations or cash flows.

The Indian Customs Department, Mumbai, filed a "show cause notice" against one of our subsidiaries and various third parties in July 1999. The show cause notice alleged that the initial entry into India in 1988 and other subsequent movements of the Trident II jackup rig operated by the subsidiary constituted imports and exports for which proper customs procedures were not followed and sought payment of customs duties of approximately $31 million based on an alleged 1998 rig value of $49 million, plus interest and penalties, and confiscation of the rig. In January 2000, the Customs Department issued its order, which found that we had imported the rig improperly and intentionally concealed the import from the authorities, and directed us to pay a redemption fee of approximately $3 million for the rig in lieu of confiscation and to pay penalties of approximately $1 million in addition to the amount of customs duties owed. In February 2000, we filed an appeal with the Customs, Excise and Service Tax Appellate Tribunal (“CESTAT”), together with an application to have the confiscation of the rig stayed pending the outcome of the appeal. In March 2000, the CESTAT ruled on the stay application, directing that the confiscation be stayed pending the appeal. The CESTAT issued its order on our appeal on February 2, 2001, and while it found that the rig was imported in 1988 without proper documentation or payment of duties, the redemption fee and penalties were reduced to less than $0.1 million in view of the ambiguity surrounding the import practice at the time and the lack of intentional concealment by us. The CESTAT further sustained our position regarding the value of the rig at the time of import as $13 million and ruled that subsequent movements of the rig were not liable to import documentation or duties in view of the prevailing practice of the Customs Department, thus limiting our exposure as to custom duties to approximately $6 million. Although CESTAT did not grant us the benefit of a customs duty exemption due to the absence of the required documentation, CESTAT left it open for our subsidiary to seek such documentation from the Ministry of Petroleum. Following the CESTAT order, we tendered payment of redemption, penalty and duty in the amount specified by the order by offset against a $0.6 million deposit and $10.7 million guarantee previously made by us. The Customs Department attempted to draw the entire guarantee, alleging the actual duty payable is approximately $22 million based on an interpretation of the CESTAT order that we believe is incorrect. This action was stopped by an interim ruling of the High Court, Mumbai on writ petition filed by us. We and the Customs Department both filed appeals with the Supreme Court of India against the order of the CESTAT, and both appeals were admitted. The Supreme Court has dismissed the Customs Department appeal and affirmed the CESTAT order but the Customs Department has not agreed with our interpretation of that order. We are contesting their interpretation. We and our customer agreed to pursue and obtained the issuance of the required documentation from the Ministry of Petroleum that, if accepted by the Customs Department, would reduce the duty to nil. The Customs Department did not accept the documentation or agree to refund the duties already paid. We are pursuing our remedies against the Customs Department and our customer. We do not expect the liability, if any, resulting from this matter to have a material adverse effect on our consolidated financial position, results of operations or cash flows.

- 20 -


In October 2001, TODCO was notified by the U.S. Environmental Protection Agency ("EPA") that the EPA had identified a subsidiary as a potentially responsible party in connection with the Palmer Barge Line superfund site located in Port Arthur, Texas. Based upon the information provided by the EPA and a review of TODCO's internal records to date, TODCO disputes its designation as a potentially responsible party. Pursuant to the master separation agreement with TODCO, we are responsible and will indemnify TODCO for any losses TODCO incurs in connection with this action. We do not expect the liability, if any, resulting from this matter to have a material adverse effect on our consolidated financial position, results of operations or cash flows.

In August 2003, a judgment of approximately $9.5 million was entered by the Labor Division of the Provincial Court of Luanda, Angola, against us and one of our labor contractors, Hull Blyth, in favor of certain former workers on several of our drilling rigs. The workers were employed by Hull Blyth to work on several drilling rigs while the rigs were located in Angola. When the drilling contracts concluded and the rigs left Angola, the workers' employment ended. The workers brought suit claiming that they were not properly compensated when their employment ended. In addition to the monetary judgment, the Labor Division ordered the workers to be hired by us. We believe that this judgment is without sufficient legal foundation and have appealed the matter to the Angola Supreme Court. We further believe that Hull Blyth has an obligation to protect us from any judgment. We do not expect the liability, if any, resulting from this matter to have a material adverse effect on our consolidated financial position, results of operations or cash flows.

One of our subsidiaries is involved in an action with respect to customs penalties relating to the Sedco 710 semisubmersible drilling rig. Prior to the Sedco Forex merger, this drilling rig, which was working for Petrobras in Brazil at the time, had been admitted into the country on a temporary basis under authority granted to a Schlumberger entity. Prior to the Sedco Forex merger, the drilling contract was moved to an entity that would become one of our subsidiaries. In early 2000, the drilling contract was extended for another year. On January 10, 2000, the temporary import permit granted to the Schlumberger entity expired, and renewal filings were not made until later that January. In April 2000, the Brazilian customs authorities cancelled the import permit. The Schlumberger entity filed an action in the Brazilian federal court of Campos for the purpose of extending the temporary admission. Other proceedings were also initiated in order to secure the transfer of the temporary admission to our subsidiary. Ultimately, the court permitted the transfer to our entity but has not ruled that the temporary admission could be extended without the payment of a financial penalty. During the first quarter of 2004, the customs office renewed its efforts to collect a penalty and issued a second assessment for this penalty but has now done so against our subsidiary. The assessment is for approximately $71 million. We believe that the amount of the assessment, even if it were appropriate, should only be approximately $7 million and should in any event be assessed against the Schlumberger entity. We and Schlumberger are contesting our respective assessments. We have put Schlumberger on notice that we consider any assessment to be the responsibility of Schlumberger. We do not expect the liability, if any, resulting from this matter to have a material adverse effect on our consolidated financial position, results of operations or cash flows.

We have a dispute with TODCO concerning payment to us under our tax sharing agreement with TODCO for the tax benefit that TODCO derives from exercises of options to purchase our ordinary shares held by employees of TODCO. An arbitration proceeding was initiated in January 2006, and the parties are in the process of appointing an arbitrator. We are seeking payment of the amount of tax benefits derived from exercises of options to purchase our ordinary shares by employees of TODCO who were not on the payroll of TODCO at the time of exercise and a declaration that TODCO pay us for the benefit derived from such exercises in the future. TODCO is seeking to avoid such payment and is asking that the entire tax sharing agreement be voided. TODCO also filed suit in Houston in the district court of the State of Texas in January 2006 seeking to set aside the arbitration provision and to void the entire tax sharing agreement. We believe TODCO owes us approximately $10.7 million based on options exercised through December 31, 2005, and we do not believe TODCO’s attempts to void the tax sharing agreement have merit. We do not expect the outcome of this matter to have a material adverse effect on our consolidated financial position, results of operations or cash flows.

- 21 -


We are involved in various tax matters as described in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Outlook—Tax Matters." We are also involved in a number of other lawsuits, all of which have arisen in the ordinary course of our business. We do not expect the liability, if any, resulting from these other matters to have a material adverse effect on our consolidated financial position, results of operations or cash flows. We cannot predict with certainty the outcome or effect of any of the litigation matters specifically described above or of any such other pending or threatened litigation. There can be no assurance that our beliefs or expectations as to the outcome or effect of any lawsuit or other litigation matter will prove correct and the eventual outcome of these matters could materially differ from management's current estimates.

Submission of Matters to a Vote of Security Holders 

The Company did not submit any matter to a vote of its security holders during the fourth quarter of 2005.

Executive Officers of the Registrant

Officer
 
Office
 
Age as of
March 1, 2006
Robert L. Long
 
President and Chief Executive Officer
 
60
Jean P. Cahuzac
 
Executive Vice President and Chief Operating Officer
 
52
Eric B. Brown
 
Senior Vice President, General Counsel and Corporate Secretary
 
54
Gregory L. Cauthen
 
Senior Vice President and Chief Financial Officer
 
48
Steven L. Newman
 
Senior Vice President, Human Resources, Information Process Solutions and Treasury
 
41
David A. Tonnel
 
Vice President and Controller
 
36

The officers of the Company are elected annually by the board of directors. There is no family relationship between any of the above-named executive officers.

Robert L. Long is President, Chief Executive Officer and a member of the board of directors of the Company. Mr. Long served as President of the Company from December 2001 to October 2002, at which time he assumed the additional position of Chief Executive Officer and became a member of the board of directors. Mr. Long served as Chief Financial Officer of the Company from August 1996 until December 2001. Mr. Long served as Senior Vice President of the Company from May 1990 until the time of the Sedco Forex merger, at which time he assumed the position of Executive Vice President. Mr. Long also served as Treasurer of the Company from September 1997 until March 2001. Mr. Long has been employed by the Company since 1976 and was elected Vice President in 1987.

Jean P. Cahuzac is Executive Vice President and Chief Operating Officer of the Company. Mr. Cahuzac served as Executive Vice President, Operations of the Company from February 2001 until October 2002, at which time he assumed his current position. Mr. Cahuzac served as President of Sedco Forex from January 1999 until the time of the Sedco Forex merger, at which time he assumed the positions of Executive Vice President and President, Europe, Middle East and Africa with the Company. Mr. Cahuzac served as Vice President-Operations Manager of Sedco Forex from May 1998 to January 1999, Region Manager-Europe, Africa and CIS of Sedco Forex from September 1994 to May 1998 and Vice President/General Manager-North Sea Region of Sedco Forex from February 1994 to September 1994. He had been employed by Schlumberger since 1979.

Eric B. Brown is Senior Vice President, General Counsel and Corporate Secretary of the Company. Mr. Brown served as Vice President and General Counsel of the Company since February 1995 and Corporate Secretary of the Company since September 1995. He assumed the position of Senior Vice President in February 2001. Prior to assuming his duties with the Company, Mr. Brown served as General Counsel of Coastal Gas Marketing Company.

Gregory L. Cauthen is Senior Vice President and Chief Financial Officer of the Company. He was also Treasurer of the Company until July 2003. Mr. Cauthen served as Vice President, Chief Financial Officer and Treasurer from December 2001 until he was elected in July 2002 as Senior Vice President. Mr. Cauthen served as Vice President, Finance from March 2001 to December 2001. Prior to joining the Company, he served as President and Chief Executive Officer of WebCaskets.com, Inc., a provider of death care services, from June 2000 until February 2001. Prior to June 2000, he was employed at Service Corporation International, a provider of death care services, where he served as Senior Vice President, Financial Services from July 1998 to August 1999, Vice President, Treasurer from July 1995 to July 1998, was assigned to various special projects from August 1999 to May 2000 and had been employed in various other positions since February 1991.

- 22 -


Steven L. Newman is Senior Vice President of Human Resources, Information Process Solutions and Treasury. Mr. Newman served as Vice President of Performance and Technology of the Company from August 2003 until March 2005, at which time he assumed his current position. Mr. Newman served as Regional Manager, Asia Australia from May 2001 until August 2003. From December 2000 to May 2001, Mr. Newman served as Region Operations Manager of the Africa-Mediterranean Region of the Company. From April 1999 to December 2000, Mr. Newman served in various operational and marketing roles in the Africa-Mediterranean and U.K. region offices. Mr. Newman has been employed by the Company since 1994.

David A. Tonnel is Vice President and Controller of the Company. Mr. Tonnel served as Assistant Controller of the Company from May 2003 to February 2005, at which time he assumed his current position. Mr. Tonnel served as Finance Manager, Asia Australia Region from October 2000 to May 2003 and as Controller, Nigeria from April 1999 to October 2000. Mr. Tonnel joined the Company in 1996 after working for Ernst & Young in France as Senior Auditor.
 
- 23 -


PART II

Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities

Our ordinary shares are listed on the New York Stock Exchange (the “NYSE”) under the symbol “RIG.” The following table sets forth the high and low sales prices of our ordinary shares for the periods indicated as reported on the NYSE Composite Tape.

       
Price
 
       
High
 
Low
 
               
2004
   
First Quarter
 
$
31.94
 
$
23.10
 
 
   
Second Quarter
   
29.27
   
24.49
 
 
   
Third Quarter 
   
36.24
   
25.94
 
 
   
Fourth Quarter 
   
43.25
   
33.70
 
     
 
             
2005
   
First Quarter
 
$
51.97
 
$
39.79
 
 
   
Second Quarter 
   
58.19
   
43.16
 
 
   
Third Quarter
   
63.11
   
53.52
 
 
   
Fourth Quarter 
   
70.93
   
52.34
 

On February 28, 2006, the last reported sales price of our ordinary shares on the NYSE Composite Tape was $74.18 per share. On such date, there were 12,747 holders of record of our ordinary shares and 325,966,986 ordinary shares outstanding.

We paid quarterly cash dividends of $0.03 per ordinary share from the fourth quarter of 1993 to the second quarter of 2002. Any future declaration and payment of dividends will (i) depend on our results of operations, financial condition, cash requirements and other relevant factors, (ii) be subject to the discretion of the board of directors, (iii) be subject to restrictions contained in our revolving credit agreement and other debt covenants and (iv) be payable only out of our profits or share premium account in accordance with Cayman Islands law.

There is currently no reciprocal tax treaty between the Cayman Islands and the United States. Under current Cayman Islands law, there is no withholding tax on dividends.

We are a Cayman Islands exempted company. Our authorized share capital is $13,000,000, divided into 800,000,000 ordinary shares, par value $0.01, and 50,000,000 preference shares, par value $0.10, of which shares may be designated and created as shares of any other classes or series of shares with the respective rights and restrictions determined by action of our board of directors. On February 28, 2006, no preference shares were outstanding.

The holders of ordinary shares are entitled to one vote per share other than on the election of directors.

With respect to the election of directors, each holder of ordinary shares entitled to vote at the election has the right to vote, in person or by proxy, the number of shares held by him for as many persons as there are directors to be elected and for whose election that holder has a right to vote. The directors are divided into three classes, with only one class being up for election each year. Directors are elected by a plurality of the votes cast in the election. Cumulative voting for the election of directors is prohibited by our articles of association.

There are no limitations imposed by Cayman Islands law or our articles of association on the right of nonresident shareholders to hold or vote their ordinary shares.

The rights attached to any separate class or series of shares, unless otherwise provided by the terms of the shares of that class or series, may be varied only with the consent in writing of the holders of all of the issued shares of that class or series or by a special resolution passed at a separate general meeting of holders of the shares of that class or series. The necessary quorum for that meeting is the presence of holders of at least a majority of the shares of that class or series. Each holder of shares of the class or series present, in person or by proxy, will have one vote for each share of the class or series of which he is the holder. Outstanding shares will not be deemed to be varied by the creation or issuance of additional shares that rank in any respect prior to or equivalent with those shares.

- 24 -


Under Cayman Islands law, some matters, like altering the memorandum or articles of association, changing the name of a company, voluntarily winding up a company or resolving to be registered by way of continuation in a jurisdiction outside the Cayman Islands, require approval of shareholders by a special resolution. A special resolution is a resolution (1) passed by the holders of two-thirds of the shares voted at a general meeting or (2) approved in writing by all shareholders entitled to vote at a general meeting of the company.

The presence of shareholders, in person or by proxy, holding at least a majority of the issued shares generally entitled to vote at a meeting, is a quorum for the transaction of most business. However, different quorums are required in some cases to approve a change in our articles of association.

Our board of directors is authorized, without obtaining any vote or consent of the holders of any class or series of shares unless expressly provided by the terms of issue of that class or series, to provide from time to time for the issuance of classes or series of preference shares and to establish the characteristics of each class or series, including the number of shares, designations, relative voting rights, dividend rights, liquidation and other rights, redemption, repurchase or exchange rights and any other preferences and relative, participating, optional or other rights and limitations not inconsistent with applicable law.

Our articles of association contain provisions that could prevent or delay an acquisition of our Company by means of a tender offer, proxy contest or otherwise.

The foregoing description is a summary. This summary is not complete and is subject to the complete text of our memorandum and articles of association. For more information regarding our ordinary shares and our preference shares, see our Current Report on Form 8-K dated May 14, 1999 and our memorandum and articles of association. Our memorandum and articles of association are filed as exhibits to this annual report.

Issuer Purchases of Equity Securities
 
                   
Period
 
(a) Total
Number
of Shares
Purchased (1)
 
(b) Average
Price
Paid Per
Share
 
(c) Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs (2)
 
(d) Maximum Number (or
Approximate Dollar
Value) of Shares that May
Yet Be Purchased Under
the Plans or Programs (2)
(in millions)
 
October 2005
   
(149
)
$
52.01
   
N/A
 
$
2,000.0
 
November 2005
   
   
   
N/A
   
N/A
 
December 2005
   
6,040,230
   
66.44
   
6,014,751
   
1,600.0
 
Total
   
6,040,081
 
$
66.44
   
6,014,751
 
$
1,600.0
 
 
 

(1)
Total number of shares purchased in December 2005 includes 25,479 shares withheld by us in satisfaction of withholding taxes due upon the vesting of restricted shares granted to our employees under our Long-Term Incentive Plan to pay withholding taxes due upon vesting of a restricted share award.

(2)
In October 2005, our board of directors authorized the repurchase of up to $2 billion of our ordinary shares. The shares may be repurchased from time to time in open market or private transactions. The repurchase program does not have an established expiration date and may be suspended or discontinued at any time. Under the program, repurchased shares are retired and returned to unissued status. From inception through December 31, 2005, we have repurchased a total of 6,014,751 of our ordinary shares at a total cost of $400 million ($66.50 per share).

Selected Financial Data

The selected financial data as of December 31, 2005 and 2004 and for each of the three years in the period ended December 31, 2005 has been derived from the audited consolidated financial statements included elsewhere herein. The selected financial data as of December 31, 2003, 2002 and 2001, and for the years ended December 31, 2002 and 2001 has been derived from audited consolidated financial statements not included herein. The following data should be read in conjunction with “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations” and the audited consolidated financial statements and the notes thereto included under “Item 8. Financial Statements and Supplementary Data.”

On January 31, 2001, we completed a merger transaction with R&B Falcon. As a result of the merger, R&B Falcon became our indirect wholly owned subsidiary. The merger was accounted for as a purchase and we were treated as the accounting acquiror. The balance sheet data as of December 31, 2001 represents the consolidated financial position of the combined company. The statement of operations and other financial data for the year ended December 31, 2001 include eleven months of operating results and cash flows for the merged company.

- 25 -


We consolidated TODCO in our financial statements as a business segment through December 16, 2004 and that portion of TODCO that we did not own was reported as minority interest in our consolidated statements of operations and balance sheet. As a result of the conversion of the TODCO class B common stock into class A common stock, our ownership and voting interest declined to approximately 22 percent and we no longer consolidated TODCO in our financial statements but accounted for our remaining investment using the equity method of accounting.

In May 2005 and June 2005, respectively, we completed a public offering and a sale of TODCO common stock pursuant to Rule 144 under the Securities Act of 1933, as amended (respectively referred to as the “May Offering” and the “June Sale”). After the May Offering, we accounted for our remaining investment using the cost method of accounting. As a result of the June Sale, we no longer own any shares of TODCO’s common stock.

   
Years ended December 31,
 
   
2005
 
2004
 
2003
 
2002
 
2001
 
   
(In millions, except per share data)
 
Statement of Operations
                     
Operating revenues
 
$
2,892
 
$
2,614
 
$
2,434
 
$
2,674
 
$
2,820
 
Operating income (loss)
   
720
   
328
   
240
   
(2,310
)
 
550
(a)
Income (loss) before cumulative effect of changes in accounting principles
   
716
   
152
   
18
   
(2,368
)
 
253
 
Cumulative effect of changes in accounting principles.
   
   
   
1
   
(1,364
)
 
 
Net income (loss)
   
716
   
152
   
19
   
(3,732
)
 
253
 
Basic earnings (loss) per share
                             
 
Income (loss) before cumulative effect of changes in accounting principles per share
 
$
2.19
 
$
0.47
 
$
0.06
 
$
(7.42
)
$
0.82
 
Cumulative effect of changes in accounting principles
   
   
   
   
(4.27
)
 
 
Net income (loss)
 
$
2.19
 
$
0.47
 
$
0.06
 
$
(11.69
)
$
0.82
(a)
Diluted earnings (loss) per share
                             
 
Income (loss) before cumulative effect of changes in accounting principles per share
 
$
2.13
 
$
0.47
 
$
0.06
 
$
(7.42
)
$
0.80
 
Cumulative effect of changes in accounting principles
   
   
   
   
(4.27
)
 
 
Net income (loss)
 
$
2.13
 
$
0.47
 
$
0.06
 
$
(11.69
)
$
0.80
(a)
                               
 
Balance Sheet Data (at end of period)
                               
Total assets
 
$
10,457
 
$
10,758
 
$
11,663
 
$
12,665
 
$
17,048
 
Long-term debt
   
1,197
   
2,462
   
3,612
   
3,630
   
4,540
 
Total shareholders’ equity
   
7,982
   
7,393
   
7,193
   
7,141
   
10,910
 
Dividends per share
   
   
   
 
$
0.06
 
$
0.12
 
                                 
Other Financial Data
                               
Cash provided by operating activities
 
$
864
 
$
600
 
$
525
 
$
939
 
$
560
 
Cash provided by (used in) investing activities
   
169
   
551
   
(445
)
 
(45
)
 
(26
)
Cash provided by (used in) financing activities
   
(1,039
)
 
(1,174
)
 
(820
)
 
(533
)
 
285
 
Capital expenditures
   
182
   
127
   
494
   
141
   
506
 
Operating margin
   
25
%
 
13
%
 
10
%
 
N/M
   
20
%
 

“N/M” means not meaningful due to loss on impairments of long-lived assets.

(a)
Includes goodwill amortization of $155 million, or $0.49 per diluted share. Goodwill is no longer amortized beginning in fiscal year 2002 in accordance with the Financial Accounting Standards Board's (“FASB”) Statement of Financial Accounting Standards (“SFAS”) 142, Goodwill and Other Intangible Assets.

- 26 -

 
Management's Discussion and Analysis of Financial Condition and Results of Operations

The following information should be read in conjunction with the information contained in “Item 1A. Risk Factors” and the audited consolidated financial statements and the notes thereto included under “Item 8. Financial Statements and Supplementary Data” elsewhere in this annual report.

Overview 

Transocean Inc. (together with its subsidiaries and predecessors, unless the context requires otherwise, the “Company,” “Transocean,” “we,” “us” or “our”) is a leading international provider of offshore contract drilling services for oil and gas wells. As of March 2, 2006, we owned, had partial ownership interests in or operated 89 mobile offshore and barge drilling units. As of this date, our fleet included 32 High-Specification semisubmersibles and drillships (“floaters”), 23 Other Floaters, 25 Jackup Rigs and 9 Other Rigs.

Our mobile offshore drilling fleet is considered one of the most modern and versatile fleets in the world. Our primary business is to contract these drilling rigs, related equipment and work crews primarily on a dayrate basis to drill oil and gas wells. We specialize in technically demanding segments of the offshore drilling business with a particular focus on deepwater and harsh environment drilling services. We also provide additional services, including integrated services.

Key measures of our total company results of operations and financial condition are as follows:

   
Years ended December 31,
     
   
2005
 
2004
 
Change
 
   
(In millions, except daily amounts and percentages)
 
Average daily revenue (a)(c)(d)
 
$
105,100
 
$
71,300
 
$
33,800
 
Utilization (b)(c)(d)
   
79
%
 
58
%
 
N/A
 
Statement of Operations (c)
                   
Operating revenue
 
$
2,891.7
 
$
2,613.9
 
$
277.8
 
Operating and maintenance expense
   
1,720.6
   
1,713.6
   
7.0
 
Operating income
   
719.5
   
327.9
   
391.6
 
Net income
   
715.6
   
152.2
   
563.4
 
Balance Sheet Data (at end of period) (c)
                   
Cash
   
445.4
   
451.3
   
(5.9
)
Total Assets
   
10,457.2
   
10,758.3
   
(301.1
)
Total Debt
   
1,597.1
   
2,481.5
   
(884.4
)
 

“N/A” means not applicable.

(a)
Average daily revenue is defined as contract drilling revenue earned per revenue earning day. A revenue earning day is defined as a day for which a rig earns dayrate after commencement of operations.
(b)
Utilization is the total actual number of revenue earning days as a percentage of the total number of calendar days in the period.
(c)
We consolidated TODCO’s (together with its subsidiaries and predecessors, unless the context requires otherwise, “TODCO,” a publicly traded company and a former wholly-owned subsidiary) results of operations and financial condition in our consolidated financial statements through December 16, 2004. We deconsolidated TODCO effective December 17, 2004 and subsequently accounted for our investment in TODCO under the equity method of accounting through May 18, 2005, at which time our ownership interest fell below 20 percent. See “―Significant Events.”
(d)
Excludes a drillship engaged in scientific geological coring activities, the Joides Resolution, that is owned by a joint venture in which we have a 50 percent interest and is accounted for under the equity method of accounting.

2005 was an exceptional year for the industry with strong demand and increasing dayrates for all asset classes, and we believe this strong demand will continue in 2006. Leading dayrates are at record levels for most rig classes and customers are contracting rigs for longer terms than we have seen historically for rigs other than newbuilds.  Interest in high-specification floaters is particularly strong and we are seeing interest on the part of some customers to discuss availability of rigs starting as far out as 2008 and extending toward the end of the decade.  There is also evidence of a broadening base of customers with deepwater drilling rig requirements for exploration and production drilling programs in various geographic locations. Some of these rig needs could potentially be addressed by new rig construction. We are presently aware of a number of operators that have expressed an interest in awarding drilling contracts for newly constructed ultra-deepwater floaters. As a result of the level of activity industrywide, we are seeing increases in our cost structure.  A shortage of qualified people is driving compensation cost up and suppliers are increasing prices as their backlogs build.  These labor and vendor price increases, while meaningful, are not significant in comparison with our expected increase in revenue for 2006 and beyond. We also have a deepwater newbuild rig, two major upgrades and a large number of repair and maintenance shipyard projects underway or planned to commence in 2006. The actual timing and duration of these shipyard projects, along with the actual start of higher dayrate contracts, will have a significant influence on our results of operations in 2006.

- 27 -


Our revenues and operating and maintenance expenses for the year ended December 31, 2005 increased from the prior year due to increased activity and higher labor and rig maintenance costs, partially offset by the deconsolidation of TODCO effective December 17, 2004 (see “—Results of Operations”) and decreased integrated services provided to our clients. For the year ended December 31, 2005, our revenues and our operating and maintenance expenses were adversely affected as a result of damage sustained to two of our High-Specification semisubmersibles during hurricanes Katrina and Rita (see “—Significant Events”). Our financial results for the year ended December 31, 2005 included the recognition of gains from our May 2005 public offering (the “May Offering”) and June 2005 sale pursuant to Rule 144 under the Securities Act of 1933 (the “June Sale,” and, together with the May Offering, the “2005 Offering and Sale”) of TODCO common stock, gains from the sale of three rigs, other income recognized under the TODCO tax sharing agreement and reductions in tax expense related to the settlement of various tax audits, partially offset by income tax provisions attributable to the restructuring of certain non-U.S. operations and charges pertaining to a loss on retirement of debt (see “—Significant Events”). Our financial results for the year ended December 31, 2004 included gains recognized on the TODCO initial public offering (“TODCO IPO”) as well as the September 2004 and December 2004 additional public offerings of TODCO common stock (respectively referred to as the “September 2004 Offering” and “December 2004 Offering” and together with the TODCO IPO, the “2004 Offerings”) and a gain from the sale of a rig, partially offset by a tax valuation allowance adjustment and stock option expense recorded in connection with the TODCO IPO as well as a non-cash charge related to contingent amounts due from TODCO under the tax sharing agreement and charges pertaining to losses on retirement of debt (see “—Results of Operations”). Cash decreased during the year ended December 31, 2005 primarily as a result of increased capital expenditures, the early retirements of debt and repurchase of ordinary shares, partially offset by proceeds received from the 2005 Offering and Sale, the sale of rigs and exercises of stock options, as well as cash provided by operating activities.

Through December 16, 2004, our operations were aggregated into two reportable segments: (i) Transocean Drilling and (ii) TODCO. The Transocean Drilling segment consists of floaters, jackups and other rigs used in support of offshore drilling activities and offshore support services on a worldwide basis. The TODCO segment consisted of our interest in TODCO, which conducts jackup, drilling barge, land rig, submersible and other operations in the U.S. Gulf of Mexico and inland waters, Mexico, Trinidad and Venezuela. The organization and aggregation of our business into the two segments were based on differences in economic characteristics, customer base, asset class, contract structure and management structure. In addition, the TODCO segment fleet was highly dependent upon the U.S. natural gas industry while the Transocean Drilling segment’s operations are more dependent upon the worldwide oil industry. As a result of the deconsolidation of TODCO (see “―Significant Events”), we now operate in one business segment, the Transocean Drilling segment.

Our Transocean Drilling segment fleet operates in a single, global market for the provision of contract drilling services. The location of our rigs and the allocation of resources to build or upgrade rigs are determined by the activities and needs of our customers.

We categorize our fleet as follows: (i) “High-Specification Floaters,” consisting of our “Fifth-Generation Deepwater Floaters,” “Other Deepwater Floaters” and “Other High-Specification Floaters,” (ii) “Other Floaters,” (iii) “Jackups” and (iv) “Other Rigs.” Within our High-Specification Floaters category, we consider our Fifth-Generation Deepwater Floaters to be the semisubmersibles Deepwater Horizon, Cajun Express, Deepwater Nautilus, Sedco Energy and Sedco Express and the drillships Deepwater Discovery, Deepwater Expedition, Deepwater Frontier, Deepwater Millennium, Deepwater Pathfinder, Discoverer Deep Seas, Discoverer Enterprise and Discoverer Spirit. These rigs were built in the construction cycle that occurred from approximately 1996 to 2001 and have high-pressure mud pumps and a water depth capability of 7,500 feet or greater. The Other Deepwater Floaters are generally those other semisubmersible rigs and drillships that have a water depth capacity of at least 4,500 feet. The Other High-Specification Floaters, built as fourth-generation rigs in the mid to late 1980’s, are capable of drilling in harsh environments and have greater displacement than previously constructed rigs resulting in larger variable load capacity, more useable deck space and better motion characteristics. The Other Floaters category is generally comprised of those non-high-specification floaters with a water depth capacity of less than 4,500 feet. The Jackups category consists of our jackup fleet, and the Other Rigs category consists of other rigs that are of a different type or use. These categories reflect how we view, and how we believe our investors and the industry generally view, our fleet, and reflect our strategic focus on the ownership and operation of premium high-specification floating rigs and jackups.

- 28 -

 
Significant Events

Hurricane Damage—In the third quarter of 2005, two of our semisubmersible rigs, the Deepwater Nautilus and the Transocean Marianas, sustained damage during hurricanes Katrina and Rita. During hurricane Katrina, the Deepwater Nautilus sustained damage to its mooring system and lost approximately 3,200 feet of marine riser and a portion of its subsea well control system. The rig was undergoing repairs during hurricane Rita and was set adrift following the failure of a tow line utilized by a towing vessel. Also during hurricane Rita, the Transocean Marianas sustained damage to its mooring system, was forced off its drilling location and was grounded in shallow water. The Deepwater Nautilus was out of service for 24 days in 2005 and is expected to be out of service approximately 60 days in 2006. The Transocean Marianas was out of service for 95 days in 2005 and is expected to be out of service approximately 100 days in 2006. Operating income in 2005 was negatively impacted by approximately $39 million due to lost revenue and higher operating and maintenance costs on the Transocean Marianas and the Deepwater Nautilus. Depending on the timing of the repairs, we currently estimate the total lost revenue plus repair, crew and other costs for the two rigs to have a negative impact on operating income of approximately $45 million to $55 million in 2006. In addition, we also expect to spend approximately $30 million on capital expenditures to replace damaged equipment. See "Income and Expense Categories-Operating and Maintenance Costs.”

Asset Acquisition—In May 2005, we purchased the semisubmersible rig M. G. Hulme, Jr., which we had previously operated under a lease arrangement. See “—Off-Balance Sheet Arrangement.”

Asset Dispositions—In January 2005, we completed the sale of the semisubmersible rig Sedco 600 for net proceeds of $24.9 million, of which $2.5 million was received in 2004, and recognized a gain on the sale of $18.8 million. In June 2005, we sold the jackup rig Transocean Jupiter and a land rig for net proceeds of $23.5 million and recognized a gain on the sale of $14.0 million. See “—Capital Expenditures, Acquisitions and Dispositions.”

In February 2006, we completed the sale of the drillship Peregrine III for net proceeds of $78.7 million, of which $7.8 million was received in December 2005, and expect to recognize a gain on the sale of approximately $62 million. See “—Liquidity and Capital Resources-Capital Expenditures, Acquisitions and Dispositions.”

Debt Repurchase and Redemption—In March 2005, we redeemed our $247.8 million aggregate principal amount outstanding 6.95% Senior Notes due April 2008 at the make-whole premium price provided in the indenture. We redeemed these notes at 108.259 percent of face value, or $268.2 million, plus accrued and unpaid interest. In the first quarter of 2005, we recognized a loss on this redemption of $6.7 million, which reflected adjustments for fair value of the debt at the date of the merger with R&B Falcon Corporation and the unamortized fair value adjustment on a previously terminated interest rate swap. We funded the redemption with existing cash balances.

In July 2005, we acquired, pursuant to a tender offer, a total of $534.4 million, or approximately 76.3 percent, of the aggregate principal amount of our 6.625% Notes due April 2011 at 110.578 percent of face value, or $590.9 million, plus accrued and unpaid interest. In the third quarter of 2005, we recognized a gain on this repurchase of $0.2 million, which reflected adjustments for the unamortized fair value adjustment on a previously terminated interest rate swap. We funded the repurchase with existing cash balances.

Revolving Credit Agreement—In July 2005, we entered into a $500.0 million, five-year revolving credit agreement (the “Revolving Credit Agreement”). In conjunction with entering into this facility, we terminated our $800.0 million, five-year revolving credit agreement dated December 2003 and recognized a loss on the termination of this agreement of $0.8 million in the third quarter of 2005.

Repurchase of Ordinary Shares—In October 2005, our board of directors authorized the repurchase of up to $2 billion of our ordinary shares. In December 2005, we repurchased and retired $400 million of our ordinary shares, which amounted to approximately 6.0 million ordinary shares. See “—Liquidity and Capital Resources-Sources and Uses of Cash.”

TODCO—We sold 12.0 million shares of TODCO’s class A common stock representing 20 percent of TODCO’s total outstanding shares at $20.50 per share in the May Offering. We sold our remaining 1.3 million shares of TODCO’s class A common stock representing two percent of TODCO’s total outstanding shares at $23.57 in the June Sale. After the May Offering, we accounted for our remaining investment using the cost method of accounting. As a result of the June Sale, we no longer own any shares of TODCO’s common stock. In the second quarter of 2005, we received net proceeds of $271.9 million from the 2005 Offering and Sale and recognized a gain of $165.0 million, which represented the excess of net proceeds received over the net book value of the shares sold in the 2005 Offering and Sale. We refer collectively to the 2005 Offering and Sale and the public offerings of TODCO Class A common stock in 2004 as the “TODCO Stock Sales.”

- 29 -

 
Outlook

Drilling Market—Oil and natural gas commodity prices continue to be strong, and we expect prices to remain high for the near future relative to historical price levels. Future price expectations have historically been a key driver for offshore drilling demand. However, the availability of quality drilling prospects, exploration success, relative production costs, the stage of reservoir development and political and regulatory environments also affect our customers’ drilling programs.

Prospects for our 32 High-Specification Floaters continue to be robust. We have recently been awarded a five-year contract for the construction of an enhanced Enterprise-class drillship, to be named the Discoverer Clear Leader, with an estimated total capital expenditure of approximately $650 million. We currently expect this rig to begin operations in the U.S. Gulf of Mexico in approximately the second quarter of 2009, after construction in South Korea followed by sea trials, mobilization to the U.S. Gulf of Mexico and customer acceptance. We are also currently in discussions with several clients concerning other potential drilling contracts for newbuild deepwater rigs.

We have also signed a number of other new contracts or extensions for our High-Specification Floaters that reflect the strong activity in this sector. We have been awarded multi-year contracts for the Transocean Marianas, Jack Bates, Sedco 709, Deepwater Discovery, the two Sedco 700-series semisubmersible upgrades, Discoverer Spirit and Deepwater Millennium. Additionally, we have entered into contract extensions for multi-year programs for the Deepwater Nautilus, Deepwater Frontier, Cajun Express and Discoverer Enterprise. We continue to believe that, over the long term, deepwater exploration and development drilling opportunities in the Gulf of Mexico, West Africa, Brazil and India and other emerging deepwater market sectors represent a significant source of future deepwater rig demand. We continue to see an appreciable customer preference for using fifth-generation equipment in these deepwater areas, which we believe has led to a near-term shortage of these highest specification rigs.
 
Our Other Floaters fleet, comprised of 23 semisubmersible rigs, is largely committed to contracts that extend into 2007, excluding three semisubmersible rigs that remain idle. This fleet continues to benefit from improving activity levels in all regions. Robust customer demand remains evident in most operating regions, including the North Sea, West Africa and India. In the U.K. sector of the North Sea, our three most recent contract awards within this fleet have dayrates ranging from $250,000 to $310,000. These three contracts have varying commencement dates in 2007 for one-year durations extending into 2008. We have begun the reactivation of two previously idle semisubmersibles, the Transocean Prospect and Transocean Winner, both supported by multi-year contracts, which are expected to commence by June 2006 and October 2006, respectively. We continue to evaluate contract opportunities that could result in the reactivation of our idle rigs, the semisubmersible rigs C. Kirk Rhein, Jr. and Transocean Wildcat. Should a decision be made to reactivate any of the idle units, they are not expected to be operational before the third quarter of 2006.

In the fourth quarter of 2005, we entered into agreements with a subsidiary of Royal Dutch Petroleum (Shell) and with Chevron for the upgrades of two Sedco 700-series semisubmersibles in our Others Floaters fleet. Under the Shell agreement, Shell is committed to a three-year contract to be finalized by the parties based upon stated drilling contract principles. We expect the upgrade to be completed in approximately the second quarter of 2007, subject to finalization of project arrangements and other factors, at a cost of approximately $300 million depending upon final specifications and other factors. Drilling operations would commence after commissioning and acceptance following the shipyard work. Shell has the right to terminate the contract if the shipyard work is not completed by February 15, 2008.

Under the Chevron agreement, Chevron is committed to a three-year contract, with a right to extend the contract for an additional two years, to be finalized by the parties based upon stated drilling contract principles. We expect the upgrade to be completed in approximately the second quarter of 2008, subject to finalization of project arrangements and other factors, at a cost of approximately $300 million depending upon final specifications and other factors. Drilling operations would commence after commissioning and acceptance following the shipyard work. Chevron has the right to terminate the contract if the shipyard work is not completed by December 31, 2008.

The outlook for activity for the jackup market sector remains strong, particularly in South East Asia, India and West Africa. We recently signed three-year contracts for drilling programs in India involving five of our jackups. We expect to remain at or near full utilization for our Jackups fleet in the near term. However, we continue to monitor the potential effect of newbuild jackups, which have scheduled delivery dates ranging from 2006 through approximately 2010. While we have not seen an appreciable effect to date, the addition of rig capacity could have an adverse impact on utilization and dayrates.
 
- 30 -


In January 2006, we entered into rig marketing and purchase option agreements with PetroJack ASA pursuant to which we were granted exclusive marketing rights for, and options to purchase, up to three premium jackup rigs under construction. Our marketing rights and option period runs through March 15, 2006. We have not exercised any of the options but would anticipate exercising an option if we could secure a drilling contract of sufficient value and duration for the rig. We are not obligated to exercise any of the options.
 
While we anticipate a favorable demand environment to continue during 2006 and into 2007, our results of operations in 2006 will be significantly influenced by the actual timing and duration of the various shipyard projects and the actual start of higher dayrate contracts. We expect our results in the first two quarters of 2006 to be negatively impacted by the combination of anticipated higher operating and maintenance expenses and lost revenue due to out of service time and delays in the start of higher dayrate contracts.

We expect downtime and significant costs to be incurred during the first quarter of 2006 resulting from planned shipyard projects and/or mobilizations for the Discoverer 534, Sedco 710, J. W. McLean, Transocean Driller and J. T. Angel, as well as for the Transocean Marianas and the Deepwater Nautilus due to the hurricane incidents. These rig mobilizations and shipyard projects are expected to have an adverse impact on revenues and operating income. We also expect to incur significant costs related to the reactivation of the previously idled Transocean Prospect and Transocean Winner. In addition, vendor price increases and rising labor costs due to increased drilling activity, as well as anticipated increases in insurance costs, are expected to increase operating and maintenance costs. The combination of these trends is expected to lead to a level of operating and maintenance costs in the first and second quarters of 2006 that is higher than the fourth quarter of 2005.

Our shipyard projects, including the construction of the deepwater drillship Discoverer Clear Leader, the Sedco 700-series rig upgrades, our two rig reactivations and any other potential newbuild projects, are subject to risks of delay and cost overruns for a variety of reasons, including some outside of our control. A delay could adversely affect any drilling contract for the rig following the shipyard work, depending upon the drilling contract terms.

We also expect that a number of pre-existing, fixed-price contract options will be exercised by our customers, which will preclude us from taking full advantage of increased market rates for those rigs subject to these contract options. We have seven existing contracts with fixed-priced or capped options for dayrates that we believe are less than current market dayrates. Customers may also use well-in-progress or similar provisions in our existing contracts to delay the start of higher dayrates in subsequent contracts.

We continue to monitor the potential effects of announced newbuild deepwater drilling rigs and deepwater upgrade projects. Most of these units have scheduled completion dates in 2008 and beyond, and we are unable to predict what effect, if any, the additional capacity will have on the drilling market. While we currently believe demand for deepwater drilling services will remain strong into 2008, the addition of deepwater rig capacity could have an adverse impact on utilization and dayrates.

The offshore contract drilling market remains highly competitive and cyclical, and it has been historically difficult to forecast future market conditions. Declines in oil and/or gas prices and other risks may reduce rig demand and adversely affect utilization and dayrates. Major operator and national oil company capital budgets are key drivers of the overall business climate, and these may change within a fiscal year depending on exploration results and other factors. Additionally, increased competition for our customers’ drilling budgets could come from, among other areas, land-based energy markets in Africa, Russia, other former Soviet Union states, the Middle East and Alaska.

Our operations are geographically dispersed in oil and gas exploration and development areas throughout the world. Rigs can be moved from one region to another, but the cost of moving a rig and the availability of rig-moving vessels may cause the supply and demand balance to vary somewhat between regions. However, significant variations between regions do not tend to persist long-term because of rig mobility. Consequently, we operate in a single, global offshore drilling market.
 
- 31 -


Tax Matters—We are a Cayman Islands company registered in Barbados. We operate through our various subsidiaries in a number of countries throughout the world. Consequently, we are subject to changes in tax laws, treaties and regulations in and between the countries in which we operate. A material change in these tax laws, treaties or regulations in any of the countries in which we operate could result in a higher or lower effective tax rate on our worldwide earnings.

Our income tax returns are subject to review and examination in the various jurisdictions in which we operate. We are currently contesting various non-U.S. assessments. We accrue for income tax contingencies that we believe are probable exposures. While we cannot predict or provide assurance as to the final outcome, we do not expect the liability, if any, resulting from existing or future assessments to have a material adverse effect on our consolidated financial position, results of operations or cash flows.

Our 2002 and 2003 U.S. federal income tax returns are currently under examination by the IRS and our 2001 U.S. federal income tax return remains open for examination. No examination report has been received at this time. While we cannot predict or provide assurance as to the final outcome, we do not expect the liability, if any, resulting from the examination to have a material adverse effect on our consolidated financial position, results of operations or cash flows.

In September 2004, the Norwegian tax authorities initiated inquiries related to a restructuring transaction undertaken in 2001 and 2002 and a dividend payment made during 2001. In February 2005, we filed a response to these inquiries. In March 2005, pursuant to court orders, the Norwegian tax authorities took action to obtain additional information regarding these transactions. During 2005, we have continued to respond to information requests from the Norwegian authorities. Based on these inquiries, we believe the Norwegian authorities are contemplating a tax assessment of approximately $96.4 million on the dividend, plus penalty and interest. No assessment has been made, and we believe such an assessment would be without merit. While we cannot predict or provide assurance as to the final outcome, we do not expect the liability, if any, resulting from the inquiry to have a material adverse effect on our consolidated financial position, results of operations or cash flows.

As a result of the deconsolidation of TODCO from our other U.S. subsidiaries for U.S. federal income tax purposes in conjunction with the TODCO IPO, we established an initial valuation allowance in the first quarter of 2004 of approximately $31.0 million against the estimated deferred tax assets of TODCO in excess of its deferred tax liabilities and other deferred tax assets not expected to be realized, taking into account prudent and feasible tax planning strategies as required by the Financial Accounting Standards Board’s (“FASB”) Statement of Financial Accounting Standard (“SFAS”) 109, Accounting for Income Taxes. We adjusted the initial valuation allowance during 2004 to reflect changes in our estimate of the ultimate amount of TODCO’s deferred tax assets. An allocation of tax benefits between TODCO and our other U.S. subsidiaries occurred in the third quarter of 2005 upon the filing of our 2004 U.S. consolidated federal income tax return. As a result of this allocation, we recorded additional income tax expense of approximately $8 million in the third quarter of 2005 to adjust the previously estimated allocation. This allocation is subject to potential revision upon subsequent IRS audit of our tax returns and such revision, should it occur, could impact our effective tax rate for future years as well as the ultimate amount of payments by TODCO under the tax sharing agreement.

Under the tax sharing agreement entered into between us and TODCO in connection with the TODCO IPO, we are entitled to receive from TODCO payment for most of the tax benefits generated prior to the TODCO IPO that TODCO utilizes subsequent to the TODCO IPO. As long as TODCO was our consolidated subsidiary, we followed the provisions of SFAS 109, which allowed us to evaluate the recoverability of the deferred tax assets associated with the tax sharing agreement considering the deferred tax liabilities of TODCO. We recorded a valuation allowance for the excess of these deferred tax assets over the deferred tax liabilities of TODCO, also taking into account prudent and feasible tax planning strategies as required by SFAS 109. Because we no longer own any shares of TODCO, we no longer include TODCO as a consolidated subsidiary in our financial statements, and we are no longer able to apply the provisions of SFAS 109 in accounting for the utilization of these deferred tax assets. As a result, we recorded a non-cash charge of $167.1 million in the fourth quarter of 2004 related to contingent amounts due from TODCO under the tax sharing agreement. In future years, as TODCO generates taxable income and utilizes its pre-TODCO IPO tax assets, TODCO is required to pay us for the benefits received in accordance with the provisions of the tax sharing agreement. We will recognize those amounts as other income as those amounts are realized, which is generally based on when TODCO files its annual tax returns. We are involved in an arbitration proceeding with TODCO in which we are seeking payment of certain disputed amounts, and TODCO is seeking, in both this proceeding as well as in a lawsuit, to void the entire tax sharing agreement. We believe TODCO owes us the disputed payments and do not believe TODCO’s attempts to void the tax sharing agreement have merit. See “Item 3. Legal Proceedings.”

During the year ended December 31, 2005, we received $32.0 million in payments from TODCO related to TODCO’s expected utilization of such tax benefits for the 2004 and 2005 tax years. Of the $32.0 million received, $11.4 million and $20.6 million was received for the 2004 tax year and a portion of the 2005 tax year, respectively. Included in the 2005 payments are $1.7 million relating to stock options deductions. In 2005, TODCO filed its 2004 U.S. federal and state income tax returns and we recognized $11.4 million as other income in our consolidated income statement. The amounts received pertaining to TODCO’s 2005 federal and state income tax returns, as well as payments received related to stock options deductions, were deferred in other current liabilities in our consolidated balance sheet. We will recognize these estimated payments as other income when TODCO finalizes and files its 2005 federal and state income tax returns and the dispute with TODCO is resolved. Estimated tax benefits in excess of $300 million remain to be utilized by TODCO under the tax sharing agreement, although the ultimate amount and timing of the utilization is highly contingent on a variety of factors including potential revisions to the tax benefits upon examination by the IRS, which is currently reviewing our 2002 and 2003 tax years, the amount of taxable income that TODCO realizes in future years and the resolution of the dispute with TODCO related to the tax sharing agreement.

- 32 -

 
Performance and Other Key Indicators

Contract Backlog—The following table reflects our contract backlog and associated average contractual dayrates at the periods ended on or prior to December 31, 2005 for our Transocean Drilling segment and reflects firm commitments only, typically represented by signed contracts. Backlog is indicative of the full contractual dayrate. The amount of actual revenue earned and the actual periods during which revenues are earned will be different than the amounts and periods shown in the tables below due to various factors including shipyard and maintenance projects, other downtime and other factors that result in lower applicable dayrates than the full contractual operating dayrate. Our contract backlog is calculated by multiplying the contracted operating dayrate by the firm contract period, excluding revenues for mobilization, demobilization, contract preparation and customer reimbursables and such amounts are not expected to be significant to our contract drilling revenues. The contract backlog average dayrate is defined as the contracted operating dayrate to be earned per revenue earning day in the period. A revenue earning day is defined as a day for which a rig earns dayrate after commencement of operations and over the firm contract period.

   
December 31,
2005
 
September 23,
2005
 
December 31,
2004
 
   
(In millions)
 
Contract Backlog
             
High-Specification Floaters
 
$
8,329.5
 
$
5,093.3
 
$
1,897.6
 
Other Floaters
   
1,643.2
   
1,062.6
   
206.3
 
Jackups
   
808.3
   
531.8
   
558.9
 
Other Rigs
   
132.3
   
148.0
   
200.3
 
Total
 
$
10,913.3
 
$
6,835.7
 
$
2,863.1
 

The following table reflects the amount and the average dayrate of our contract backlog by year as of December 31, 2005.

   
For the years ending December 31,
 
   
Total
 
2006
 
2007
 
2008