Diamond Offshore Drilling Inc (DO) 2018 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Second Quarter 2018 Diamond Offshore Drilling Inc. Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. Samir Ali, Vice President of Investor Relations. Sir, you may begin.

Thank you, Joelle. 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, Senior Vice President and Chief Financial Officer.

Before we begin our remarks, I remind you that the information reported on this call speaks only as of today, and therefore, you are advised that time-sensitive information may no longer be accurate at any time of 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 include 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 are covered by that disclosure.

We will be referencing non-GAAP figures on our call today. Please find a reconciliation to GAAP financials on our website. And now I'll turn the call over to Marc.

Thank you, Samir. Good morning, everyone, and thank you for joining us today. For the second quarter of 2018, Diamond Offshore announced earnings of minus $0.50 per share, which includes restructuring costs and a noncash impairment charge related to the sale of the Ocean Scepter. Excluding these adjustments, our earnings per share for the second quarter of 2018 were minus $0.33.

The offshore drilling market remains challenged. However, the decline quarter-over-quarter was primarily driven by the previously disclosed out-of-service time on the Ocean Courage and Ocean Valiant. We do not expect either of these events to repeat in the third quarter of 2018.

In prior calls, I have spoken to a series of innovations that help reduce the cost of deepwater drilling for our clients. These have included: the Floating Factory, Pressure Control by the Hour, Sim-Stack service and our helical riser system. And in this past quarter, we have further provided thought leadership to our industry by introducing our Blockchain Drilling service. This is one of the first publicly disclosed blockchain technology applications in upstream activities and will be used to drive efficiencies across the entire value chain. Blockchain technology shines when there are multiple parties to a single longitude in all transaction, which in offshore drilling, is the manufacturer of a well. The technology will provide an immutable platform for the optimization of well construction activities, including drilling-related services, matériel and the supply chain, both offshore and shore-based.

Current tracking systems rely on a unidirectional flow of data from outside sources onto a central database. Instead, the Blockchain Drilling service enables a bi-directional flow of data between all nodes in a system, which is then confirmed using consensus algorithms. By enabling automated actions and removing the lag associated with updating currently available databases, blockchain has the ability to make the exchange of goods and services associated with the manufacturer of the well quicker, more efficient, more reliable and more automated. Greater resolution on activities encourages greater accountability, which then further enables pricing to be better structured around performance. This would not only be the case for transactions between Diamond and the operator, but also for other third-party service providers and the operator on any of Diamond's blockchain-enabled rigs.

Diamond will commence the installation of this service in the fourth quarter and will plan to take it fleet-wide in coming quarters. Initial customer response has been very positive and further helps differentiate our fleet from our peers. I have previously spoken at length on the success of our prior innovations, but please allow me to provide a very brief update. In this past quarter alone, 3 of our drillships achieved 100% operational efficiency. One of these drillships manufacturing wells to 32,000 feet here in the Gulf of Mexico, operated with only 9 hours of subsea downtime in a 12-month period, while another is currently at 3 hours of down time year-to-date. This is differentiated and class-leading performance, pushing Diamond Offshore's assets to the front of the deli line of desirability, which provides a segue into recent contracting activity here at Diamond Offshore. I am very pleased to announce that we have secured an additional net 5 years of backlog for our drillships, the asset class which I have repeatedly stated is the most distressed. This additional backlog is with 2 major deepwater players being BP and Anadarko. As I have just explained, our drillships are consistently delivering class-leading performance and the confidence both BP and Anadarko have in our assets is reflected by this significant success.

So let me discuss the Anadarko award first. We have agreed to extend the Ocean BlackHawk sixth-generation drillship from June 2019 until April 2021. The operating dayrate will be $495,000 per day through April 2020, whereupon it will be adjusted to a rate that is significantly above current market rate and is subject to a onetime capped increase based on the then prevailing market rate should it be higher. Staying with Anadarko, we have agreed to an early release of the Ocean BlackHornet, which will be effective when the Ocean BlackHawk completes its regulatory maintenance and equipment recertification estimated to be in the second quarter of 2019.

This then allows the Ocean BlackHornet to be contracted with BP for a term of at least 2 years, plus 2 1-year options. Further, BP has also agreed to contract a second drillship, which will be named at a later date also for a term of at least 2 years, plus 2 1-year options. The operating dayrate for each contract will be within an agreed range of dayrates that are materially higher than current market dayrates and will be determined within the range based on then prevailing market rates.

Further, we have agreed with BP to early terminate the Ocean GreatWhite contract effective July 1, 2018, and for BP to pay Diamond a fee that will be recorded in Q3 of 2018. The existing contract was due to expire in January 2020, and we are now free to secure new work for the rig. Further to my prior commentary and related to this early contract termination, BP has agreed to either pay Diamond Offshore $135 million through a series of designated payments through 2019 to 2023 or contract 1 or more additional Diamond rigs so that we receive a gross margin at least equal to this designated amount. None of the above is included in our current backlog.

The Ocean GreatWhite has left its mooring in Malaysian is currently in a shipyard in Singapore where it is being prepared for work in the North Sea. It will begin its mobilization to the North Sea at the end of Q3 so that it will be ready to commence work at the beginning of Q2 2019. We are in advanced discussions with an operator to put the rig on contract next year and remain optimistic that this asset will stay employed in the harsh environment sector of the North Sea for many years. All of our sixth-generation drillships are working for Tier 1 clients, and we believe that in what remains a tough market for this asset class, our differentiated strategy through thought leadership and innovation and best-in-class operational performance is proving to be a success in terms of securing additional backlog.

Now allow me to provide some commentary on the market. Our customers are not looking at spot oil prices but instead are focused on the futures curve, and we have finally begun to see the back end of the curve pickup. The 5-year futures Brent oil price has found some stability above $60 a barrel, which should help increase demand for offshore drilling in 2019 and beyond. This increase, coupled with supply rationalization has led to some tightness in the moored asset class. We believe this segment is inflecting, and we are seeing slight pricing increases in certain markets. The tightening is not limited to the North Sea, as we are also seeing it in other nonharsh environments. Customers are looking to lock in capacity for 2020 and beyond as they see the coming recovery of the moored asset class. However, although demand for sixth-generation dynamically positioned assets is clearly picking up, this particular segment remains well oversupplied, and we have yet to see an inflection in market dayrates. Yet our ability to secure additional backlog at rates that are materially above the current market rate is a testimony to the hard-working people here at Diamond Offshore, both shore based and on the rigs. Our strategy has not changed. We will continue to focus on providing class-leading operational performance that helps oil and gas companies lower their total cost of ownership, a strategy that has clearly pushed our fleet to the top of the list of desirability. At the same time, we will continue to look at opportunities that present themselves with respect to growing our fleet. As these opportunities materialize, however, we will remain disciplined around the future allocation of capital with a focus on maximizing that future capital efficiency.

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. Earlier today, we reported a net loss of $69 million or negative $0.50 per share for the second quarter of 2018. Our second quarter results include an impairment related to the sale of the last remaining jack-up and further restructuring cost. Excluding these items, Diamond had an adjusted net loss of $45 million or negative $0.33 per share. This compares to our first quarter adjusted net loss of $21 million or negative $0.16 per share. The quarter-over-quarter decline was primarily driven by lower revenue associated with previously announced second quarter out-of-service time, partially offset by a number of rigs going back on contract.

Before I go into our second quarter results, let me provide some additional color on the Anadarko and BP deals. Let's start with Anadarko and the Ocean BlackHawk extension. As Marc mentioned, the rate will remain at $495,000 per day until April of 2020 and then reduce to a significantly above current market dayrate for the final year. The cash flow will follow the contracted rate, however, accounting rules dictate that we recognize the revenue at the weighted average blended rate, which is in the low 400s over the entire term of the contract from June of 2018 until April 2021.

Now moving to BP. The $18 million fee owed by BP as part of its termination of the Ocean GreatWhite will be recognized in its entirety as revenue during the third quarter of 2018. Also in the third quarter, we will recognize the remaining unamortized revenue and expense of $11 million and $16 million, respectively, which was previously being amortized over the original contract term and relates to precontract mobe and customer-requested upgrades. As for the $135 million margin commitment Marc discussed, payments received to compensate Diamond for any portion of the margin that is not earned through drilling contract by the end of each commitment period will be recognized as revenue during the final quarter of that period. There are a lot of moving parts as it relates to the accounting treatment of these deals, so I ask anyone who may have related questions to please follow-up with our IR team over the coming days.

Now turning to our second quarter 2018 results. Contract drilling revenues of $265 million was 8% lower compared to the first quarter of 2018. The decrease was mostly driven by out-of-service time associated with the special survey and upgrades to the Ocean Valiant and maintenance to the Ocean Courage both disclosed during our last call. In addition, the Ocean Apex rolled up contract towards the end of the first quarter and is currently in the shipyard preparing for its next job with Woodside in Australia. The revenue decrease from prior quarter was partially offset by the Ocean Monarch, Ocean Patriot and Ocean Guardian, all working the entire second quarter, while being idle for most of the first quarter.

Contract drilling expense of $189 million stayed relatively flat quarter-over-quarter and was below the low end of our guidance, primarily due to the timing of costs associated with the Ocean Courage maintenance projects. Although, the projects were completed during the second quarter, about half of the costs won't be expensed until the third and fourth quarters of 2018 due to our ability to use inventory on hand during the maintenance period. In addition, the timing of expenses related to the Ocean Endeavor's reactivation and special survey were pushed into later periods, as we focused on the most cost-efficient way to perform these projects. G&A costs of $18 million decreased slightly from the first quarter and came within guidance. Also as expected, we took an additional $1 million restructuring charge during the second quarter, as we continued to execute our restructuring plan implemented at the end of last year. Depreciation expense of $82 million and net interest expense of $28 million both came in at previous guidance.

During the second quarter, we executed an agreement to sell the Ocean Scepter, which was classified as held-for-sale and as a result, took a noncash impairment charge of $27 million to write the carrying value down to the net sales price. The transaction closed the end of last week.

And finally, during the second quarter, we recognized a tax benefit of $10 million for an effective tax rate of 13%. Normalizing the rate for the impairment and restructuring charges discussed earlier resulted in an effective tax rate of 12%.

Now let me provide some thoughts on the third quarter of 2018. While I don't normally provide revenue guidance, I will remind you to consider the impact the third quarter revenue of the Anadarko and BP deals discussed earlier and to refer to our fleet status report, which was published earlier today for known and projected out-of-service time during the quarter. We expect contract drilling expense for the third quarter to come in between $210 million and $215 million, including the acceleration of the Ocean GreatWhite's unamortized expense of $16 million discussed earlier. Net of this, third quarter contract drilling expense should increase $5 million to $10 million from the second quarter, driven mostly by the Ocean Valor's special survey and contract preparation for its 2-year job in Brazil commencing later this year and the ramp-up of the Ocean Endeavor's special survey and reactivation. Partially offsetting the increase was the completion of the second quarter special survey of the Ocean Valiant. We project G&A expense to decrease again in the third quarter to about $17 million, as our restructuring initiatives continue to reap benefits. Depreciation and interest expense should remain relatively unchanged at $82 million and $28 million, respectively. We anticipate our effective tax rate to be between 10% and 15% during the third quarter of 2018, but as always, it 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.

During the quarter, we continued to demonstrate that we can provide best-in-class performance while managing cost, and the contracts we announced earlier today go a long way to improving our already-strong backlog and liquidity profile. With these contracts now in place and with over $1.9 billion of liquidity, we are even better positioned to take advantage of strategic opportunities that may present themselves over the next few quarters. And with that, I'll turn it back to Marc.

Thank you, Scott. So I'm extremely pleased with the contract awards and backlog increase we have announced this past quarter. Clearly, our strategy to provide a differentiated product is working. Not only are we able to secure new work for our fleet, we also believe that the unique innovation we are providing through Pressure Control by the Hour, Sim-Stack service and now Blockchain Drilling provides an element of stickiness when work rolls over.

Our current client backlog includes, amongst others, Total, BP, Petrobras, Chevron, Shell, Hess, Anadarko and ExxonMobil. We are well positioned with Tier 1 clients on a global basis. As I mentioned, the market remains challenged, but we are beginning to see some improvement. We remain focused on charting for all stakeholders the best course to the market recovery.

And with that, I'll turn the call over for questions.

(Operator Instructions)

Our first question comes from Jud Bailey with Wells Fargo.

Wanted to start as my first question and follow up your comments, Marc, on the moored rig market. You gave some pretty positive commentary towards inflecting. I was hoping, could you give, perhaps a -- just a sense of what you're seeing in terms of rate movement from whatever you're comfortable saying? And just, is it strong enough that you would consider reactivating any of the other stacked moored assets that you have? Just a little more color on that topic would be great.

Jud, this is Ron Woll. In terms of moored rates, there's no doubt they are, I think, creeping up, they're nudging favorably quarter-over-quarter. I think it's more pronounced in markets that favor the moored class like the U.K. to be sure, Australia here to some extent as well. At this point, though, I wouldn't extrapolate too far to say that, that extends to reactivation of rigs that don't have firm work ahead. Now of course, we've done some good work with our Ocean Endeavor to bring her back in terms of reactivation. I think that's a specific and successful case for us. But I think it's probably too soon in the cycle to extrapolate too far to say that there's going to be sort of blanket reactivations of moored rigs.

Okay. I appreciate that. And then I guess moving over to the GreatWhite. A couple of questions there. Number one, could you just comment on kind of the marketing opportunities for that rig as you're seeing them in the North Sea. I would imagine the prospects for work are pretty good. And then just if -- add on to that is, you kind of walked through the different moving pieces of the contracts fairly quickly. I just want to confirm, are you going to be basically getting the same economics to -- on the remaining term on the BlackHawk, that's just going to transfer over to a combination of the BlackHornet and another drillship starting in 2020? If you could just walk through that again, I'd really appreciate it.

Sure. As it relates to the rates, we've chosen not to disclose the rates other than to state that they are significantly and materially above where current rates are today. I think more to the point, the rates of both BP and the Anadarko awards moving forward represent where perhaps we believe dayrates for drillships will have progressed in the initial years of a solid market recovery. And if the market recovery surprises to the upside, we have the ability to reset those rates accordingly. They are not at all reflective of where the market is today and do provide for a healthy return. As to the Ocean GreatWhite, obviously in the mix that we've got here, recontracting the Ocean GreatWhite will be key moving forward, which is why it's in the yard in Singapore today and why in a few months, we'll be taking it to the North Sea. We are in advanced negotiations with a client to put the rig to work possibly at the end of Q1 next year. And as I said in my prepared remarks, having just returned myself from client visits to the North Sea, I believe that this rig will have opportunities for work for many years to come.

Our next question comes from James West with Evercore ISI.

So Marc, with the BlackHawk and the BlackHornet, I understand you don't want to let us know not exactly what the dayrates are, but how -- I guess in terms of kind of coming to an idea of a dayrate or coming to negotiating a dayrate for those rigs, what were the factors at play? How did you guys decide kind of what you thought the market would look like at that point? And I respect you have an option there to raise if the market is better than you originally think it would be, but it's obviously materially higher than the pretty challenged dayrates we have today.

Sure. Thanks for the question, James. The reason why we are not disclosing the rates, perhaps some obviously is for sensitive competitive reasons, as of course, we do continue to bid other work over the same time horizon. I think our competitors are looking for data points. And as it related to specifically how we went through the negotiations, one of our clients has actually told us the premium we could command based on the operating performance that we're providing. So these assets are very attractive. In prior calls, I've spoken to the fact that we are consistently delivering wells significantly ahead of schedule. And this is one of the reasons why Anadarko worked with us actually to enable us to take 1 of the drillships on contract with them and give it to BP. So look, the takeaway from the story here is that by differentiating our assets, by innovating and delivering clearly superior operating performance, we now have demonstrated that our strategy is able to achieve these kind of results. After all, we're talking about 5 years of backlog here, James, being awarded to us that is being awarded in what quite frankly is the most distressed asset class, at rates, once again, I'm stating this again, are substantially above where the current market sits today. And I think in anybody's good -- book, that's pretty good.

Got it. Okay. And then I had a question with the Blockchain technology you guys have rolled out here recently. Is that currently in use on your rigs today? Or is it something we'll see in the next few quarters?

Yes. It's -- so we've announced the technology. We wanted to make sure that, once again, we got the total leadership in the space here. We've been working for a period of time now with a partner called Data Gumbo here in the Gulf of Mexico. And we're looking at rolling it out. It's not rolled out right now. We're working with 1 or 2 clients to see how their blockchain activities dovetail with what we're doing and then looking at rolling it -- well, introducing it to the fleet in Q4 and then rolling it out fleetwide during the course of 2019. And it's -- I think as you probably can imagine, it's -- there's a lot of interest that we've received from all of the majors and independents that are out there, to include some NOCs as well, to see what we can actually achieve in this space.

Our next question comes from Jim Wicklund with Crédit Suisse.

The tail end of your discussion, your position to take advantage of potential opportunities, about 90% of the questions we get asked from the offshore drillers overall is the outlook for M&A. You guys obviously getting 5 more years of backlog gives you visibility. That makes it easier to do something strategic next. Your shareholding is famously concentrated and most people don't think that, that ownership would like to suffer dilution, so that puts you guys in a different box, at least as it goes to investors minds. Can you talk about the range of possibilities you see overall in the industry over the next couple of years in M&A and where Diamond fits?

James, thanks for the question. I think...

Jim.

Jim, sorry, I think as it relates to our shareholder, you'll have to ask the question to them. However, the -- I think you will see some more consolidation in the industry. I think what's holding it back perhaps today is relative valuation. And as I mentioned in my closing remarks, for us at Diamond Offshore, all opportunities are on the table. However, we will ensure that when we deploy our capital moving forward, that we have given a significant diligence to that task, and we'll make sure that it's accretive to shareholders in some form or another. So it really is all-around relative valuation. And as we progress through this downturn, tomorrow is 1 day closer to the recovery. But I think what's probably holding us up today is relative valuation. I think one of the positives that we have is that you've just seen us today announce a significant backlog increase to our fleet. So as we sit today, we're comfortable having secured that backlog that we can look at opportunities, perhaps whether it's distressed assets or participating in M&A, we can explore those with a secured backlog and secure liquidity as opportunities materialize.

Okay. That's very helpful. I appreciate that. My follow-up, if I could, you're pricing these -- you're given the opportunity to price these things wherever the market is in a couple of years. The rates that you've negotiated so far, like you say, are significantly above the current level. When do you think we start to see material changes in utilization in the deepwater market? Is this a '19 event, a '20 or a '21 event? You rattled off the number of major oil companies that you work for and like 10 of those companies are 70% of deepwater spending. I'm just curious, with your conversations with these companies, do you think the material improvement is going to be '19 or '20 or '21? Nobody has a crystal ball, but yours is much better than mine.

So yes, I mean we have positioned ourselves vis-à-vis our client portfolio extremely well as it relates to deepwater moving forward. And that wasn't by accident. The -- clearly the moored market is targeting faster than we're seeing in the DP segment. The DP segment is suffering still from significant oversupply, which once again, is why securing this 5 years of backlog was so important to us and our stakeholders. Let's be clear, the work that we are tendering today is for activity at the back end of '19 and into 2020 and dayrates in the market are still suppressed for the DP assets. So when you're talking about the DP assets, the rate of recovery is not going to happen before 2020 or 2021. For the moored assets, as we explained somewhat in our prepared remarks here, we have seen an inflection, and that's not just limited to the North Sea, it's other basins in the world. We're starting to see a point of inflection and certainly some opportunity to push pricing. Now it's still going to be a while before we get back to rates that we were used to some 3 or 4 years ago. But perhaps one could say the moored asset class will see an increase in rates, albeit slow, in 2019. But I believe that it's going to be '20 or '21 for the DP asset class to include that sixth-generation drillships.

Our next question comes from Ian MacPherson with Simmons.

Marc, can you speak to the -- I know the GreatWhite is a harsh environment rig for Southern Australia. Do its harsh environment criteria match that of the North Sea? Or do you envision that it will require some capital upgrades in order to prepare for the work that you're targeting there?

Yes. Ian, another good question there. The -- so it was built for The Great Australian Bight. There are some small capital upgrades. Nothing major, nothing that is enough to report on specifically. But for example, the rig is in Singapore right now, it's -- some of the windows have to be replaced, it's that kind of upgrade. So it's not a reactivation in any sense of the word. The Australian safety case is not unsimilar to the U.K. safety case. So of course, it had an Australian safety case. So it's just a case of dusting off the file and submitting it to the U.K. authorities. But we expect the rig to be undertow beginning of September and going to the yard and nig for some minor customer-requested upgrades and then we should be, all things -- if all things pan out, we don't have a contract inked, let me be clear on that, but our expectation and the time lines we are working to is having the rig working in the North Sea end of Q1, beginning of Q2 next year.

Okay. And just to clarify, your payout from BP on the GreatWhite is completely independent from the separate work that you -- that the rate can gain in the future, correct?

That is correct. It's completely independent. And once again, let me just be clear on the BP deal. The $135 million of, perhaps if you want to call it the gift card, is applicable to gross margin on contracts that we may win further down the road but it's not included in any backlog figures that we've released today.

Right. Right. Right. And then last one for me, you've definitely spent a lot of time, thought, consideration and strategy around differentiating the Black ships in several ways, so can you speak to how you have tried to incorporate those differentiated features into your, sort of, repricing? It sounded -- you didn't use the word index, but it sounds like there's an index-related pricing reset, and how you evaluate the peer group? And how you will price off the peer group for those rigs?

Sure. So one of the clients that we're working for today has indicated to us the premium that they believe our flagships have on other assets out there. I'm not going to share that with you, obviously, for competitive reasons. But the -- what we did is, we kind of worked with our clients, we looked at what we believe, based on projections, that we've garnered from working with various consultants in this space as to what demand will look like, what the subsequent dayrates will look like a few years into a recovery, and we've set the pricing around that accordingly. Now to be clear, it's not indexed. The pricing is not indexed. But we have a onetime opportunity to reset the market dayrate within a band should the market rate actually recover faster than what we predict today.

Our next question comes from Sean Meakim with JP Morgan.

So with the moored rig pricing starting move and you mentioned even outside of the North Sea, can you talk a little bit about where else you're seeing the most tendering activity? Are you maybe competing with stacked rigs looking to reactivate? And maybe how the pace could improve in some of these markets outside of the North Sea?

Yes, Sean, this is Ron. So as you noted there, North Sea is certainly very active for us and others so that's certainly, I think, leading the moored asset class. Australia has, I think, also a good level of activity. Although, I'd say for both markets right now, the attractiveness of stacked rigs to operators is still pretty cool. And I don't see that being a sort of a true sort of supply force at this point. We are seeing good some good signals kind of elsewhere Asia and Southeast Asia of interest in moored rigs. You're seeing some potential nibbles in Mexico but nothing I'd describe as in force as of yet. I think Guam is still largely a kind of a DP space right now today. So I mean we like the North Sea overall as a place to lead moored. I think Australia is close behind, other markets, not far off, but I would have to echo kind of Marc's comments here that moored is leading, I think, the improved tendering activity. Pricing tends to be a little bit better. It's just a little smaller kind of class compared to the kind of rates you're seeing in the oversupplied DP side of the house.

And then Marc, I was thinking, as you talked about your outlook out for next couple of years for the sixth-gen drillships, operating performance and lack of downtime for your rigs, you're certainly running ahead drilling programs pretty consistently, how do you think about the -- that improvement as an impediment to rebalancing the market? So in other words, clearly you need to compete to deliver that performance but to what extent do these improvements do you expect that you see, more of a across the fleet, make it difficult for the market to rebalance and for rates to eventually move higher?

Sean, that's something we're looking at ourselves. At the end of the day, the big kahuna is how you do reduce the total cost of ownership for the operators of these projects. And if you can speed stuff up, then clearly that makes projects that may be sitting over the horizon or on the horizon more economic. So it actually brings them back over the horizon so there's more work for us to go and attack, especially when our clients have choices from their future capital expenditures as well, be it onshore or offshore. So at the end of the day, we've got to make costs lower for the deepwater development and that means drilling wells faster, quite frankly. That's it in a nutshell. And so, okay, that does have an impact on projects that have already been sanctioned, but it doesn't have an impact on the future projects that are waiting to be sanctioned. And there's a lot of reserves still on out there in deepwater that will need to be developed over the next 1.5 decades that we need to bring over the horizon so our clients invest in them. And as I mentioned again in my prepared remarks, we've positioned ourselves very well with -- as Jim suggested, with 70% of the work that's out there from our client perspective. So yes, it's -- one could say it's an impediment to a recovery, certainly for the ultra deepwater assets. But I don't see it that way. I see it as a way of bringing the reserves that are currently locked because they're not economic. I see it as a way to make them more available to us and so increase that pie. And as I've been stating throughout this call this morning, our strategy is paying off. So we seem to be very attractive. Let's just look at the Sim-Stack service alone. That service, which is ours and ours alone at this moment in time, was awarded a Best Available Safety Technology award by the regulator here in the Gulf of Mexico. So how attractive is having a drillship that has been given and award recognizing safety and technology to clients working here in the Gulf of Mexico. I would argue it's very, very attractive. So by continuing to do this, by continuing to innovate, by continuing to give thought leadership, by continuing to differentiate our assets, we will be at the top of the deli line as these reserves get unlocked because we make them cheaper by doing things more efficiently. So I'm not worried about that, Sean, so to speak.

Our next question comes from Scott Gruber with Citigroup.

Marc, just to clarify, the option to raise rates if the market is better than expected in a few years time, that applies to both the Anadarko and BP deals?

This is Ron. Scotty, indeed it does.

Got it. And are you able to say if the undisclosed rates on both deals, are they in the same ballpark?

Yes. This is Ron. Scotty, that's a fair question. So I think the answer is, broadly speaking, yes. I mean, as Marc said, they are well above markets for today and they also reflect kind of our outlook for an improved market beyond 2020. But yes, they're in the same ballpark.

Got it. And then just turning to the Floating Factory, you guys mentioned that, obviously, that the moored market is starting to inflect here, the harsh environment market is already inflected. Are you able to reengineer the floating rig concept and design an eighth-gen rig for application in the mid-water or in the harsh environment?

Yes. Absolutely yes. I'm an engineer by trade, cut my teeth working on the -- actually on rig floors as I started my career. So absolutely, when I say yes, it can be done. The big question is though is that, from a financial perspective, the gains aren't quite as substantial because one of the largest components to driving efficiency with a Floating Factory is the tripping speed, getting up to well over 6,000 feet per hour, and so when you're in ultra-deepwater, clearly that has a major contribution or that is a major contribution to driving efficiency gains. In the mid-water space, that's not -- that advantage is, lets just say, smaller because you're not tripping to the same depth. The wells are typically less deep. You don't have so much water or riser to trip through. So the efficiency gains on a mid-water unit are less and at this moment in time, we're not looking at that. As it relates to the Floating Factory technology itself, we believe in it, our clients believe in it. Clearly the market doesn't justify building those assets. So frankly everything's been laminated, stuck in a file and is sitting there awaiting a better day, perhaps.

Our next question comes from Kurt Hallead with RBC.

So wanted to follow-up just real quick, in the freak -- fleet status in the commentary this morning where you talk about the BP having the -- contracting another rig to be determined. I'm safe to assume, it's one of the existing rigs you have that are probably working for a different oil company at this juncture, one of the other of the 2 Black rigs. Is that fair? Or are you indicating here the potential for a newbuild asset?

Kurt, it's Ron. Thanks for the question. So of the 2 rigs that we have pointed towards BP, 1 is named today, as you well know, the second rig is not yet named and it could come from a rig that's working elsewhere here for other clients. But the way the agreement is structured, it also allows us to deploy a rig of equivalent capability, and it could be one we don't own today. I wouldn't go so far to say a rig we'd build, I think that's probably a bridge too far. But it can be one that we own today or one that we own in the future.

Interesting. Okay. Got that. So the other question I had for you then, when you guys discussed the dynamics for better substantially higher than market rates, just wanted to calibrate a couple of things. So the DP drillship market, depending on the asset where it's located, the rate ranges that I've heard of late have been somewhere between $135,000 to may be approaching $200,000 a day and just wanted to see if that's consistent with what you've been hearing about the current market rates for the DP drillship market?

Yes. Again, this is Ron. I think we're well aware of where the market is today. I think what we're describing here though is where the market's going to be several years from now, which of course, is really a stronger figure than where current market is. So I'd look at where the market is today here, and I then can work past that figure into where both we and our customers think we're going to be.

Okay. So -- but the I just wanted to get a firm handle on where we thought the starting rates were today, obviously. So that's a helpful answer. Appreciate that. And then just lastly, if I may follow up here then is on the North Sea harsh environment rates, again, Marc, as you go into next year, when you talk about multiyear type of dynamics, is this a sense you're getting from a particular customer or is this a sense you're getting from a number of different customers, which is suggesting not only strength but the breadth of market interest in these assets in the North Sea?

Yes. As I've mentioned dealing with one of the Q&As or perhaps even in the call -- in the prepared remarks, I did spend quite a bit of time over in the North Sea a couple of weeks ago. And I was actually quite surprised at the messaging that I got from those client visits, which was consistent. And perhaps the key is that if you look at our clients' CapEx alternatives on a global basis through simplification, standardization and scope, all our clients that I met suggested that the North Sea competes very effectively today with other alternatives on a global basis to the extent that capital invested in that area does compete well with that, that's available elsewhere on a worldwide basis. And that includes West of Shetland. so I left quite optimistic that the GreatWhite as an asset in the North Sea and possibly other harsh areas, perhaps Eastern Canada, will be active for a period -- a considerable period of time.

Our next question comes from Sasha Sanwal with UBS.

Although, we don't have all the dayrates, these new contract do give you guys much more flexibility to go on and look at M&A. So in that context, can you give us your thoughts on the confidence level in diligencing the value of floaters that have been cold stacked for extended periods of time? And can you bring sense to potential reactivation?

That indeed is a very good question and something that, obviously, we spend a lot of time considering ourselves here. It depends on the asset itself. I do believe that there are sixth-generation DP drillships that are in the market today, not necessarily being marketed but perhaps cold stacked that will not see the light of day again, because, obviously, the longer these assets sit, the more expensive that it will be to reactivate an asset. And something else that I think that we have been speaking to is one has to understand what is the true cost of reactivation? What is the cash cost to a company of bringing a sixth-generation drillship that may have been idle for 4 or 5 years, possibly 6 years, back in to the market? Because it's not just the reactivation cost alone of switching the lights back on, on the rig, you've got to mobilize it, you've got to do customer-requested upgrades, you've got to do a special survey, you've got to recertify the riser and the BOP and so on and so forth, and then tow it to location before you're generating cash. So the cost of these assets is going to -- reactivate them is going to be more expensive than I think the industry truly realizes, and therefore, there will be a barrier to reactivation, and then, dayrates will have to rise so that the cost of marginal supply, if that's what you want to call it, dayrates will have to rise to such a significant level that it makes it possible to reactivate some of these older assets, put the cash into them, on the understanding you are unlikely to have a contract for them in the first place. So the diligence you have to put into in terms of valuing an asset that is likely to have been cold stacked for 4 or 5 years is significant and therein lies the rub, what is the value you put on to that asset. So it's a very good question.

Great. And as a follow-up, in the past, you guys said that your optimal fleet size is significantly larger than the current composition, can you share your latest thoughts?

Well, if we're going to maximize shareholder returns in the next recovery because a recovery is coming, it's just we don't know when, it would be helpful if we had more assets in the fleet. However, it has to make sense financially. And we're not going to overpay for assets. We are comfortable with our fleet as it exists today. We can ride the wave when it returns, however, is there an opportunity to increase the size of the fleet, and therefore, a benefit from -- more from a recovery to provide better returns for our shareholders when that recovery comes. So absolutely, let me be clear. We're -- there's no urge to merge or anything like that. We are very comfortable with our fleet size. We've taken the correct investment over the past few years to be successful as we've shown. The key at the moment is keeping the assets working, which we are doing as we've shown, and should the right opportunity materialize, then we'll work with our shareholders to make sure that it is accreted moving forward on the metrics that we choose to measure it on. So yes, we will be opportunistic, but it has to be something that makes sense in the long run.

Our next question comes from Haithum Nokta with Clarksons.

Sorry to beat, I guess, the dead horse here, but just on the rate for the new work that you've booked today -- announced today, Marc, you describe them as rates that you would expect in, I think, the early part of a recovery, I just want to confirm that that's kind of your view of those rates and would they be below what you would envision as a ''midcycle'' rate for these assets?

So yes, once again, these are rates which we believe, specifically for DP drillships, will it progress and -- in the initial years of a solid market recovery. So I just want to reiterate for everybody, these are not today's market rates of which a suggested band has been put forward in one of the key questions already. So it's -- we're very pleased with these rates.

Okay. But they're below what you would kind of envision as midcycle or something that would incentivize new-build construction or anything like that, correct?

I wouldn't suggest a below midcycle. I think that they're getting pretty close to midcycle. But certainly not at a rate that would incentivize new builds.

This does conclude today's Q&A session. I will now like to turn the call over to Marc Edwards for closing remarks.

Thank you, everybody, for participating in today's call, 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 today's program, and you may all disconnect. Everyone, have a great day.