Diamond Offshore Drilling Inc (DO) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2017 Diamond Offshore Drilling Earnings Conference Call. (Operator Instructions) And as a reminder, today's conference call is being recorded.

I'd now like to turn the conference over to Samir Ali, Vice President, Investor Relations and Corporate Development. Please go ahead.

Thank you, Janice. Good morning, everyone, and thank you for joining us. With me on the call today are Marc Edwards, President and Chief Executive Officer; Ron Woll, Senior Vice President and Chief Commercial Officer; and Scott Kornblau, Vice President and acting Chief Financial Officer.

Before we could begin our remarks, I remind you that the information reported on this call speaks only as of today, and therefore, you're advised that time-sensitive information may no longer be accurate at the time of any replay of this call.

In addition, certain statements made during this call may be forward-looking in nature. Those statements are based on our current expectations and include known and unknown risks and uncertainties, many of which we're unable to predict or control, that may cause our actual results or performance to differ materially from any future results or performance expressed or implied by these statements. These risks and uncertainties, included in the risk factors disclosed in our filings with the SEC, included in our 10-K and 10-Q filings.

Further, we expressly disclaim any obligation to update or revise any forward-looking statements. Please refer to the disclosure regarding forward-looking statements incorporated in our press release issued earlier today. And please note that the contents of our call today are covered by that disclosure.

We will be referencing non-GAAP figures on our call today. Please find the reconciliation to GAAP on our website.

And now, I'll turn the call over to Marc.

Thank you, Samir. Good morning, everyone, and thank you for participating on our call today.

For the fourth quarter of 2017, Diamond Offshore announced a loss of $0.23 per share, which includes restructuring and other one-time charges. Excluding these charges, our adjusted loss for the fourth quarter of 2017 was $0.05 per share. Although we are beginning to see tangible signs of a demand-led recovery and certainty of the markets, day rates do remain suppressed.

As a result, we have taken a hard look at our corporate structure and indirect costs and have taken measures to further reduce expenses. Our significant restructuring efforts are ongoing, and we expect to take additional charges in the first quarter of 2018. Scott will provide color in his prepared remarks.

Allow me now to provide some highlights from this past year as it relates to Diamond Offshore. Not only did we secure approximately 88 months of additional backlog, we also made several key strategic decisions to help ensure Diamond Offshore is best positioned for the eventual recovery.

Recall during the past summer, we elected to refinance our 2019 bonds. Given the continued uncertainty in the offshore drilling market, it was prudent to bolster our already best-in-class liquidity. With no new-build capital expenditures and attractive debt profile as our next bond maturity is not until 2023, Diamond Offshore remains well positioned to weather this ongoing downturn. Additionally, we have an untapped revolver and continue to build cash on our balance sheet.

Also in 2017, the Ocean GreatWhite and the Ocean BlackRhino began their respective 3-year contracts with Tier 1 clients at solid day rates. The Ocean BlackRhino joined her sister rig, the Ocean BlackLion, on Hess' Stampede development program here in the Gulf of Mexico. Both rigs are now in full development mode and with the unique to Diamond Offshore Pressure Control by the Hour construct, continue to progress this client's program ahead of schedule and under budget.

In 2017, Diamond Offshore's Pressure Control by the Hour model started to pay dividends for all stakeholders. When we first implemented this service, our rolling 12-month subsea nonproductive time was not only unacceptable to ourselves, it was also unacceptable to our clients. And this was on equipment that had just been delivered as new from the original equipment manufacturer.

By moving to Diamond's Pressure Control by the Hour construct, unplanned downtime has been significantly reduced. In this past quarter alone, we experienced only 0.65% of subsea nonproductive time, equivalent to just 14 hours per drillship in the entire quarter. This has tangible benefits for all stakeholders.

The client maximizes the ability to progress the well, Diamond maximizes revenue opportunity by avoiding unplanned downtime and the original equipment manufacturer maximizes revenue opportunity by ensuring product availability. Not only do we have their maintenance personnel permanently on board the rigs, we also have direct input into their enhanced design for reliability ethos and component upgrades.

This class-leading reliability now differentiates our ultra-deepwater drillships from their peers and uniquely positions us in terms of product desirability. In an oversupplied market, this type of performance will make a difference when it comes to finding new backlogs for these rigs. When they start to roll off their current contracts in just under 2 years, not only will these rigs be hot, but they will also have class-leading reliability. We are still working with the original equipment manufacturer on further component upgrades, but I can report that our 2 clients are very pleased with their current rig performance.

Importantly, also in this past year, we were able to achieve the best safety performance in the company history. We still have room to improve as our goal is to have 0 incidents, but with this achievement, it proves we are moving in the right direction. I would like to take this moment to applaud our rig crews, as they have worked tirelessly to uphold our safety pledge in order to reach this new milestone.

Now turning to our contracting activity since our last call. Diamond has secured approximately 48 months of backlog across 5 rigs. The Ocean Valiant, the Ocean Guardian, the Ocean Apex, the Ocean Monarch and the Ocean Valor. All of the backlog secured on these rigs will generate positive margin, which is a testament to the quality of our assets and our customer service in a continually challenging market.

The fourth generation Ocean Valiant was extended by Maersk for approximately 550 days, keeping the rig contracted until February 2020. Not only were we able to keep the rig on contract, but also the extension was awarded at a premium to the already solid day rate.

And the third generation Ocean Guardian was awarded a 120-day contract by Chevron in the U.K. This contract will commence immediately following the Decipher campaign. And with this win, the rig has secured work for the 2018 drilling season in the North Sea. We are pursuing other opportunities for the rig in both the winter and next season and are optimistic on her outlook.

Both the Guardian and Valiant operate in the North Sea, which is primarily a moored market, and is starting to show signs of a recovery. Diamond Offshore is well positioned to take advantage of this recovery with 3 rigs operating in theater and access to additional moored harsh environment rigs, such as the Ocean Endeavor.

Looking now to the Australian market. The Ocean Apex entered into a paid option during the fourth quarter of 2017. The option provides Woodside the ability to contract the rig for work starting in the second quarter of 2019. The option fee is nonrefundable, and Woodside must declare their intentions by April 2018. We view this as a win-win situation for both Diamond and our client, where we are paid for the availability of the rig in 2019, while our client ensures access to a premium moored asset with an established Australian safety case, a requirement to work in this region of the world.

To touch on another rig currently in the Australasian region, the Ocean Monarch will soon be mobilized to the Bass Strait to begin her program for Cooper Energy, which will keep the rig occupied until later this year. After completing the campaign with Cooper Energy, the rig will begin a 60-day program for ExxonMobil, also in the Bass Strait.

In the fourth quarter of 2017, Origin Energy sold their assets in the Bass Strait to Beach Energy. As a result, Beach Energy reviewed their newly-acquired acreage and elected to delay the drilling campaign.

Moving to Brazil. We have come to a resolution with Petrobras regarding the Ocean Valor. This contract represents the first award made by Petrobras to a major international driller for almost 2 years. As many people on this call will know, Petrobras continues to release rigs, and we are pleased that despite this fact, Diamond was able to secure 2 additional years of work, keeping the Ocean Valor contracted until late 2020. With this new agreement, Petrobras is able to reduce nonproductive spend in the near term, and Diamond Offshore was able to add $144 million of backlog in a mutually beneficial resolution to this matter.

So allow me now to provide an update on the Ocean Endeavor. The rig is currently cold stacked in the Mediterranean. However, we are likely to reactivate this rig during the course of this year. At this moment, we do not have a firm contract in place, but given the level of interest in the Endeavor over the past few months, reactivating the rig is a prudent use of our capital. We are also considering putting her through an early 5-year special survey.

Now turning to general commentary on the offshore drilling market. There have been some improvements with major operators, such as ExxonMobil, Total, Shell and BP sanctioning new offshore developments. More specifically, we are witnessing a recovery in demand in certain moored asset category segments, such as the North Sea.

Utilization is improving with positive implications for an eventual recovery in day rates. I believe day rates for the moored asset class will recover before those of the high-end dynamically positioned sixth-generation drillships.

Of the almost 100 floaters that have been scrapped since the beginning of this extended downturn, over 85 were in the moored asset class. This alone will help to incubate a recovery in utilization in a market segment that has now started to tighten at current oil prices and explains why we are looking to proactively reactivate the moored fifth-generation Ocean Endeavor.

Further, we are also seeing a trend, whereby clients are looking to fix moored assets on term work of between 2 and 3 years. However, we still view the recovery in the sixth-generation DP drillship market as being somewhat over the horizon.

25 drillships are expected to roll off contract in the next 12 months, and there are not enough opportunities currently in the pipeline to absorb these rigs. Utilization in this asset category will likely track down another peg this year. That being said, although the number of tenders for drillships has increased, the competition remains fierce as indicated by recent fixtures at below cash breakeven.

I have long maintained that the most distressed asset class is that of the sixth-generation dynamically positioned drillships. And this is still the case, which is one of the reasons we embarked on Pressure Control by the Hour. We needed to push our drillships to the top of the deli line of desirability. I have long advocated about the benefits of having a mixed asset fleet and the contract awards we have announced this quarter are further testimony to this strategy.

Longer term, we believe in the viability of offshore as onshore alone cannot meet the looming supply gap. The curtailment in offshore drilling and the subsequent decline in sanctioning will eventually lead to a supply shortfall.

In 2016, only 11 billion barrels of production were sanctioned globally. This compares to total global consumption of 34 billion barrels. This deficit in project sanctioning will eventually lead to increasing rig demand. We estimate that over 550 rig years of work will be required between 2021 and 2025. This is very close to the number of years demanded during the last peak from 2010 to 2014.

Offshore drilling is a cyclical business, and this downturn is without precedent. However, we are starting to see some signs of a recovery and continue to work to best position Diamond for when that time does come.

So with that, I will turn the call over to Scott to discuss the financials for the quarter. And then I will have some closing remarks. Scott?

Thanks, Marc, and good morning, everyone. This morning, we reported a net loss of $32 million or $0.23 per share for the fourth quarter of 2017 compared to third quarter net income of $11 million or $0.08 per share. These figures include the restructuring costs Marc referred to earlier and other one-time charges I will discuss later. Excluding these charges, our net loss for the fourth quarter was $7 million or $0.05 per share.

Before I go into our fourth quarter results, I would like to briefly touch on the Ocean Valor agreement with Petrobras. After further analysis of the accounting rules around revenue, we did not book a $20 million charge in the fourth quarter as previously expected. As a reminder, this charge was to adjust for the third quarter 2017 difference between the revised standby rate of $190,000 per day and the previous standby rate.

This, in addition to a similar treatment in the fourth quarter, results in approximately $40 million that will be applied as a credit during the extended term from October 2018 to September 2020. Said another way, Diamond will book $190,000 per day from January 2018 until September 2018 and then $289,000 per day, less the pro rata credit, from October 2018 until the end of the contract in September 2020.

Now turning to our fourth quarter 2017 results. First, contract drilling revenues of $338 million during the quarter decreased 6% from the third quarter, mostly driven by the Ocean Patriot and Ocean Monarch coming off contract during the fourth quarter. This decrease was partially offset by nearly a full quarter of operations on the Ocean Courage, which if you recall, was undergoing BOP upgrades for much of the third quarter.

Contract drilling expenses of $204 million came in 3% higher in the fourth quarter compared to the third quarter but were still within the lower end of our guidance. The quarter-over-quarter variance is primarily driven by the fourth quarter mobes of the Ocean Onyx and Ocean Scepter.

Depreciation of $86 million was slightly higher than guidance due to normal year-end adjustments. G&A cost of $20 million came in slightly above guidance as a result of a one-time nonrecurring engineering charge. Net interest expense of $29 million came within our guided range and increased slightly quarter-over-quarter, reflecting a higher interest rate on our 2025 senior notes issued during the third quarter compared to the 2019 senior notes retired during the same period.

Also during the quarter, we recorded a gain of $8 million related to the sale of 5 rigs previously classified as held for sale and an impairment charge of $28 million related to the Ocean Scepter.

As for the restructuring mentioned earlier, we booked a $14 million charge during the quarter associated with employee severance and the amicable termination of a foreign agency agreement. As discussed on our past quarterly calls, we continue to proactively manage our cost structure, and in the fourth quarter, we made some difficult decisions to further align our company with the ongoing market realities. We will continue to evaluate innovative ways to further streamline the organization and expect to take an additional restructuring charge in the first quarter of 2018.

And finally, full year 2017 capital expenditures of $140 million came in approximately $15 million above guidance, as we started ordering equipment for the Ocean Valor's 2-year extension with Petrobras. The rig will undergo a similar upgrade as was performed on the Ocean Courage in the third quarter of 2017. We plan to complete this upgrade by October 2018, prior to commencement of the additional 2 years of work in Brazil. Unlike the Courage, we will not have to take any unpaid downtime during the Valor's upgrade, as it will be performed during the paid standby period.

Now let me provide some thoughts on the first quarter of 2018. We expect contract drilling expenses for the first quarter to come in between $195 million and $200 million. The sequential decrease from prior quarter is a result of the Ocean Scepter rolling off contract during the fourth quarter and the fourth quarter mobilization of the Ocean Onyx and Ocean Scepter, partially offset by the first quarter start-ups of the Ocean Guardian and Ocean Patriot, both in the North Sea.

We estimate our depreciation expense to be approximately $82 million for the first quarter of 2018. The sequential decrease from fourth quarter is primarily driven by the suspension of depreciation on the Ocean Scepter as the rig is now classified as held for sale.

G&A costs are expected to be between $15 million and $17 million during the first quarter and will likely decrease in future quarters as the impact of the restructuring flows through. We also expect to take an additional restructuring charge between $2 million and $3 million during the first quarter related to the cost-saving efforts discussed earlier.

Net interest expense on our current debt and bank line of credit is projected to remain flat at approximately $29 million for each quarter of 2018. We anticipate our effective tax rate to be between 10% and 15% during the first quarter of 2018. Of course, the rate may fluctuate up or down based on a variety of factors, including, but not limited to, changes to the geographic mix of earnings, further clarification around tax reform as well as tax assessments, settlements or movements in exchange rates.

For our CapEx guidance, we estimate that we will incur maintenance capital cost of approximately $220 million for the full year of 2018. The increased year-over-year is primarily driven by the likely reactivation of the Ocean Endeavor and BOP upgrades on the Ocean Valiant.

Now let's turn to tax reform. As the sole remaining major U.S.-based offshore drilling company, we welcome the Tax Reform Act as the lower U.S. income tax rate and territorial tax regime gives us the opportunity to compete on a more level playing field with our inverted competitors. Over the long term, we anticipate a lower effective tax rate and an improvement in cash flow as a result of the new law but won't be able to immediately reap the benefits until we return to profitability in the U.S.

In the fourth quarter of 2017, we recorded a net one-time provisional tax expense of approximately $1 million related to tax reform. This provisional expense is primarily attributable to the mandatory deemed repatriation, offset by the revaluation of our net U.S. deferred tax liability at the newly enacted lower tax rate of 21%. Currently, we do not anticipate any cash tax cost associated with the mandatory deemed repatriation. We will continue to monitor developments in this area, and if necessary, we'll adjust our estimates throughout 2018 as additional guidance and clarification becomes available.

To close, I want to reiterate the strength of our balance sheet. We have taken several strategic steps over the past few years to position Diamond for sustainable long-term success. At year-end, we had approximately $375 million in cash and cash equivalents and currently have an undrawn $1.5 billion revolver. With no significant planned expenditures ahead of us and no debt maturities until 2023, Diamond Offshore is expected to be cash -- free cash flow positive, which gives us the ability to deploy capital in a variety of ways.

And with that, I'll turn it back to Marc.

Thanks, Scott. So in 2017, Diamond proactively strengthened both our balance sheet and increased our liquidity. We put all our final 2 new build rigs to work and extended the Ocean Valor contract with Petrobras. We have all of our sixth-generation rigs contracted until mid-2019 and beyond, and have secured additional work for several of our moored assets with yet more opportunities currently in the pipeline.

Although we still face market headwinds in the near to medium term, the path to recovery is starting to take shape. We will continue to demonstrate our ability to innovate and drive thought leadership in the industry to improve both efficiency and lower the total cost of deepwater drilling, while at the same time, with a strong balance sheet and liquidity position, we do have strategic options available to us to remain focused on the most efficient forward allocation of capital.

And with that, I will turn the call over to questions.

(Operator Instructions) And our first question comes from Kurt Hallead of RBC.

Marc, you did, I think, you did a better job in kind of spelling out the differentiation on what's going on in the marketplace between the moored assets and the DP assets. And in that same context, you also referenced activating the Endeavor from cold-stacked mode. So there seems to be some element of thawing in the marketplace to a certain extent. What do you envision, potentially activating another cold-stacked rig maybe before year-end? Or is there sufficient enough demand in your mind that's starting to build for you to start thinking about that?

That's a good question, Kurt. Thanks for pointing on that. The moored market is definitely tightening. Many of the -- well, in fact, all of the recent fixtures that we've got have been well above cash breakeven. And although we haven't had to fix the sixth-generation or any DP assets in the recent past, if you just look at some of the data points in the market, that clearly isn't the case for DP assets. We have a number of other moored assets that are cold-stacked. And when I look at the -- as I've just said on my prepared remarks, when we look at the future allocation of capital, capital efficiency in total, that does give us options to either go out into the market and look at other distressed assets or, indeed, further investments in some of our own fleet that is currently cold-stacked and, indeed, bring those forward and back into the market. But right now, what we've got on the table and what we're looking at imminently is the reactivation on early 5-year survey of the Ocean Endeavor.

Okay. And you think -- I know you mentioned it in your prepared commentary, you're thinking Endeavor -- you think in your mind, the Endeavor will have or be on contract before the end of the year? Or was it more likely that it will get -- start to work in early '19?

Kurt, this is Ron Woll. Yes, so we're pleased, of course, to be bringing Endeavor back from cold stacked, given the tightness in the moored market. It makes a lot of sense. I would say that although we haven't announced kind of exactly where she'll go or who she'll work for, we've had several operators that we've expressed significant interest in that rig. And so we're confident that she'll go to work, let's say, the next 15, 18 months is quite high. So whether it's into this year, starting next year, it's probably in that time zone, right in that time frame. There's still a pretty, I think, deliberate reactivation of path ahead for her. It's not just flipping a switch, as you well understand. But certainly, I think if you think around a year, plus or minus, that we would expect her to be back on the job someplace.

And just one maybe quick follow-up on that. So the increase in spend as mentioned was related to the Endeavor, a differential look to be roughly $20 million. So is that in total what you think it will cost to activate the Endeavor?

This is Scott, Kurt. If you take a look at our Capex '17 versus the guidance I gave on '18, I mean, the delta is greater than $20 million. I'm not going to give a specific number on the reactivation of Endeavor, though I will say, we have in the past kind of guided to a $50 million to $100 million range to reactivate a cold-stacked rig, and we're going to be in the midpoint of that, give or take a little.

So Kurt, just also on that, I mean, when you look at the cash drain to reactivate a rig, you don't just look at the CapEx to bring back a cold stacked. You've got a cash burn on the OpEx regarding getting the crews up and running. You've got recertification of BOPs, risers. You've got certain upgrades to -- the client might require. So reactivation cost, you've got to understand what you're totally looking at from a cash burn perspective. And I think, in general, they will be higher than what the market is somewhat positioning around today.

And our next question comes from Jud Bailey of Wells Fargo.

A follow-up on the Endeavor. If we take just the midpoint of the reactivation cost that you highlighted, between $50 million and $100 million, can you talk to us a little bit on how you're thinking about contract terms to spend that amount of money? How you think about duration? And do you think of in terms of some sort of payback over a number of years? Or how do you think about that?

Jud, this is Ron Woll again. When we think about reactivating a rig, we've all maintained that several of our stacked rigs could come back further into the cycle. As we think about that decision, we look for sustained utilization potential, not just kind of hunting around for one job. Now certainly, the tightening market in moored market makes that more credible than it was, say, 1 year ago. But we think beyond any single job, although we do look for a strong launch program to bring a rig back. So we think that's kind of based on where the moored market is, that launch job maybe out there. And so it makes sense to do what we've done.

Okay. And if I could, I'll just follow up then. And you referenced that a couple of times in prepared comments about the tightening in the moored asset class. Does it seem realistic that we could see upward pressure on rates in 2018 or 2019? Do you think it's realistic? And would it be primarily in the North Sea if that were to occur?

Yes. Again, this is Ron here. So what I described from a rate standpoint, in the North Sea where the moored market is tightest today, I would say that rates have come off their bottoms of [2015], 2017. So it is sort of modestly better than it was. Although, keep in mind, we're comparing to a pretty painful baseline. I think we're at a point now where rigs that work in the sweet spot of the North Sea drilling season, kind of the -- kind of a spring, summer, late summer season, those rigs can go to work at above marginal cost and sort of do well for a customer, make a decent margin and keep going. I would argue that in the not preferred part of the season, in the winter months, it's still pretty challenging. So that's -- there's no easy release there. But I wouldn't make a broad statement on the -- that sort of easy times or here on rates. I think in a very specific market and a very specific time frame of the year, we can work above marginal cost, but I'd be cautious on extrapolating too far beyond that.

Okay. And just to make sure I'm thinking about it the correct way, Ron. And when you say off of the lows of '16 '17, would like $10,000, $15,000 off of the lows be a reasonable way to think about the type of bump we've seen?

Yes, I'll probably not going to quite go for that sort of -- that part of the conversation. It's moderately better, but it's -- it's not sort of a screaming improvement. It's slightly better.

And our next question comes from Sean Meakim of JPMorgan.

So Marc, I was hoping you could just elaborate a little bit more on where you think you are in the cycle with respect to customers still being more focused on trying to shed legacy drilling contracts compared to eventually making that turn towards being inclined to take on multi-year contracts in the floater market. Can you maybe just give us a sense kind of where you think we are, moving from the downward slope of that cycle to the other side?

Yes, sure. I think clients are tending to shed legacy contracts. Most of those legacy contracts that needed to be addressed have been addressed in one shape, manner, form or another. And as we're moving through, as we continue to churn through this downturn, I think clients are now beginning to look at contracting rigs, certainly in the moored asset class at longer term -- on a longer-term basis than what we've typically seen in the past. So as it relates to the moored asset class, we're seeing terms of 2 and 3 years come back onto the table. We've extended the Ocean Valor contract by 2 years. You've seen that on the Monarch, we've got a paid option to keep the rig ready for work in 2019. And also if you look at the Valiant in the North Sea, we put that rig back to work for 550 days at a higher price than what it was already working at. So just building on the prior commentary from Ron, we have seen that rates in the moored asset class are ticking up slightly and term is coming back into the vernacular. Now, the market is somewhat bifurcating because we haven't seen that same progress, certainly in the dynamically positioned sixth-generation drillship asset class, whereby we saw a rig be terminated early during this past quarter, and we've also seen some fixtures go at a day rate that is below cash breakeven, certainly here in the Gulf of Mexico. So the market is somewhat bifurcating. And then from that, I think, one can deduce right, okay, the moored asset class is somewhat fixing itself, and we're seeing a path to recovery. But that's primarily built on the fact that 85 floaters have come out of that asset class. When you look at the DP asset class, the same hadn't happened. And therefore, one can deduce from that, that we do need some of the sixth-generation drillships to leave the market. And I would argue, as I've done in the past that, that will happen through extended cold stacking of these rigs. And, indeed, what will happen, the way I see this moving forward, is that the hot rigs, those that are keeping -- kept working, those rigs that are perhaps some would suggest that are classified as seventh-generation rigs, but the more capable DP drillships will certainly continue in the market. We might see some recovery in pricing around those, that sub-asset class that will rise to a level that then might bring some of the cold-stacked rigs back into the market. But I would suggest to you all that there are some sixth-generation drillships sitting out there today that will not work again.

That's very helpful. And I guess just a smaller question. I don't think I heard anything in the prepared comments around the LOI that you all signed with Rockhopper Exploration for the Sea Lion programs. Any additional commentary you can offer on that?

Yes, before I pass it over to Ron, we don't generally comment on LOIs. But I'll let Ron fill you in.

Yes, this is Ron here. So we, of course, are, dare I say, well familiar with that document. So we're certainly sort of well aware of that topic. We don't sort of get into things precontract. But I will say, we have worked with Premier for quite some time in the North Sea, know them well, they know us well, good relationship, a lot of trust there. We've also worked before in Falklands, so we know that field well. And so I think there's a lot of things to like there, and you can connect the dots from there.

And our next question comes from James West of Evercore ISI.

Marc, you've been one of the more realistic, prognostic here as I think in the offshore drilling arena in the last several years. Admittedly, it's primarily pinned that it's not going to be good. But it's a little bit better tone, I think, this morning, obviously around the moored rigs, and that's understandable. But with these sixth- and seventh-generation assets and understandably some of these are never going to work again, how many do you think or do you have a sense of how many you need to come out of the market to create a better market environment for that asset class?

That's the $69,000 question. If you look at the DP asset class, there's still 22 drillships that have to come out of the shipyards as another sustainment of DPs. There's another about 11 semis that have to come out of the shipyards as well. So we've got that kind of headwind that's already in front of us. Never mind the rigs that are cold-stacked and, indeed, warm-stacked that don't have any work today, and it's a substantial number. In terms of where the market is going, I think, my commentary has to be somewhat careful here. Because we do believe that between 2021 and 2025, the market bounces back significantly and even the majority of the sixth-generation assets will find work at good pricing. Nevertheless, they're still close to 100 -- well, 180 sixth-generation assets that will be in the marketplace and perhaps a steady-state market will be 110 to 130 that will be working. So I would suggest around 60 would probably have to come out of the market. Now obviously, there's quite a variance on that particular number. But it's not hard to see that -- I could name many of the assets that are already out there I want. But certainly, the early fifth-generation assets or the somewhat less technically capable, and I'm suggesting here single-direct 1 BOP, perhaps not such a high hook load as what is available in the market today, those assets that will have been stacked for 4 or 5 years will require quite a large reactivation fee. And they certainly won't be reactivated when day rates are certainly where they are today. But I would argue perhaps, anything below $300,000 a day. And so from that aspect, I think you will see assets leaving the market but really due to the fact that day rates won't get back to a level that will allow the asset owners to invest money on a reactivation fee and bring them into market, which just propagates the fact that costs will continue to go up, and these assets ultimately will not come back to work. So I think you'll see bifurcation in the moored asset -- sorry, in the DP asset class as well, that will help rates recover in their spaces, similar to what we're beginning to see in the moored asset class. I mean, I think what is different to earlier commentary and I do believe that we've been perhaps more realistic than our peers in discussing the market, I think, we can now visualize and map a path to recovery in the moored asset class. I'm not sure we're there yet with the DP asset class.

Okay. That's very helpful. So if we're not talking about a recovery in DP until the '21 to '25 time period, which is still a ways away from now, so we've got 3 more years of minimum of rust and lack of care. Does that naturally cause the rig -- I guess it should, but I mean, do you see a pathway for natural attrition to take care of some of this?

And to my earlier point, James, I think that's exactly what we will be seeing because the cost of reactivation will simply get to a level that day rates won't support, unless we see day rates moving up. So it's like the marginal cost per rig of bringing it back into the market. And let's face it, saltwater is one of the most corrosive environments to store here. So I think, in general, the market is underestimating the total cost of bringing back a drillship after it's been stacked for 4 or 5 years. And it's not just the CapEx on the reactivation itself. Like I say, there's cost relating to certification, the BOP, riser, et cetera, et cetera. You've got to bring the crew back on board. You've got to get the crew trained, and you've got to reposition the drillship to wherever it might need to go in terms of mobilization cost. And the other thing that is critical here, we've spoken about Pressure Control by the Hour, and I'll reiterate that number that we got to in Q4, 0.65% of NPT on our subsea systems across all 4 of our drillships, which is absolutely class leading. The -- you cannot test the stack, the subsea stack of a drillship without it first being on contract, simply because there is no wellhead that you can sail up to and test the drillship or test the subsea stack before it goes on contract. So our customers will always prefer a hot rig over a cold rig. So it kind of propagates the issue of the cold-stacked rigs, especially the more complex ones, having to cross a hurdle to get back into the market and then get a contract. So I think you'll see that market bifurcate, and the rigs that we're keeping working will keep working whereas those that are cold-stacked will find it more and more difficult as time progresses to come back into the market.

And our next question comes from Ian MacPherson of Simmons.

Marc, I had imagined that another of your more likely candidate for reactivation will be the Onyx, which you've repositioned in Malaysia. And if you compare the state of that rig and the scope of reactivation possibilities and the parameters of really cost and timing, I would have thought that, that would might be a little bit less cold and then maybe a little quicker to market, a little cheaper to market than Endeavor. Would that be a fair characterization or no -- not?

It's Ron here. So I think both the Endeavor and the Onyx are 2, I think, pretty likely candidates for a reactivation. We talked about that before as the more -- kind of market got better. Those made the most sense. They were the kind of last off the line, came off with good strong programs: the Endeavor in the Black Sea, the Onyx close to the Gulf. So they were both -- and I think, they both sort of came off the line in very good shape with sort of good resumes in that way and not having them cold all that long kind of make good sense to come back. They have both have good useful lives yet ahead. Endeavor was our strong kind of large deck space, very desirable for large drilling programs. The Onyx, of course, is both good for exploration and development. We, in fact, have introduced kind of both those rigs to a number of clients in across multiple regions. Obviously, we're talking moored markets here, but I would say not just the North Sea for both those rigs. And so it would be our -- it would be certainly welcome for us and something that we certainly work towards to see both the rigs come back in this part of the cycle. And again, it's been interesting to see customer reactions to those rigs. Those reactions have been quite favorable, which is, tell me more, talk to me about what your reactivation plans are. And so they are looked at, I think, very well. I think with proper scrutiny, given that it'll work today, but I'll describe those conversation to be quite favorable and pragmatic. And so I would not at all be surprised to see both those rigs come back in this cycle.

Okay. And this is kind of a different type of question, but we've seen recently 2 significant transactions, I don't know if both have been fully consummated, but announced transactions regarding harsh environment rigs, stranded new builds that have been picked up by nonstandard players. And coincidentally, both of them are rigs that look, at least by rig design, like the GreatWhite, and they reportedly moved at pretty high prices that we've seen. We've seen asset transaction prices that imply 5 -- maybe $500 million and maybe even up to $600 million for a fully delivered price for those assets. And I wonder, Marc, what your thoughts are on that asset pricing level for rigs like the GreatWhite. And what that suggests to you about your longer-term options with that rig, the GreatWhite, and the entry of those strategy builts into its competitive domain?

So first of all, the longer-term options for the Ocean GreatWhite, one I've spoken about having customer discussions regarding the Onyx and the Endeavor. The Ocean GreatWhite is still under contract with BP for another 2 years. The rig is not currently drilling right now. It's in a standby mode for BP. However, having said that, we have also had a number of inquiries as it relates to putting the Ocean GreatWhite back to work, but then, of course, that comes with the caveat that there's a discussion with BP there as well. As it relates to the pricing that some of our peers and others have undergone in terms of picking up very similar rigs to the Ocean GreatWhite, that is for them to comment on as to whether they feel that price was acceptable or not. Nevertheless, I think from our perspective, we are very comfortable to have the Ocean GreatWhite in our fleet. We are very optimistic as it relates to its future. The Ocean GreatWhite, of course, is a hybrid rig. It can work in the DP space, all the moored space. But as it relates to the efficient use of capital moving forward, in this current market, I would say that the arbitrage for us between what some have paid for high-spec harsh environments semis is a little bit too high from us when we look at how we plan to spend our capital moving forward and allocate it accordingly. So I feel that the pricing that is paid in that market is perhaps too high, but nevertheless, we're very happy to have the Ocean GreatWhite in our fleet at the same time.

And our next question comes from Haithum Nokta of Clarksons Platou Securities.

On the moored rig market tightening, I think pretty understood that the North Sea and Australia as well have been -- are pretty unique. But have you started to see those same characteristics in bit of a more benign markets like West Africa, Southeast Asia or South America?

So, yes, we have. Australia, of course, we're looking at the Falklands. There's an opportunity for a couple of moored rigs -- well, there's more than 1 opportunity here. There's a couple of opportunities in Latin America and also in West Africa, which is a very benign market at this moment in time. So it's -- the North Sea is tightening significantly, and we're beginning to see a certain tightening of what is a very low base, let's make sure we understand that in other markets around the world. So as we've been consistently saying throughout this call, we are seeing a path to recovery in the moored asset class.

Okay. And it seems rig reactivations will seemingly be your primary use of capital for, call it, the next year to 18 months or so. Can you maybe remind us where like the Floating Factory project or just sixth-gen acquisitions or the high-spec sixth-, seventh-generation acquisitions fall for you? I mean, if we're talking about a recovery in that market in '21 to '25, I assume it's not on the front burner but just any additional commentary would be appreciated.

Sure. I think what we do need to see is we need to see a tightening in day rates in that market. We are somewhat concerned about the assets that are in the yards, that are still going to come to market. So we haven't seen the supply and demand equation somewhat start to fix as it relates to the number of assets that are in the market, that are coming to the market and the available opportunities for them at this moment in time. The Floating Factory would take a 4-year build. We obviously have the design complete. We've been in negotiations with vendors and the shipyards, but we have not pulled any triggers as it relates to what decisions we'll make -- we're going to make moving forward. We're still building cash. We've built cash close to well over $90 million in the last quarter. So we're building up a war chest. And we will, when we come to execute as to how we will renew the fleet moving forward, do a project that comes with a lot of diligence behind it. Because of by always being consistently saying, the allocation of future capital is one of the major things we're looking at as a management team here in Diamond Offshore. So the options are still there. We can still pull various triggers. We're keenly monitoring all opportunities that exist in the marketplace, and we'll execute only after a significant amount of diligence and comfort that we are allocating capital efficiency.

Appreciate that. So just to be clear, any kind of -- the [rigs] in Floating Factory wouldn't put a delivery before '22 or '23 at this point based on...

Right. So right now, it's at least -- it's 4 years out before the rig would be able to start generating revenue and [anchor].

And our next question comes from Greg Lewis of Crédit Suisse.

So yes, we saw the extension on the Valor, congratulations. Yes, I think one of the big issues that Diamond has been facing -- you have a great backlog over the next 2 years, but just given your comments about a rig recovery in 2021 through 2025 for the offshore DP floater market, is there conversations that the company is having with its 2 customers around potential blend and extends on any of the black rigs?

So one of the important things that we've always looked at here over at Diamond is when -- well, in just under 2 years' time, when the black ships roll off contract, how are we going to keep them working. And I alluded to the fact that, earlier in the call, we needed to push these rigs in an oversupplied market to the top of desirability when it comes to our performance and differentiate them through process. And we've been successful in doing that. These rigs are performing extremely well for the clients they are working for now. However, I think it's fair to say that one of the clients, its drilling program has come at the end of its current project, it will be curtailed. So what we are doing is we're already establishing communications with other interested parties who have an interest in taking these rigs on. They will be hot. They're performance, as it stands today, is outstanding, and there's no reason to assume that it -- that won't continue. So these rigs are somewhat attractive in a market that is usually oversupplied. So we are quite optimistic at this time in rolling these rigs over. Some of them will stay with their current clients, I believe, but maybe 2 will move on to another opportunity that may manifest itself in the not so distant future. So I think the best thing we can do as a company is control what we can control and that is differentiate the rigs, make sure they are performing at the highest level that enhances their ability to get them contracted once they roll off of it. So I'm relatively optimistic that these rigs will keep working.

Okay, great. And then, Ron, you mentioned opportunities for the Endeavor may be inside the North Sea but may be outside the North Sea. I guess, just 2 questions on that. One is, as we think about the North Sea, clearly, that's even a two-tiered market with the South -- Southern North Sea being a little bit more looser than the north North Sea. Curious where you see the Endeavor working in the North Sea and then if you could sort of maybe on a percentage basis talk about what type of -- on a percentage basis, is 50% of the work that the Endeavor is being looked at potentially doing outside the North Sea and other basins? Any sort of color around that would be super helpful.

Yes, this is Ron. I guess the answer is yes, which is if you're looking at programs that are, as you would say, in the kind of maybe easier part of the pool there, the central south part of the North Sea, plus you can also crush programs further north that are much more aggressive. And operators I think look to her and, I think, take comfort in knowing she can handle some pretty tough programs in pretty tough weather. At the same time, given her large deck space, there are operators outside the North Sea, including in West Africa, who have expressed interest in her. And so I think the answer is yes and yes. Now of the multiple opportunities that she's looking at, which one's going to hit, in what sequence, I won't sort of forecast or guess at that. But the nice thing about her is that operators, as they think about bringing her onto a program, know that she can handle a variety of challenges and not just on calm easy days.

But the work she will be doing will be term work when she comes back into the market. So she's not going to be moving around, so to speak.

Yes, we wouldn't -- this is Ron again. We wouldn't reactivate a rig and then have her chase kind of well-to-well work. So the kind of job they're looking at obviously has some term tied to them, and that makes a lot of sense. And the customers would expect that rig to work kind of on their program for more than just a short while.

And our next question comes from Waqar Syed of Goldman Sachs.

Marc, typically, we find that as things start to get better, demand starts to pick up, we start to see costs start to creep up. Is there something we should expect as well on daily operating cost that you modeled out for next year and beyond that those will start to pick up, either from labor or repair and maintenance or anything else?

Waqar, thanks for the question. No, we're not seeing cost inflation in our space at this time. As a matter of fact, perhaps there will be a little bit of cost deflation right now.

But I was thinking more like when we start to see North Sea will pick up in demand, and you start to see more rigs go back to work industry-wide. Should we start to assume that, that time next year or beyond that cost, OpEx start to pick up?

I think so, Waqar, at this particular time. There's still a lot of slack in the business. This isn't a North American child story by any sense of the imagination. We don't have bottlenecks as it relates to cost of goods or anything like that. This is really -- our largest cost back is always labor. I don't see that there's any cost inflation there. I think one of the challenges that we're going to have moving forward is looking at how we want to spend our cash as it relates to reactivation of the rigs themselves and how we allocate or what we actually do to the rigs in terms of upgrading them. I think that's more of the question or uncertainty rather than cost inflation. Certainly, for the next couple of years. I don't see cost inflation in our space in '18 or '19.

Okay. And then for CapEx, we should assume that '17 was kind of the low point in Capex for the first and next cycle?

Good question. For us, I think, we're unique amongst our peers. We didn't have any new build CapEx going on, or we weren't deferring delivery from shipyards, et cetera, et cetera. So really, let's see, in '17, most of our CapEx was maintenance. So I think that might trend up a little bit of course. I think our guidance is now $220 million, and some of that does of course include the reactivation of the Endeavor. So if we look at reactivation of the Onyx, et cetera, et cetera, I think moving forward, we're going to see a little higher CapEx number than just positionally you saw for us in '17.

And our next question comes from Daniel Boyd of BMO Capital Markets.

I just want to follow up on the Endeavor reactivation. Clearly, you're seeing some positive signs in the moored asset class, and I'm assuming you expect rates to increase. But how are you thinking about the payback period potentially for that type of an upgrade? You've talked about 2- to 3-year opportunities. So let's say, there's a 3-year opportunity, you historically -- I think the industry has looked at sort of 80% or so cost recovery during initial term. Is that something you think is in the realm of possibility? Or just given the starting point, that's going to be a little bit tougher to get there?

Dan, that question already has come up somewhat during the Q&A session. I'm not going to be drawn on how we look at amortizing reactivation cost. Suffice it to say, clearly, we're not going to do it if the market is somewhat transactional moving forward. We're going to do this with contracted term work. And again, just staying with the Endeavor, we have a number of clients that are chasing the Endeavor, and we believe that if we reactivate it, for example, for a 2-year or 3-year term, there will be immediate follow-on work after that. So -- but as it relates to the specifics of how we amortize reactivation and what time we amortize it over, I'm not drawn on that in this public forum.

Of the $75 million, how much of that is CapEx versus the other cost that you discussed that might fall into OpEx?

Dan, this is Scott. The majority of it is CapEx. As Marc said, if we reactivate her, we'll also do a special survey, which historically we have expensed, but I would model in the vast majority as being CapEx.

And that concludes our question-and-answer session for today. I'd like to turn the conference back over to Marc Edwards for any closing remarks.

Thanks very much for participating in the call -- today's call, everybody, and we look forward to speaking with you again next quarter.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone, have a great day.